Foursquare’s Growth Dilemma

Crossing the chasm from early adopters to the mainstream market poses significant problems for foursquare. It’s a classic Catch-22. How does foursquare engage a mainstream audience - we’ll call them “normals” - without alienating the core group of early-adopters who catapulted them to 1 million users?

To recap, the debate so far has been around which of the following foursquare features will be most attractive to the mainstream consumer market:

1) Discount

2) Game Dynamics (badges, points, etc.)

3) Tips related to location (See Chris Dixon’s post)

Though these features are not mutually exclusive, I believe discounts are the most attractive to the mainstream market, and will be necessary for foursquare to cross the chasm. Normals may come for the novelty of the product, but eventually will want a return for their patronage; otherwise they just don’t have, or won’t make, the time to use the service. I’ve written about this previously, and a recent Dave McClure blog post echoed these sentiments. He writes:

Without financial incentives or discounts, there is absolutely no reason on god’s green earth to “check-in” for your stoner cousin, your luddite penny-pinching aunt, and certainly not your clueless grandmother. they could give a rat’s ass about your stupid little iPhone app with the pretty pictures and clever auto-discovery that barely works while draining the hell out of the battery… that is, until you give them $5 off their next beer or 5-dollar foot long…. at which point guess what? HELLO, MAINSTREAM CONSUMER MARKET! while there may be ways to s[t]imulate financial incentives & discounts with virtual goods, frequent flier miles, or other point-based systems & psychological motivations, nothing works better to increase conversion than a cool $5 bucks in yr digital wallet, or 20% off yr next offline purchase.

While I don’t agree with everything he wrote (specifically, that rewards programs are more similar to game dynamics than to discounts) I do agree on the basic premise: that “normals” do not care about shiny badges, they care about saving money.

However, venturing into discounts could pose a problem for foursquare. I was speaking with an analyst at a VC firm the other day who pointed out that early-adopter users often react negatively to being “given” something in return for using a product. Early-adopters use the product because of the intrinsic enjoyment it brings them. This value is diminished when they are given something tangible for using the product.

It’s kind of like students receiving money for getting A’s in school. Though on the surface it sounds like a good idea (why not add another motivating factor!), this actually has been proven to reduce student performance, because enjoyment switches from intrinsic (or internal) motivation to extrinsic (or external) motivation. Intrinsic motivation is more powerful and sustainable than extrinsic. When motivated by intrinsic factors, a user is willing to act irrationally, giving more than he or she receives materially from the service; the user is compensated by inherent enjoyment. They do not see usage of the product as a market transaction governed by market rules: rather, it is an emotional decision.

However, when motivation switches to extrinsic factors, the user will adopt logical market expectations that are associated with a market transaction and expect a 1:1 correlation of what they give and what they receive. It is no longer an emotional decision. If what they receive in discounts does not compensate for the effort of checking-in, the user will not use the product.

Giving discounts to users could prove devastating in foursquare’s efforts to keep their core users engaged. The internal motivation subsides, as it is replaced by external motivation and likely an increasingly apathetic core user base. Also, the thrill of early adoption no doubt fades as more normals become regular users. It’s not so cool to blast your locations and insights about them when you find your archeology professor or sweet aunt chatted them up some time before you.

So, on one hand foursquare needs discounts to attract a mainstream market. How can they grow as a company and increase monetization if they stall at 1 million users? On the other, they may alienate their existing user base if they move too much in this direction. Early-stage technology companies are extremely reliant on their initial users. A striking example on point is Aardvark, acquired by Google. For the social search service, 20% of users accounted for 85% of all answers. So, which way to go? It’s a fine line, and the outcome cannot easily be predicted. But I’ll leave with one idea: the Roger’s Innovation Adoption Curve (pictured below).

The curve classifies users of innovative products on the basis of when they start using the product: some will adopt early, most will adopt mid-stream and others will adopt later. It is a normal distribution curve, and identifies innovators, early adopters, the early majority, the late majority and the laggards. In this model, 2.5% of users are innovators, 13.5% are early adopters, and the other 84% are what we would classify as “normals.” Right now it would appear that foursquare is just crossing the chasm between innovators and early adopters. The foursquare service is most powerful when used on a large scale. My best guess is that they will do all they can to capture the remaining ~97% of the market through discounts, but will do everything they can to keep their early adopters engaged through game dynamics. We may very well see an increasingly segmented foursquare user base; core users attracted for the game dynamics while largely ignoring discounts, and mainstream users attracted by discounts while apathetic to badges and points.

