Foursquare has been ticking off a lot of milestones lately. It has $50 million in funding, a $600 million valuation, 10 million users and 10,000 developers. And yet, there’s that little nagging thing called a revenue model; something it has been slow to figure out.
It appears the location-based social network is now poised to rev up its revenue engine by eventually charging merchants to offer deals and access its business tools. Foursquare co-founder Naveen Selvadurai told the New York Post that the company is planning to charge its more than half a million merchants for the previously free tools.
Foursquare will wait, in order to ensure its merchant platform — which includes the ability to claim a venue, run local deals and see analytics via a dashboard — is more robust before it begins to charge. But it’s clear that day is coming Selvadurai believes it will be worth it for local businesses, which are now seeing a return on their investment in Foursquare.
“Now we’re able to close that circle,” he said. “[The check-in] comes back to me in forms of recommendations. It goes back to [users] in interesting ways.”
This was going to happen at some point. A company can’t simply remain “cool” forever without figuring out how to make some money. Last month, Foursquare signed some big partnerships with deals companies like Living Social and Groupon that include revenue sharing provisions. But it’s been unclear how much Foursquare was making in those partnerships. Some, like a deal with American Express (s axp), had no revenue sharing element. By working directly with merchants, however, Foursquare has a better shot in getting revenue from its location check-ins and building on its success as a location-based network.
“The [merchant] tools allow you to claim your venue and start running specials and see the dashboard,” Erin Gleason, Foursquare’s media representative told the Post. “That’s all free right now, but it’s obviously very valuable data.”
But it will be a challenge for Foursquare to ensure its merchants pony up for things they were getting for free. Merchants are being inundated with calls from sales people, and they have a lot of options for bringing in consumers via discounts and deals. Facebook, for example, has its own Facebook Deals platform which offers free deals and a lot of check-in data for merchants. That may change, but Foursquare may not want to be too far out in front of Facebook, which has more money and can afford to wait before charging.
There are also a lot of other alternatives, like partners Groupon and Living Social, who are moving toward more instant real-time deals. While they are working with Foursquare, they’ll also be appealing directly to merchants. And that’s not to mention a bunch of other challengers who would love to scoop up more of Foursquare’s business, should its merchant partners scoff at pay services.
The point is, businesses will have to be convinced there’s a lot of value in paying for Foursquare’s tools. I don’t doubt some businesses are seeing a Foursquare lift, but we’ll have to see how many feel that it’s significant enough to be a major source of revenue. Foursquare is smart in partnering with some big deals providers, but that alone probably doesn’t warrant its lofty valuation. It now has to hope that it has made some good friends with businesses, relationships that will endure even after money starts changing hands.