Looking Inside The Foursquare Hype

Geolocation services are becoming one of the next hot things in the social marketing space. While players such as foursquare and Gowalla are dedicated providers of geolocation-based marketing services, bigger players, including Google and Facebook have, have entered the space with their own offerings  – Google Places and Facebook Places.

Foursquare’s Business Model
Dennis Crowley and Naveen Selvadurai founded foursquare in New York City in 2008, but it took a year before the company launched its location-based mobile platform. The service lets users share their location with friends and earn points and virtual badges when they “check-in” using their smartphones or through SMSs. It also lets users bookmark information about places they want to visit and provides relevant suggestions about nearby places. In exchange, merchants can leverage the platform by using marketing and analytical tools to obtain, engage, and retain customers and audiences.

foursquare boasts a subscriber base of more than 6.5 million, over 60% of whom are in the United States. Last year, the company recorded 381.6 million check-ins, with one check-in being reported from the international space station. It claims to record more than 2 million check-ins daily and expects to have more than 10 million users by June of this year.

But, foursquare is still defining its revenue model. According to analysts, the company operates a three-tiered advertising revenue package: one for small local businesses, another for retail chains, and a third for the big brands. foursquare offers customers services where deals are sold against ad impressions for Web ads, clicks for search ads or cost per check-in. It has advertising deals with many large brands including Pepsi, Louis Vuitton, and Zagat, to name a few. But while some of these tie-ups are for money, others are merely “exploratory.”

foursquare provides various marketing tools to retailers and big marketers. To bolster brand engagement for its bigger partners, foursquare’s marketing tools include Pages, the brand homepage on foursquare that lets a brand’s fans follow the latest news on that brand, and Partner Badges, the rewards awarded for exploration. One example is Zagat’s badge to users frequenting Zagat-rated restaurants. For smaller merchants, foursquare’s Merchant Platform offers free marketing tools that lets retailers create marketing offers and coupons that are displayed to foursquare users when they check in at or near the retail store. Additionally, merchants are provided with a free Venue Stats Dashboard to track user data and help drive additional traffic.

The company received $20 million in funding from Andreessen Horowitz, Union Square Ventures and O’Reilly AlphaTech Ventures last year. The funding round had pegged the company’s valuation at $95 million. This was the second round of funding for foursquare, which began operations with funding of $1.4 million.

foursquare’s Expansion Plans
foursquare is focusing on international expansion and recently announced plans to launch its service in five new languages: Spanish, French, Italian, German and Japanese. It is also mulling setting up an office in the UK. Within Japan, it has tied up with KDDI, Japan’s second-largest mobile carrier, to expand their services in the country. foursquare believes Japan to be the second most checked-in city around the world. The tie-up with KDDI will include a default shortcut for foursquare on certain Android-based devices manufactured by Toshiba, Sharp, and Pantech.

foursquare is also working on creating a unified venues database through its Venues Project. The aim of the Venues Project is to create integrated locations database that consolidates information from smartphone use, GPS data on those devices and social networking. Through the project, foursquare will be able to compile a continually updated, real-time view of places all around the world and offer a “new breed of location-based applications on the Web — with foursquare at the center of it all.”

foursquare may still be struggling to find the right monetization strategy for its business, but it seems to have understood the importance of location-based social marketing and is successfully building an evolving service to address that need. The company’s meteoric growth rate over the past year had led to $140 million buy-out interests from Yahoo! and Facebook. foursquare has turned down these offers and is working on developing tools and services that will be able to address the growing location-based marketing market. According to ABI research, spending on location-based marketing services will grow from an estimated $43 million in 2010 to $1.8 billion in 2015.

foursquare has potential, but its current financial performance remains unknown. In fact, analysts estimate that the company has relatively small revenues. Yet, as this Business Insider report indicates, the valuation could be anywhere between $500 million and $1 billion or more. The valuation is based on foursquare’s future financial performance; I would like to see some figures on actual financial performance before I can digest such high valuations.