Archive | September, 2012

3 Things Foursquare Should Learn from Trulia (TRLA) and Yelp To Get to $100M in Revenue

Today was an incredible day. I had the extraordinary pleasure of being on the New York Stock Exchange floor this morning for the IPO of Trulia (#TRLA).  It was the most exciting day of my career to date (that’s me below).  I was on the founding team at Trulia and was responsible for building the sales organization between 2005 and 2010. The Trulia sales team now accounts for half the Trulia’s 500+ brilliant employees and most of its revenue. I left in 2010 to start Crunched on a mission to help other companies build large sales organizations with technology.

So what does Foursquare have to do with Trulia and Yelp?  A great deal, actually. For starters, all three are essentially media companies. All three drive massive engagement from mobile devices, Foursquare exclusively. All three cater to consumers on one side and small to mid-sized businesses (SMBs) on the other. All three have “listings” search, discovery, check-in, and some type of rating and reviews at the very heart of their core service and value proposition. Foursquare and Yelp both help consumers discover, rate and review local businesses, like restaurants.  Trulia helps consumers find homes and make smarter home buying decisions in the process. It gets those home listings from real estate brokers and agents, which are basically small and mid-sized business. All three companies make money almost exclusively from advertising from two basic groups of advertisers: large brands and SMBs. All three companies sell a mix of brand advertising like banner ads, as well as integrations and sponsorships to large brands like American Express and the advertising agencies that represent them. They also sell advertising to small businesses in the form of banners, featured listings and local promotions.


That leads to the 3 things Foursquare should learn from Trulia and Yelp:

  1. Brand Advertising Doesn’t Scale Online – The best thing about brand advertising is that big brands have large advertising budgets that they spend every year without fail.  The three worst things about brand advertising:
    1. Lumpy & Unpredictable Most brands buy on a campaign and/or seasonal basis.  For example, Home Depot advertises mostly in the summer to promote barbecues and gardening tools and in the winter to sell snow blowers and shovels. American Express spends like crazy when it launches a new card, and then pulls back. This means you can run a multi-million dollar campaign for a brand one-quarter and then not hear from them again for six months to a year. You cannot build a scalable, repeatable business on that kind of revenue stream, especially if you want to be a public company. Only the top three or four largest media properties get guaranteed revenue a year in advance for their ad inventory, known as “up-fronts.” More on that in #3 directly below.
    2. Category Exclusivity – For most vertical web properties, the number of national brand categories that make sense for your site are limited. In other words, it only make sense for certain types of companies to advertise around real estate or restaurants.  Foursquare has a huge deal with American Express right now, which seems like a great partnership for both sides. I’m sure AMEX is writing Foursquare nice big checks to get access to consumers using their credit cards to buy from local businesses all day, as those SMBs pay AMEX 3-5% of each transaction.  What’s wrong with that deal? Well, most likely American Express has exclusivity and Foursquare cannot sell to Visa or MasterCard while the relationship is ongoing.  Oh, well. There goes an entire category of advertisers that make sense for Foursquare wrapped up in a single partnership.  Not only does that limit your revenue opportunities, but also when you have category exclusivity, the loss of that one brand advertiser is a big hit to your top and bottom line unless you can replace it immediately.  Remember what Mom told you, don’t put all your eggs in one basket.
    3. Massive Scale Required – Advertising for national brands is still all about reach and frequency. As popular as the Internet is today, the vast majority of advertising dollars still go to TV. Why? Because that is still the easiest, most efficient place to reach hundreds of millions of consumers. Brands advertise the same way online. Brands spend something like 80% of their online budget with a handful of sites that have the biggest audience, which is almost always Google, Facebook, Yahoo and Microsoft (Bing).  The remaining 20% of the budget gets allocated to thousands and thousands of sites and mobile applications.  Ouch!  Since supply outstrips demand, it is a big race to the bottom in terms of the price advertisers will pay and websites can charge.  A very significant percent of online brand ads are sold for low single digits ($1-$5) per thousand views or impressions, known as a cost-per-thousand or CPM. Thus, you need a massive number of users and traffic to make money at that game.  Google, Facebook, Microsoft and even Twitter have the kind of scale to make this work, but most other media properties don’t.  Sure, Foursquare has 20 million registered users, but only a fraction of them are active.

