Foursquare...how do they make it profitable?

In this article I will write about Foursquare. What is Foursquare about, who are it's current users, who is Foursquare targeting as clients, what kind of business model do they use and how do they plan to develop in the near future.

What is Foursquare?
Let's start by briefly explaining what Foursquare is about. When you go to their website www.foursquare.com you will find a site that has some similarities with other social websites such as Facebook. The design of the website is fairly simple and consist out of an animated graphic design, a clear reference that the site can be used to get in contact with friends and a hard to miss button to "join now". Furthermore there is some streaming data of people in all kind of locations doing things that are not really clear unless you are already familiar with the concept of what Foursquare is all about. For this the online tutorial comes in handy: "How to unlock your world with Foursquare".

In the video tutorial they not only explain how to use Foursquare but they also market it to their targeted users. They are doing this with phrases as "with Foursquare you will be able to find happiness around the corner" and "you need a passion for exploration". It emphasizes that it is simple to use, you only need a cellphone with ability to download apps and a Foursquare account. It uses other social media, such as Facebook and Twitter, to widely spread your message to your friends.

In an article by nick saint in business insider dated 28 january 2010 it is described as "Foursquare is primarily for letting your friends know where you are and figuring out where they are. Secondarily, it's for collecting points, prize "badges," and eventually, coupons, for going about your everyday business". You can use Foursquare to post your location on twitter or on Facebook, so it reaches your personal network beyond the boundaries of Foursquare alone. The locations can vary from a Business School like IE, a Star bucks or a tapasbar.

Foursquare operates in the business know as "location services" and according to a CNN article by Peter Cashmere dated November 19 2009 it has Gowalla, Loopt, Brightkite and Google's Latitude as main competitors. According to the same article Foursquare will not have an easy ride to grow in this market and might be overtaken in the future by new initiatives in this segment for instance from Twitter, however right now the writer of this article thinks that Foursquare has an competitive edge in the market as he states "All of these services, I'd argue, lack the highly addictive game play that appears to have Foursquare users hooked".

Who are the users?
In my search to discover who Foursquare is primarily targeting as users, I found it hard to obtain any solid information on the topic, which in itself may not be that strange. Most likely is doesn't matter that much to Foursquare who signs up to their service, as long as the number of users is fast growing. I have to add that this is merely my humble opinion. However for the current and future clients of foursquare this may be (very) important information and right now it is becoming an increasing point of focus in marketing related articles on the subject, as I will discuss in a later paragraph of this blog entry.

In my opinion up until now foursquare attracts a specific target group called "the early adapters". This is a term derived from the the diffusion of innovations theory by Everett Rogers. In this theory early adopters are described as "the second fastest category of individuals who adopt an innovation. These individuals have the highest degree of opinion leadership among the other adopter categories. Early adopters are typically younger in age, have a higher social status, have more financial lucidity, advanced education, and are more socially forward than late adopters". Foursquare makes use of relative new tools as smart phones with apps, relatively new media as Twitter and Facebook and it presents itself as being an innovative way for exploring people to connect with each other.

Although a growing number of people is starting to use smart phones with apps and media like Twitter, in my opinion the market of "location services" is still in an early phase and not yet on the point where early majority or late majority join in. According to Rogers theory "Early adapters" make up about 14% of the total market and "Early majority" about 34%. For the future of Foursquare the movement from the one to the other segments might be crucial in terms of getting enough users to attract clients. Later more on this.

So who actually are the clients of Foursquare?
First thought might lead you to say the users, but as long as the service is and remains free for users, this group can not be seen as clients. The people or organizations that buy or will ultimately end up buying the service Foursquare is providing are the real clients.

As is visible on the home page, but also on the pages after signing in, Foursquare partially obtains income from what I would call "the more traditional clients" through straightforward product advertisements on their website, these are companies that have a direct connection with the operating system of foursquare such as iPhone, Blackberry, et cetera

But is does more than that. Going back to the homepage, the button which offers the ability for businesses to use foursquare to reward customers reveals part of the other targeted clients. These are the small to medium enterprises that benefit from people connecting on Foursquare and drawing in more clients and therefor generating more profit for these businesses. Foursquare started out with "making business deals with local bars and restaurants offering free food and drinks to users who became the “mayor” of their venue, or in some cases just checked-in". This is evolving into a paid service as we will see in the last paragraph.

