Everyone knows that brick-and-mortar retailers are suffering -- foot traffic has slowed as more shoppers move their spending online. If Pandora Media (NYSE:P) can show advertisers that ads on its service generate higher in-store sales, that could be a huge boon for its ad revenue.

As it turns out, a recent partnership with Foursquare is the company's latest attempt to prove that advertising on Pandora works.

The new plan

Pandora is in the process of revising its business strategy due to a recent investment from Sirius XM Holdings. Sirius management wants Pandora to go back to its roots and focus on building its ad-supported service that touts over 80 million active listeners as of the latest quarter.

A band performing on stage.

Image source: Pandora Blog.

Partnering with Foursquare

Foursquare is a small private company with over 200 employees that makes search and discovery mobile apps that leverage user location data. Products such as Foursquare City Guide give users the experience of discovery with recommendations on what to do and where to go from the Foursquare community. 

Foursquare serves brands as well as consumers. Location-based intelligence has produced several products that can help advertisers track results. Attribution by Foursquare is one such product that will help Pandora test the effectiveness of ads on its music service. With 2.5 million users who are part of the Foursquare community, the product is used to aggregate consumer data for offline shopping. 

Pandora's initial test campaign was conducted with Subway sandwich shops and the Mohegan Sun casino -- results were impressive. The data showed that ads served up by Pandora can potentially result in a 7.5% increase in incremental visits to store locations based on test results.  

Keri Degroote, VP of Research and Analytics at Pandora, wrote in a blog post regarding the new partnership:

Pandora has always provided rigorous data insights and strong ROI for advertisers, collecting over one billion signals from our 100% logged in 84 million user base  -- who they are, what they do and how they listen on Pandora. By pairing our suite of innovative advertising solutions with Foursquare's best-in-class Attribution by Foursquare platform to deliver offline measurement for all ads, brands can now get a deep and constantly refreshed understanding of how campaigns are driving results in the real world.

Pandora has a big edge over traditional radio

Pandora's ability to target listeners with individualized ads based on their actual location gives the company a major advantage over traditional radio. Couple that advantage with Foursquare products, and you can complete the feedback loop by giving direct return on investment insights to advertisers. Unlike traditional radio, an advertiser only pays when a listener is using Pandora and an ad is played. Being able to tie that ad to an individual and in-store sale is an incredible feat.

Total ad spend for traditional radio is approximately $18 billion per year in the U.S. Meanwhile, in 2016, Pandora generated $1.1 billion in advertising revenue. There should be plenty of room for future growth.

Investors should look for results

Pandora reports ad revenue on a quarterly basis: 

Metric Q1 Q2 Q3 Q4
2015 advertising revenue $179 million $231 million $255 million $269 million
2016 advertising revenue $220 million $265 million $274 million $313 million
2017 advertising revenue $223 million TBD TBD TBD

Data source: Pandora. Chart by author.

The metric was virtually flat year over year in the first quarter, but if advertisers experience the boosts in foot traffic that Pandora hopes to deliver, ad growth should accelerate thanks to the Foursquare partnership. 

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