Foursquare: Technology Strategy
Foursquare Technology Strategy – Case Study 1 a) What is foursquare’s business model and value proposition? Business model: Up until the point in time that the case study covers, the company did not arrive at a clear business model. They made small monthly revenues by providing special batches for partner companies like Bravo and VH1 which they charged approximately $10,000/month for. But these partnerships were rather seen as a possibility to increase brand awareness and brand credibility in order to drive up the number of users than as a source of revenue.
The CEOs were already planning to charge ompanies/venues for promotions they offered on foursquare to consumers but had not concluded on a defined pricing scheme yet. Additionally, they were considering customized batches and advertising banners as sources of income but decided that it was too early for these actions. Value proposition: Foursquare interacts as an intermediary platform between consumers and venues. Consumers are the individuals that enter venues in order to collect points and batches.
Venues are restaurants, bars and shops that are listed as locations on foursquare and that have the possibility to offer promotions as discounts to the members. Thus, we have to consider foursquare’s value proposition separately for both. Value proposition to consumers: The first and biggest value proposition foursquare provides to the consumers is the ability to turn life into a game. Users can collect different batches by entering venues and compete with friends and strangers in a city for the prestigious “mayor” title, the batch awarded to the most frequent visitor of a certain place or most active member in a certain city.
Hence, it motivates users to go out, try new places and gather new experiences. Closely linked to the “life is a game” value proposition is the idea of roviding a social network through foursquare. In addition to competing with your friends on gathering the most batches, the app also enables users to establish a personal profile and see who is around; through this, it creates opportunities for meetings and social exchange.
This option is not only available for friends but also for total strangers – it therefore provides visitors of a city with the ability to easily meet locals with similar interests and extend their social network. Moreover, foursquare creates value for travelers and visitors by displaying insider tips, reviews and recommendations from other users. It also enables users to bookmark their favorite places for later revisits and to create a to-do list with places to visit, which provides a motivation to come back after a visit.
The last part of the value proposition is based on the linkage foursquare provides between consumers and venues: Foursquare members can benefit from promotions at certain venues, such as discounted or free drinks. Value proposition to venues: that is displayed on foursquare, through which they influence the perceived image of their venue. In addition, it provides them with free advertisement and increased xposure. Venues also have the benefit of being able to attract new customers by offering promotions and to retain loyal customers by providing incentives for regular visits. b) What strategic moves and critical business choices explain its growth to date? Before foursquare, the co-founder Crowley already developed Dodgeball, a service that enabled people to inform all their friends nearby by text message about their current location. After selling it to Google and several years of working on the service, Crowley left Google in 2007. When Google shut down Dodgeball in 2009, he ecided to build a new application based on the features of the discontinued program.
In the following, we will highlight the most important strategic moves and critical business choices that explain the success of foursquare so far: Preemption strategy: Preemption strategy is described by Shapiro and Varian (1999) as to build an early lead, so positive feedback works for you and against your rivals. According to them, the marketer has to be aggressive in the beginning to build up a critical mass of users by finding “gadget freaks” that are most eager to test new technologies. Thus, the final goal is to increase demand side economies of scale.
The founders of foursquare conducted exactly this strategy: They launched an alpha and beta version to 80 of their friends in New York, San Francisco and Los Angeles with limited functionalities to gather quick feedback. A focus on about 30 cities and the usage of a licensed database with the geolocations and street addresses of key venues allowed them to publicly launch a full version in March 2009. This timing attracted previous Dodgeball users who were left without an equivalent application after Google ecided to discontinue the Dodgeball-service Just a few months earlier.
Additionally, they took advantage of the annual South by Southwest Interactive (SXSW) festival, which attracts early adopters from all over the world to present their application. They gathered thousands of users during SXSW that went home and told their friends to participate in foursquare. Even though the product offered was only reasonably complete in functions and half-baked in terms of design and programming its early launch got them ahead of competitors.
They gained a first mover advantage, and managed to positively exploit the feedback. They overcame the often long lasting step from “Innovators” to “Early Adopters” right from the start, used their significant influence on the adoption of the early majority, and even gained first media coverage on the highly frequented technology blog Mashable. One of the most important strategic moves in this context was to avoid and resist early commercialization through advertising clatter like banner ads which irritate users and reduce user value.
Even though this decision made it more difficult to find venture capitalists, it was critical to aid a rapid expansion and to stay in line with the preemption strategy. Scale up as quickly as possible to achieve network effect advantages: While former social networks such as facebook and twitter had to educate users how to use their products as well as explain their value proposition, foursquare levered the already broad acceptance of social platforms and realized strong growth from the beginning.
Driven by customers’ requirement to use the developed the application early on for all smartphone platforms available and expanded to 100 cities to increase the advantage of the network effect. The launch of “foursquare Everywhere” enabled users to sign up from any city in the world. Deals with manufacturers and carriers, such as Telefonica, operating in 17 countries, to adopt the foursquare on their devices put the app instantly in front of millions of people that bought new phones.
