Foursquare's Success Depends On Local Merchants and Its API

Don't Look Now: Everyone's Favorite Check-In Service Is Actually Building a Business

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Last month, Foursquare expanded its merchant interface, adding best practices and use cases to help them craft more effective Foursquare campaigns. It builds on Foursquare's quiet launch in mid-July of an open API to select partners aimed at making Foursquare a more inclusive, useful platform for merchants, and third parties, key to cracking the $22 billion local online ad market.

CEO Dennis Crowley spelled out Foursquare's approach in August: "We designed our products to connect merchants with users, and to connect users to merchants. The majority of the revenue generated by the company would come from the tools which we offer these local merchants."

Until recently, that meant investing heavily in its merchant dashboard as the primary distribution channel for tools like specials as well as check-in analytics, and attempting to service thousands of small businesses on their own. It's unclear when Foursquare changed course, but in July the startup quietly opened the merchant API to select partners. Now they include third parties like Yext, which helps local business maintain listings on multiple platforms, American Express's Clickable-powered local marketing solution YourBuzz, and AOL's hyperlocal media play, Patch.

Street Fight Summit 2001, Oct. 25-26 NYC
Street Fight Summit 2001, Oct. 25-26 NYC

Foursquare has kept the merchant API close to the vest, but by moving away from a branded, single-channel approach like the merchant dashboard, the company appears to favor a model that lets other third parties build solutions for small business using the Foursquare API.

The reason for doing this is simple: maintaining direct relationships with all the merchants that want to leverage Foursquare would require a massive sales and support staff. In short, it just wouldn't scale. Foursquare itself has signaled that this is the way forward, even if it means losing a direct relationship with the business.

"Foursquare represents one metric for [merchants] to take a quick pulse of how their business is doing," Foursquare's director of business development Eric Friedman said. "And if a merchant uses an integrated dashboard from another service provider, that 's okay with us."

Yext, which closed a $10 million series D round in June, allows small business to edit their listings on sites like Yelp and Superpages through a single platform. CEO Howard Lerman told me recently that users will soon be able to access and edit the Foursquare suite from Yext's web-based dashboard.

"I think what they have done with the Merchant API is very smart," Lerman said. "They have made it possible for third-party services with deep SMB relationships to update their information on behalf of their clients, rather than running a closed system like Google."

The API is also being built into American Express's YourBuzz product, which provides small business owners with tools to monitor their digital presence on social media outlets like Twitter, Facebook, and now Foursquare. Powered by digital marketing solutions company Clickable, the YourBuzz application is one of a handful of small business tools that Amex has created as part of their Open campaign. "It's an opportunity for Foursquare to gain access to a customer set that would not readily be available to them otherwise," Clickable's director of business development Maxine Friedman said. "The power of American Express' marketing is equally attractive to them as well."

As for Patch, the specifics of its integration with Foursquare are less clear. The AOL subsidiary issued the following comment on the matter: "We view business owners as some of our most powerful users, and as such we want to connect them with the most relevant tools for their success. Our partnership with Foursquare aligns perfectly with that goal. Like Patch, Foursquare empowers business owners digitally; between the data Foursquare can provide their customers and small business owners and Patch's power to serve our users community by community, we are jointly poised to offer small business owners a unique way to connect with their most relevant customers in real time."

It's unclear how the apparent move from a proprietary dashboard to an API ecosystem will impact the company's revenue model, but as it stands it looks like Foursquare will monetize these partnerships when — as the company is known to say — "the product is right." While all parties stress that there has been no formal conversation about monetization, Lerman, for one, didn't seem to mind, saying: "It is available for free, now. Whether it will remain that way, we don't know."

Monetization is not the only issue at stake here for Foursquare. As checking-in becomes commonplace among early adopters and the concept of sharing one's location expands into the mainstream, the company will need to create a sustainable system of value generation that goes beyond gamification and social-generated content.

Gowalla, Foursquare's biggest competitor in the geo-social space, announced a major restructuring of its business in September that includes a big bet on travel. Through partnerships with National Geographic, Disney and others, the company is effectively syndicating curated location-centric content from trusted brands in a geo-social environment.

If Foursquare can create a viable distribution and CRM model for its merchant tools, the company may be able to achieve the degree of merchant-user interaction which could be a real enough value proposition for the mainstream user.

Steven Jacobs is a writer for Street Fight, a news site that reports on the business of hyperlocal, location-based services and daily deals, where this article first appeared. Street Fight is hosting its first Street Fight Summit 2011 Oct. 25-26 in New York City. Ad Age readers can receive a $100 discount on the price of a ticket using the code SFS11-ADAGE.
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