Can Foursquare compete with Yelp?

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Posted 06 November 2012 14:54pm by Patricio Robles with 4 comments

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Foursquare has been on the list of candidates for the 'next big thing' for some time, but the location-based service's future seems uncertain.

Last week, reports surfaced that the company, which has already raised upwards of $70m in funding, was looking for investors to provide an additional $50m to $100m of capital at a valuation of $700m-plus. According to TechCrunch, investors aren't exactly rushing to check in to a deal.

And perhaps for good reason: despite Foursquare's traction, it doesn't have an Instagram-like growth rate, nor does it currently seem to have Pinterest-like monetization potential.

So what can Foursquare do? If a new rating feature the company has added to its iOS app is any indication, the answer to that question may be "compete with Yelp."

It's like Yelp, but better!

In the updated version of Foursquare's app, places discovered through the Explore feature now sport a 1 to 10 rating. But this isn't a Yelp-like rating: the rating is not determined by a direct vote of Foursquare users. Instead, Foursquare is mining the data it has collected, something that the company believes will give it an advantage over Yelp and similar services:

Instead of other sites where every place gets 3.5 stars, we come up with our scores using the same Foursquare magic that powers Explore. We look at signals like tips, likes, dislikes, popularity, loyalty, local expertise, and nearly 3 billion check-ins from over 25 million people worldwide. And, with every check-in and Explore search, our scores will get smarter and better.

While some might balk at the notion that an opaque rating algorithm is the best way to rank local businesses, it's not as if the Yelp approach is perfect. Case in point: Yelp, which went public earlier this year, is grappling with how to deal with the growing problem of fake reviews.

A better business model?

Yelp's relationship with local businesses isn't without tension: it depends on these businesses for a large share of its ad revenue, but its service allows customers to diss them. That puts Yelp in an odd position and it has been forced to respond to allegations that it's in the business of extortion -- both in court and the court of public opinion.

Conceivably, by rating local businesses, Foursquare could find itself in a similar position, but the fact that its ratings are not based on direct user ratings may give Foursquare an interesting opportunity to cozy up to local businesses without the same type of emotional baggage that Yelp still carries.

The big questions: does Foursquare have enough traction, and can it convince consumers that it's the best source for local business recommendations? It has an uphill battle on both fronts, and with investors apparently skeptical about the company's valuation, this may be the Foursquare's last chance to define its place in the market.