Both decisions made the application truly global. The friend invitation function that allows users to invite their phone-, facebook- and twitter-contacts to use the service further intensified demand. High user interaction and extensive feedback gathering: After the launch, the founders decided against traditional market research or field studies but instead interacted and responded to all criticism and feedback oncerning the app through e-mail, the foursquare blog, and also twitter.
This not only linked them closely to the user community but also provided them with insights into the different uses of the platform to figure out a purposeful prioritization of future features and steps. Thereby, they also found out that venues independently offered promotions to foursquare members which helped them to come up with the fact that “foursquare will connect merchants to their customers”l .
This was a solid mission statement to attract venture capitalists in order to raise funds. “Turn life into game” as basic principle triggers identification and exposure: The decision on the concept of “turning life into a game” was for two reasons of high strategic importance: Firstly, it (unconsciously) addressed humans’ thrill for hunting, competing and accomplishing quests which are still found in our behavior from Hunters and Gatherer times.
Through heavy usage, members can gain a status in the community which motivates them to increase the time using the application and triggers a higher identification with the application. Secondly, it motivates users to show off their accomplishments to friends, which in turn want to be part of the game nd become new users. The concept therefore not only causes higher usage but also helps to spread the app faster as people want to play and compete with as many friends as possible.
Exploit new and growing technology: Dennis Crowley and his co-founder Naveen Selvadurai took advantage of the new smartphone technology that promised rapid growth and enabled people to identify their location with a quick touch of a button through GPS. Additionally, the decision to allow third-party developers to build applications on top of the foursquare service added customer value to the platform by e. g. llowing other services, such as Yipit, to offer users customized deals by e-mail, based on their history of locations.
By fall 2010, more than 1,500 developers used foursquare’s API. Early involvement of venues to increase user benefit and provide future monetization opportunities: The founders early realized that foursquare not only needed to address the users but also the venues that could be visited using the application – after all they received a relevant amount of exposure by users who published their check-in at a venue. By adding tools that allowed venues to add a description of their business and direct romotions at members, they gave them the power to acquire new customers.
In contrast to banner ads, these promotions are perceived as added value by the users and reinforce them to use the applications. This strategic move basically solved the venues once sufficient members are signed up and allowed Crowley and Selvadurai to win over venture capitalists to invest in their project. Create the right team to master the challenges: The founders were already considerably reputable. Dennis Crowley due to his experience from Dodgeball and Google and Naveen Selvadurai due to his ackground from developing mobile applications for sharing user-generated, location-based content.
But in order to win the race for scale and gain venture capitalists’ trust and funding, they had to employ additional highly qualified and known people. For this they hired engineering employees with extensive experience in developing applications for the mobile platforms of android, blackberry and iOS to rapidly launch and continuously update and patch the application. They recruited Evan Cohen, former director of strategy and operations at Bebo as general manager to manage the business development team.
With additional hires they managed to build the application in a very structured and efficient approach but also achieved to keep a highly technology affine, innovative and creative company culture. Besides, they turned down an offer from Yahoo! to independently further develop the application for the users. The company culture shows a consistency in their strategy to put customer value and user experience first and commercialization second. Additionally, by keeping a strong focus on their product, they achieved a very low burn rate of only $1JS 1,35 million for 18 months.
Form strategic partnerships to create additional exposure and user value: Foursquare initiated and benefited from partnerships with several media properties like Bravo, MTV and VH1. In addition to receiving small revenues per month for special badges, they more importantly gained on-air TV promotions which strongly supported brand awareness and credibility that further reinforced the growth in demand for the application. In addition, they partnered with the restaurant reviewing-service Zagat that enabled users to access restaurant recommendations in their surroundings and thus instantly increased user alue.
Get the right venture capitalists for additional trust and exposure: Finally, by hiring known individuals from the industry, they managed to attract well know venture capitalists such as Fred Wilson and Andreessen Horowitz (successful investors in technology companies like twitter and Skype) right from the beginning. Being funded by these not only creates a big bang and heavy media coverage but also increases the attractiveness for smart people to Join the company and raises the public expectation that foursquare will be the winner of the geoapplication standard war. Why are founders so concerned with “race for scale”? The market foursquare competes in is driven by economies of networks. Shapiro and Varian (1999) argue that in these “the winner takes it all markets”, “positive feedback makes the strong grow stronger and the weak grow weaker”. They reason that in networks, ceteris paribus, the value of connecting for the individual member depends on the amount of people that are already connected to the network (Shapiro & Varian, 1999a). Thus, with every person that Joins foursquare, value is increasing for existing members and for people that consider Joining.
By implication, this also means that every person Joining a competitor’s platform raises the thread of foursquare failing since in these demand-side economies of scale only one dominant one, people will still Join the network that accumulated the most members since benefits to everyone increase with the amount of other users. As long as the other product does not provide significantly enough benefits to Justify a transition of the whole network, users will stay with the existing product. This adequately explains why the founders were so concerned with “race for scale” – it was necessary to survive as a business.
If they do not want to position themselves as a niche product or want to be wiped out, foursquare had to increase their members quicker than all their competitors. 3a) What do you recommend for foursquare going forward and why? We believe that foursquare has to continue its preemption strategy with a clear focus on customer acquisition. As stated before, they are in a “winner takes it all” market where they not only have to acquire as many members as possible to increase overall value but also have to stay ahead of competitors in user numbers.