2.    Small Business Advertising Scales - Selling to small businesses has at least three major advantages over large brands:

  1. Recurring – Yelp sells local businesses 3, 6, and 12 month advertising plan commitments at a cost of $300 to $1000 per month, according to pricing on its website.  Trulia sells featured listings and local ads to real estate professionals for similar monthly amounts, according to pricing on its website.  Everyone wins.  Local businesses get a constant flow of new leads and customers and Trulia and Yelp get predictable monthly revenue that is very, very sticky. It is a symbiotic relationship.
  2. Diversified – Yelp reported 19,000 local businesses buying advertising last September in its S-1 filing.  Similarly, Trulia reported 21,544 real estate professionals buying advertising in its recent S-1 filing.  Diversification of customers is a very, very good thing.  You will never notice when Yelp or Trulia lose a paying customers, because they have tens of thousands more and add hundreds of new ones each day.
  3. Premium – Small businesses usually advertise on a hyper local level, and in advertising the more targeted your ads the more effective and the more expensive. The brand advertising inventory of most websites goes for low single digit CPMs, as mentioned above. However, the highly geographically targeted ads bought by small businesses often drive transactions and go for premium effective CPMs in the hundreds of dollars.

3.    Selling to SMBs Requires A Massive Sales Organization – The challenge and opportunity to selling advertising to small and mid-sized business at $300-$1000 month is that you need thousands of them paying to scale.  That means you need hundreds if not thousands of salespeople calling on them. If you search Yelp on LinkedIn, you will find 600+ salespeople working at Yelp, which generated $33M in revenue in the most recent quarter, for a $130M annual run rate.  If you search Trulia on LinkedIn, you will find ~250 salespeople working at Trulia, which generated $29M in the first half of 2012, for a $60M annual run rate.  Do you see the correlation here? Its a numbers game.  The contingent of these sales teams selling to SMBs is probably making 50-80 calls per day, connecting to 6-10 SMBs per day to close a hand full of subscriptions each per day.  This is a high volume, transactional business and it requires lots of humans making lots of calls, doing lots of presentations and demos and charging lots of credit cards.

If you search Foursquare on LinkedIn, you find only 2 or 3 of its 80 employees are salespeople. The rest are product and engineering.  I’m pretty confident those few salespeople are calling on large brands like American Express, which means Foursquare is putting very little to no effort into monetizing the only scalable customer base that will get it to $100M and beyond.  It is easy to get sucked into the allure of large checks written by sexy brands instead of paying attention to thousands of little checks from the SMBs that will ultimately represent the majority of revenue needed survive and thrive.

The longer Foursquare waits to build this sales organization the harder it is going to get.  I love product and engineering centric cultures in the beginning of an Internet company’s life while you are trying to nail the end-user experience, but the longer you wait to bring in the sales team the harder it will be to integrate them into the culture.  Adding salespeople to a large, engineering centric company culture is like trying to put a baboon’s heart into Christian Slater (he dies). I could write an entire series of posts on the challenges associated with bringing sales, product and engineering together harmoniously under one roof, so I will not go into that here.  More importantly, the longer Foursquare waits to build its inside sales organization the longer it is going to take to build a scalable, repeatable revenue source that will take it from a cool app to a viable, sustainable company.  The longer it takes, the higher the risk that someone else beats them to it or passes them by.

Maybe there’s really only one thing that Foursquare should learn from Trulia and Yelp; that it needs to build a massive sales organization as soon as possible and focus the majority of its resources on small to mid-sized business to get to $100M in revenue and beyond.  Go Foursquare, check-in to that!

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