Joel on Twitter

I still have mixed feelings about Twitter, but I generally agree with the points that Joel makes. In particular I think that if you can do more listening than you do talking you can maximize its usefulness as a tool. He writes:

Although I appreciate that many people find Twitter to be valuable, I find it a truly awful way to exchange thoughts and ideas. It creates a mentally stunted world in which the most complicated thought you can think is one sentence long. It’s a cacophony of people shouting their thoughts into the abyss without listening to what anyone else is saying. Logging on gives you a page full of little hand grenades: impossible-to-understand, context-free sentences that take five minutes of research to unravel and which then turn out to be stupid, irrelevant, or pertaining to the television series Battlestar Galactica. I would write an essay describing why Twitter gives me a headache and makes me fear for the future of humanity, but it doesn’t deserve more than 140 characters of explanation, and I’ve already spent 820.

The other day I was having a conversation with my parents about the purpose of Twitter. I argued that it was to attain useful information. I use it to find interesting articles and conversations. I think the key here is that it helps me find them. The entirety of these conversations does not actually occur on the Twitter platform. My parents argued that it was yet another tool of my generation that provides entertainment to the ever-growing portion of the population who have a short attention span. The difference between “learning” and “empty enjoyment” may help illuminate the segmented market of Twtitter users. So, when you use Twitter, do you find yourself gaining knowledge; do you “learn” something of interest or value? Or is it just a way to pass them time; a vehicle for empty enjoyment? I think the answers to these questions are important for the impact Twitter will have on my generation.

The Geo Stack

If you haven’t already taken a look, Chris Dixon wrote a great post discussing the “geo stack.” In particular, I found interesting his thoughts on the monetization layer. He writes:

Finally, monetization could be a very valuable layer.  There are (at least) two parts to monetizing location. Getting local businesses to embrace the internet has been very slow going. Companies that make money on local businesses today (Yelp, Yext, ReachLocal) use expensive outbound calling and other “push” techniques to sign up local businesses. There remains a huge opportunity to supplant the yellow pages as the default advertising platform in local business owners’ minds. If apps like Foursquare can build up enough marketing / PR momentum that every restaurant, dry cleaner etc feels like they need to “get on Foursquare” this could finally open the floodgates for local business advertising.

The second part of monetizing location is facilitating and tracking offline purchases. 90%+ of purchases are still offline, although for many of those transactions people do research and make their decisions online. The internet doesn’t get paid for these transactions.  Companies like Milo (disclosure: I’m an investor) are doing interesting things in this space and I expect we’ll see a lot more activity on this layer soon.

Below is my response as I wrote on his blog:

Interesting commentary. However, I’m not sure that recs delivered to your phone would appeal to a wide population. There is a huge difference between recs or “tips” delivered to you at home on your laptop vs. outside on your phone. On a laptop, the user is probably seated, has time, and is committed to making a decision. Often this is a purchasing decision, and they are actively searching for the rec (like when they go to Hunch.com).

When delivered to a phone, the tip is delivered involuntarily (like on 4square), and the person is often in a rush, already has a plan for the next few hours at least, and not making a decision related to the tip. They could be at Starbucks and get the tip “Eric. S thinks you’d like XYZ restaurant or XYZ store.” However, its early in the morning, and the user isn’t making a decision related to eating or buying. People are less likely to remember a tip when they are not making a decision related to it. So, the tips aren’t useful, but rather annoying. I’d bet that a small portion of the population would read these tips, and an even smaller portion would act upon them.

If tips are less about where else to go, and more about what types of product to buy once you are at the store, maybe it is more relevant. I could see a wider audience finding location-specific tips useful, such as “you are at XYZ restaurant. People like you loved the steak,” but is the there really a big difference (to Normals, not early adopters) between looking at this tip and simply asking the waiter what is good?

I think the real usefulness to Normals is real-time rewards, delivered to your phone (similar to what Fred Wilson wrote about a few weeks back). Everyone likes to save money, and the rewards would be directly related to the purchasing decision at that moment (“hey, this is your 10th stop at Starbucks, you get a free coffee”).