They should under no circumstances add advertisement on the application before it s decided which platform prevails. In addition, we believe that they could exploit their media coverage more by managing customers’ expectation regarding new feature launches. In addition, they should try to use the badge-system to reward the recruitment of additional users by existing users (e. g. the “Networking-badge” for adding 10 or more friends). Once they gathered a big enough user base and won the war for scale, we believe that there are several options to monetize this user base and their cooperation with ventures: 1.
Extend the custom batch business with ventures by offering more customized services, such as becoming a “Premium Partner” that is highlighted within the app and appears on the top of the recommendation list 2. Create a paid premium version for users which enables them to enjoy more upscale “Premium Promotions” at certain venues. With this, foursquare would be able to segment its user base in terms of willingness to pay, which in turn provides benefits for the ventures, making the before mentioned “Premium Partnership” more attractive 3.
Capitalize the new customers that venues acquire through the application, i. e. get a certain amount of money for every user that checks in at a venue and uses the foursquare app to enjoy a promotional event (e. . a free/ cheaper drink) at the venue 4. Monetize the consumption, behavior, and preference profiles that can be created based on the user check-ins at venues; still, this issue should be addressed with utmost care as privacy issues might cause significant legal risk 5.
Collaborate with travel and tourism sector to surge the number of users – not only offer reviews of establishments but also include real tourist guides or even spoken guides to lock in customers once they leave their home 6. Include a chat and dating function to strengthen the social network benefits and increase the interaction f users who are strangers to each other to enforce the network advantages 3b) How successful will they be? As elaborated before, foursquare is competing in a standard war.
In order to assess foursquare’s ability to win this combat, we firstly have to identify the type of standard war they are engaged in and secondly evaluate the resources and capabilities of foursquare and its competitors and evaluate how far they are aligned to their strategy. To identify the type of war we use the framework provided by Shapiro and Varian (1999b) that enables us to classify foursquare’s situation depending on to echnology. As shown in Figure 2, we found that foursquare is fghting a Rival Revolution war with its competitors.
The new technology provided by smartphones to show your location by GPS is neither backward compatible to Dodgeball, which relied on the telephone network, nor has it been used for social networks so far. Figure 3 shows our evaluation of the six competing firms and their average on five key assets based on the information given in the Harvard Business School Case “foursquare”. The companies’ key assets are evaluated from 1 to 5 where 1 indicates a low apability and 5 a high capability. Additionally, they gain importance from left to the right.
As the graph illustrates, we found that foursquare scores highest on the “First- mover advantage”, the “Ability to innovate” and average on “Reputation and brand name” but scored below average on “Strength in complements” and “Control over an installed base of customers”. Foursquare’s high score on the first-mover advantage derives from the fact that both founders have already gained strong experience in mobile location applications/services from Dodgeball and other applications. Thus, we believe that they are further ahead on the learning curve than competitors and that they can continue to lever their knowledge.
Moreover, they constantly show their ability to innovate by adding new features and are willing to take manageable risks by launching half-baked versions to expand their lead. They have only been in business since March 2009 and have a relatively unknown brand compared to facebook or twitter but showed great abilities to exploit free media coverage from blogs as well as from strategic alliances with media properties in order to gain a idespread media coverage to build brand awareness and reputation.
Although they are below average on the other two capabilities, we conclude that foursquare has a small advantage over their competitors. If they keep continuing to follow a preemptive strategy, they have a good chance to balance out their momentary disadvantage concerning the user base, leveraging their strengths in the launch of new features and the ability to use the media which are of crucial importance in a Rival Revolution war. Concluding, we believe that they have a chance of winning the standard war and to become the prevailing platform.
Nevertheless, as also mentioned by Shapiro and Varian (1999), even the company with the best top management team needs some luck to survive and win a war in the virtual network markets. APPENDIX List of Figures Appendix 1 – Details on Key Assets Analysis for foursquare Appendix 2 – Timeline of important events List of References Figure 1 – Product adoption curve (Solis, 2008) Figure 2 – Types of Standard Wars – Adapted (Shapiro & Varian, 1999) Figure 3 – Key Asset Analysis (own creation) References Brian Solis. (2008). Refining the Echo Chamber to Excel in an Economic Crisis. Retrieved from http://www. iansolis. com/2008/10/refining-echo-chamber-to-excel- in/ Piskorski, MikolaJ Jan, Thomas R. Eisenmann, Jeffrey J. Bussgang, and David Chen (2010). Foursquare. Harvard Business School Case 711-418, January 2010. (Revised March 2013. ) Shapiro, C. , & Varian, H. R. (1999a). Information rules: A strategic guide to the network economy. Boston, Mass: Harvard Business School Press. Shapiro, C. , & Varian, H. R. (1999b). The Art of Standards Wars. California Management Review, 41(2), 8-32. Retrieved from http://search. ebscohost. com/login. aspx? direct=true&db=bth&AN=1671231 &site=ehost-live