American Express-powered Specials on Foursquare: Social Currency

Enough already. Yes, tech companies are stealing each other’s ideas without shame. But sometimes, we are too quick to label a marketing strategy the invention of some other company, and risk missing a smart business idea. Case and point, Foursquare’s marketing campaign at South by Southwest (SXSW) in Austin, Texas.

Foursquare’s program in Austin last week was not a Groupon rip-off (goes to show you how many tech writers don’t consider business models). Rather, Foursquare/American Express’s idea reflects a new evolution in the credit card rewards business model, making it effective even with a more manageable discount (not having the Achilles heel of Groupon). In contrast, Groupon involves users receiving a fire-sale discount if enough people participate (which works, for restaurants, more as foot traffic than economics of scale). Without that fire-sale discount, no one budges. But the discount (typically 50% off for the customer as Groupon takes another 25%) exposes the merchant, especially restaurants, to substantial risks.

What we saw in Austin was different. Three players (Foursquare, AmEx, and merchants) joined forces for the experiment in Austin. Foursquare, the new ingredient in the equation, provided the location-based marketing. AmEx’s service provided the incentives (the $5 credit); I’m sure that AmEx and Foursquare will have to iron out the numbers (and hopefully the rate for a “rewards card” comes down). And the merchants, of course, were there to sell stuff and offer services.

So what does Foursquare (or geo-location) bring to the equation that wasn’t there before? The combination and synchronization of rewards credit cards and location-based social media bring two new things to the table. First, suddenly a rewards card becomes much more flexible. The rewards part is less dependent on one retailer (such as Costco) or one type of purchase (like gas). Merchants can move in and out of a rewards program with greater flexibility as business conditions change (opening rewards up to small businesses which are much more unstable than Costco as it turns off customers if they show up and suddenly find out their rewards won’t work). Secondly, a customer can scan their region for rewards deals. This is where Foursquare really ups the ante. Not only does it make a shopping mall a new proposition, it can give a restaurant the upper hand in areas where customers have many dining choices. Both of these qualities, flexibility and geographical convenience are not part of Groupon’s business model. Finally, a rewards card stops being merely a dubious loyalty program although AmEx will probably try to sell it that way to those who participate (and may be successful until there is competition). By making the commitment unnecessary (as business conditions can now be factored in because customers can look it up through Foursquare), it open a new dynamic for businesses (and perhaps slightly alters AmEx’s one fee fits all model).

Let’s look at what Foursquare and AmEx did in Austin so we might see exactly how this may play out (of course, both companies will have learned lessons that willl affect the program). In Austin, Foursquare partnered with American Express in a pilot program that offered  “spend $5, get $5” deals at 50 local Austin merchants.  To participate, people check in to the store using Foursquare and those who use their enrolled American Express card for a purchase of greater than $5 dollars will receive a $5 dollar credit on their statement. Of course, the deal as it was conceived in Austin doesn’t seem to produce any revenue. However, SXSW is a perfect (young) demographic to conduct marketing experiments. Foursquare and AmEx are testing and evaluating the system and concept (which would most likely would be instituted with  discounts), and obviously trying to project how many new customers/users this program will bring in.

Even though Foursquare and AmEx were generous in Austin, I expect that they will be more shrewd business-wise as a version of this program expands (first probably to major cities where Foursquare’s presence is strong). AmEx, as a premium credit card, sees the possibility to penetrate a younger, educated demographic (AmEx has a history of throwing credit cards at this demographic and hoping it will stick) which normally gets by with Visa or Mastercard, along with enticing more merchants into their network. In addition, it goes along with AmEx’s long history of being on the forefront of credit card rewards. Foursquare suddenly adds more versatility and tangible incentives (credits over freebies) that make it more desirable to people who may be persuaded to make the jump into geo-location. Soon I think the days of mayors will go the way of Sony Beta.  Since rewards marketing can happen in real time based on geographical convenience, merchants (like restaurants) don’t have to make commitments that they cannot afford over the ups and downs of the business cycle. In fact, the old credit card rewards program fused with geo-location might turn Foursquare (especially if they can hold on to AmEx) into the technological titan it always imagined it could be.