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Twitter has announced a new partnership with American Express to allow small businesses to advertise on the popular social network. The program is due to launch in late March for American Express cardholders and merchants.

Until now, advertisers have had to work with Twitter’s team. This has limited the number of advertisers Twitter could successfully scale to.

If done right, this partnership represents a significant threat to recommendations site Yelp, which is on its road to IPO. As I wrote earlier, Yelp charges some merchants a $600 CPM for advertising that is often lacking in any relevance to the business.

Yelp also requires a commitment of at least three months and charges early termination fees for businesses that don’t meet their commitment. These rates and conditions are so bad that I can’t recommend Yelp for any business.

On the other hand, I recommend that every small business create a Twitter account to connect with their existing customers.

While Yelp’s model most closely resembles a Yellow Pages model, early indications are that Twitter’s product will be more performance driven and accountable.

A number of startups have been pushing small businesses to use their services for new customer acquisition. But tools from companies like Groupon, LivingSocial, and Yelp are not cost effective.

Many small businesses will do just fine using Twitter’s free accounts to build loyalty. But Twitter’s self-service platform offers the promise of a cost-effective new customer acquisition vehicle. Businesses will be able to pay for each new follower and build an ongoing relationship with those consumers.

I would expect that, over time, consumers will be able to load electronic offers onto their American Express card directly from a tweet. This would open the door to redemption-based advertising, where advertisers are only billed when an ad delivers a new customer.

I would also like to see Twitter develop a localized version of its user recommendations; when someone is first signing up for a Twitter account, they can enter a location and get a list of recommended businesses to follow.

There are two important keys to success with small businesses:

  • Simplicity of the user interface. Complex bidding and keyword management won’t work. An interface with a lot of form fields won’t work.
  • Marketing. Small businesses need to be aware of the product offering. This is an area where American Express can help, with its large merchant base. American Express is also funding $100 in marketing credit for the first 10,000 eligible cardholders and merchants.

Without both of these in place, a self-serve product won’t work. A third important factor is scale — and only Twitter, Facebook, and Google have the scale that is necessary for success with self-serve in the highly fragmented local market.

The companies that have reached a reasonable degree of success with small businesses have mastered both. Groupon, LivingSocial, and Yelp all work with a very simple user interface — the telephone. You don’t have to use a computer to manage their ads. They also have an effective marketing program — someone calls you.

But because dialing for dollars is expensive and takes a large team, their marketing programs are also expensive with large commitments.

Twitter and American Express have the potential to deliver better targeted prospects for far less money.

Rocky Agrawal is an analyst focused on the intersection of local, social, and mobile. He is a principal analyst at reDesign mobile. Previously, he launched local and mobile products for Microsoft and AOL. He blogs at and tweets at @rakeshlobster.

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