Thirdly Foursquare is growing fast in number of users and therefore becoming an increasing interesting marketing tool for big companies. In the last months it has been making more and more deals with large corporations as Pepsi co, HBO, Warner Bros, et cetera. It offers them a more general "brand marketing" in the form of the possibility to follow a brand or special campaigns such as the Pepsi co did in December 2009 in New York, as described in the article by Kunur Patel in Business Insider dated 4 february 2010. Some of these deals are not earning foursquare money, but others are.

Increasingly more important for potential clients of Foursquare, as discussed previously, will be the question; "how do I make sure I reach the right customers through Foursquare"? Douglas Lin wrote the following about this in an article in Media dated 5 March 2010: "brands will need to understand that just because a user “checks in” to a nearby location, doesn’t mean they are your target audience for an offer. As the space matures, demographic and psychographic information will start allowing marketers to more accurately segment and target influencers through to prime consumer prospects. Location will become just another (albeit very powerful) attribute for marketers to better target their audiences". A more clear definition of the users on Foursquare in terms of increasing the information asked in their profile might be an unavoidable evolution in a world where "location services" are bought by clients in order to use them to increase sales.

Coming to the point where all previous information comes together, the following question arrises: What is the business model of Foursquare and how do they want to further develop?
They started out as a free service without a clear business model. Their initial intent was and still is growth. In an article the NY times of 18 october by Jenna Wortham the following was written "So far, Foursquare has no revenue, and the company is still developing its business model. Mr. Crowley and Mr. Selvadurai say they are focusing on trying to build up the infrastructure, expand the user base and develop a database of locations".

As discussed before Foursquare is starting to make deals with big brands and is obtaining revenues from this. They also use VC funding to further develop the company. In my experience this means there must be a concrete plan to develop the company in to a model that creates earning, otherwise no VC will invest. As we know "free lunches do not exist".

And in the article by Kunur Patel we can read that indeed there is a plan. It reads the following; "Recently Foursquare announced is planning paid services for three tiers of businesses: small, privately owned stores and restaurants; brands with retail chains. For bigger brands, Foursquare is developing an analytics dashboard so businesses can track who's coming into their stores. Then, deals could be sold against impressions such as web ads, clicks such as search ads, or a completely new model: cost per check-in".

Foursquare primarily focus was to grow and now it is beginning to have enough substance it is starting to explore the possibilities to earn money with their database of locations and customers. They have defined different segments of clients they can target and are developing tailor made services for these three segments. The number of users will remain very important for Foursquare not to lose interest from big companies. Only having early adapters as clients will not be enough. They will move to new innovations as fast as they have joined Foursquare, just because that is the nature of this target group. Foursquare needs to attract early majority and eventually late majority groups. But also their position compared to new competition (Twitter and Facebook recently announced they are also coming on the market with a "location service") and the ability to offer there clients a service that will give a measurable result of increased sales (either through add clicks, check-ins or campaigns on Foursquare) will be a crucial factor in how this company will further develop.

What rests is my opinion on whether or not as a user Foursquare "me da tres pepinos"? The answer to this question so far is YES. I have been using foursquare for a couple of weeks and yes; it is a very funny tool to let your friends know where you are. The badges aspect and mayorship are completely wasted on me, simply because the incentive to actively get involved is too low. But this is very personal and absolutely not enough to say that Foursquare "me da tres pepinos". So why do I say it? What for me is important and the crucial factor in why I will not actively use Foursquare is that I cannot make any distinction between which friends I want to let know what information. I either reach them all or none. And this is besides the fact that when I disperse the message via Facebook, I have to assume my friends are online, either with their MAC, PC or smartphone. The push messages on the smartphone do not include wall post by others. So using for instance an app like what's up or PING is still a better alternative for me. I do not have to pay for sending these messages, I can reach a selected group of people as I might not feel up to meeting everybody in my network that is close. And I have more certainty if people will show up, because they will respond to me. This is something you can also not do with Foursquare.

Comments, additions or questions.....post them!!