Foursquare goes into monetization mode with promoted updates

Foursquare is finally addressing that age-old question faced by big, buzzy startups: how are you going to make some real money? The location-based social network is rolling out its long awaited promoted updates, an advertising product that allows local and national businesses to push out specials, news and pictures to Foursquare’s more than 20 million users.
While Foursquare has made a small amount of money in the past on things like brand promotions and allowing merchants to claim their Foursquare venue page online, it really hasn’t had a reliable monetization engine. Over the last three years, it has shunned traditional advertising in favor of creating a fun and increasingly powerful product that works for both consumers and merchants. Now, with the promoted updates, it’s leveraging its Explore technology, which suggests place recommendations to users, to match promoted updates to the people most likely to act on them.
So when users fire up their Explore tab on their Foursquare mobile app, they will now see promoted updates from nearby businesses that want to prompt some kind of action from them. The Explore engine will only send out updates to users in the area who have visited, liked or interacted with similar businesses or had friends that did so. Businesses who buy promoted updates will pay on a cost-per-action basis, which could be anything from a user visiting a venue page or unlocking a special to checking in or loading a special to their American Express (s axp) card. Merchants will be able to select the locations they want to promote and schedule updates, but they must trust Explore to do the personal targeting.
The service will be tested first by about 20 businesses including Gap (s gps), Old Navy, Hilton, Hertz, Best Buy (s bby) and Walgreens (s wag). The promoted updates are intended to help Foursquare’s one million merchants drive in new customers, something the company believes businesses are ready to pay for. The paid updates comes on the heels of local updates, a free product Foursquare introduced last week for merchants who want to communicate to their existing customers.
Foursquare’s new chief revenue officer Steven Rosenblatt told me Foursquare has an opportunity to create a robust mobile advertising product, which is a challenge for many online companies, such as Facebook, that are seeing their traffic move to mobile devices. Rosenblatt said Foursquare enjoys an advantage because it was built as a mobile-first company and understands how to craft advertisements that work for its audience. And, he said, promoted updates work well organically in Foursquare because users are already turning to it to find recommendations on places and activities around them.
“This allows merchants to reach a broader audience and it’s exciting for consumers, who uncover things they didn’t know about,” Rosenblatt said. “It just fits smoothly into the experience without interrupting. It’s additive.”
This is a big step for Foursquare and shows how all of its pieces are coming together into a potential money maker. If promoted updates work, they can demonstrate how a business can make a lot of money tapping the local advertising market. This does seem to be a smarter play on mobile, which hasn’t been a great place for traditional banner ads. But will it be enough to justify Foursquare’s $600 million valuation from last year? We’ll have to see, although Foursquare is not done selling business tools to merchants.