Becoming an “expert”

Disclaimer: I am by no means an expert, and in the spectrum of knowing, taking a view, and acting, I’m somewhere between knowing and taking a view. Below is just what I’ve observed, I’m not speaking as someone who has mastered these stages.

When I worked in Sales and Trading this summer, I was given one piece of advice more than any other: take a view. All the full-time employees expected each summer analyst to read the Wall Street Journal and talk to other traders about the latest market activity. But, many people had difficulty translating the knowledge they acquired into a coherent view on the market. It’s one thing to know the price of oil relative to equities and to read why the “experts” think the trend will either continue or cease. It’s quite another to develop your own genuine view on the subject.

It’s tricky too. In stating your opinion, where does regurgitation end and originality begin? My answer would be that forming an original opinion requires a return to primary sources – a study of the original facts or statistics, combined with a critical review of many secondary sources. So, you aren’t taking a view, but rather only being knowledgeable if you restate the opinion of one of the senior researchers at the firm or mimic the column you read in the opinion section. Taking a view requires the examination of original data and the analysis of diverse and contending readings in order to figure out what you might be missing. Only then can a person advance from simply knowing to taking a view.

Now that I am transitioning from the finance world and to the startup world, I see the same principles being important. There is a stark difference between knowing what web products do, who started them, and how they were funded (this is the “memorize TechCrunch” approach to becoming an expert) and being able to predict which will be successful and then explain why.

Some mistake simple knowledge for expertise. In fact, expertise = (knowing + taking a view + acting). And knowing, taking a view, and acting must occur in this order. Which is why it’s so important for anyone new to a particular industry to not only take in information that you read online or elsewhere (the knowing) but also engage with it (the taking a view) by talking with other people, be it in person or virtually. Laying the foundations of knowledge and taking a view early will increase your chances of success in action beyond the basal rate of luck. And then you may become an expert.

Real-Time Rewards

Fred Wilson recently made a post about rewards and monetization of the foursquare platform. He writes:

“the most interesting way to reward a checkin is to provide some real value at the moment of checkin. For example, when I show up a my local cafe in the morning and checkin, I’d love to occasionally get a message on my checkin screen that says ‘you’ve checked in for the tenth time and earned a free espresso drink.”

With respect to online communities such as foursquare, I’ve always wondered how powerful the incentive of gaining new badges really is from the users perspective. Sure, it is a status thing and can be addictive, but is it sustainable long-term? Perhaps tech early adopter types hold the value of a certain number of points in high regard, but I don’t think this is generalizable to the general public. Keep in mind that many of these early-adopters are either in the tech business, or hope to be. Active engagement in these online communities, and the building of a significant “web presence” can lead to career rewards.  As I outlined in a previous post, both venture capital firms and startups value people who are actively engaged on the web. However this incentive isn’t something that is generalizable to those outside of the tech world.

But, everyone likes to save money. I think the more sustainable incentive for users is the accumulation of rewards. In this case, rewards are powerful because they are granted in real time, and the user is being rewarded monetarily (through a discount) by using the service. My guess is that we will see a trend of real-time rewards replacing “badges” and “points” as an incentive for usage in many online communities.

However, I think we’ll see real-time rewards limited to national brands, at least initially. National brands provide the most scalable targets from an operational standpoint- one national affiliate can give discounts all over the country. These will be the early adopters, followed only later by “mom and pop” shops. As Chris Dixon recently pointed out on his blog:

The problem is that, for the most part, these local business either don’t think of the web as an important medium or don’t understand how to use it.

So what does this mean? If location-based services like foursquare discover that they can best engage users through real-time rewards then they will quickly move to put in place deals with vendors to give their users discounts. Because of the factors outlined above, I think this will be initially limited to national vendors, meaning a delay in the “going local” trend that many have talked about with respect to these types of location services.

A few weeks ago at the Hackers and Founder event in NYC, Udorse demoed its new iPhone Rewards Camera App (full disclosure: I plan on joining the Udorse team this summer). I’m excited about the product because I think it plays into emerging market signals. Real-time rewards delivered to your phone is highly motivating for users. In this case, I predict that businesses will be willing to pay per action (and provide discounts) for a qualified user of the product.

But the true power of these real-time rewards lies in the sharing of these rewards with a wider social network. The ability of a business to leverage an existing user’s network to pull in new customers through discounts is scalable in an exponential way. The promise (and delivery) of real-time rewards can pull in new users in a way that the promise of new badges and points cannot.