Foursquare: Monetization as a Means to Growth

by Ashwin Limaye

A recurring theme in many of our class discussions and my conversations with entrepreneurs has been the 'When to monetize' question, which is frequently posed as a 'Monetization v.s. Growth' tradeoff. The thesis here is that in the early stage, tech startup first focuses on product market fit, and seeks to establish a customer base with which it can validate critical assumptions and which is also the seed market that hopefully goes viral and grows into a large user base. While in this stage, spending effort on monetization is likely unproductive. For one, monetization may require the investment of scarce human resources that do not really 'improve' the product but focus on meeting the needs of other constituencies such as advertisers. Indeed, some features may need to be built or introduced that become a nuisance for the product's primary customer. Consequently, it seems logical and sensible to invest in creating the right product first, growing the user base next and then figuring out how to monetize the whole thing. Prominent examples include google and facebook, and more close to home, IMVU, Triangulate, Rentjuice, MochiMedia, etc


What struck me when thinking about foursquare was that the monetization v.s. growth tradeoff was not necessary applicable here. Sure, you could say (and many did) that the founders spent time honing the product, passionately seeking direct customer feedback and passionately incrementally working on new features to get a product that users loved and wanted before thinking about making money off it. However, as some classmates noted, could foursquare be the analogue for a local, real-time Groupon? That is, foursquare would 'sell' its services to restaurants as a platform for offering group deals: users who had checked in within a certain vicinity of the restaurant could be offered deals for visiting the restaurant in sufficient numbers over a certain time period. This would extend the platform and offer strong incentives for users to use and benefit from checkins, while encouraging vendors to sign up and offer deals, growing the other side of the platform. Users could be given an option to 'turn off all deals' thereby enabling them to use the product as before. By charging for its service, foursquare would position itself as a money-making, going-concern business committed to meeting its users' needs and could fund product development and sales teams from the money thus made. Indeed, the ability to make make money in a locality of a certain size and user concentration could be the basis for deciding areas of future expansion, valuation for raising funds as well as 'pull' users and vendors alike. 


To generalize, monetization can be a means to growth rather than a tradeoff to growth in the case of technology platforms that have the following broad characteristics:
1. Network effects exist at sub-scale i.e. a small group of interconnected users find value in using the platform even if no more users join
2. Vendors benefit from targeting such small groups and will pay to offer value to these users
3. Such sub-scale groups can be formed dynamically, and a user can at once and over time be a part of many different groups, which creates a higher level network effect of 'subgroups' that becomes a driving source of value
4. Vendors care for stability of the service provider and can see clear and immediate return on investment of their participation.


For such a technology platform, I believe that early monetization is actually a means to growth rather than a tradeoff. To give a simple analogy, consider cab-sharing services at airports: they offer a platform (kiosk, in most cases) that can form small groups of users (passengers) in real-time, to whom vendors (cab drivers) can provide 
value (pay less than fare if traveling alone, but more/equal total fare for cabbie)
. Vendors need to see this value to be a part of the platform, while users are frequently transient members of such platforms and will use such services as-needed across their travels. By making money, the kiosk stays in business and attracts more both passengers and cab drivers, allowing it to scale up profitably.


The question, though, is whether such examples and the above criteria can be codified to create 'necessary and sufficient' characteristics. That would enable entrepreneurs to design their offerings better, plan for scale and growth, fund themselves internally and make money from the word go. Suggestions?

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