7 API Business Model Terminologies

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There’s a lot to learn for those of us just getting started in the world of APIs. Even the nature of an API can be a bit elusive when just starting out, not to mention all the terminologies and acronyms required to comprehend the development world around you.

But before you can get started developing and using useful systems for communicating with the world of data, you need to have a background understanding of the tools and resources available to API practitioners as well as how APIs generate revenue. For anyone starting in APIs, this resource is intended to help.

Start by learning these seven key terms for API business models and what they mean to API practitioners.

1. API

Let’s start by defining what an Application Programming Interface (API) actually is.

APIs serve as a resource base and communication tool that allow other services to piggyback off them. The result is a network of shared information that enables developers to create innovative new services.

For example, an information request is sent out through the API as a call, and then that information is retrieved from the structured or unstructured data that acts as a source. One way to think about it is to imagine the API as the waiter in a restaurant. The user places an order, and the API communicates that order to the kitchen (the dataset) and brings back the request.

An API practitioner, then, must have an understanding of datasets and methods for harnessing and retrieving data. Fortunately, there are plenty of free and open-source datasets from BuzzFeed to Quandl that you can use and experiment with as you familiarize yourself with the API world.

2. Open APIs

In the same vein, many API business models operate in a free and open capacity. These Open APIs act as the bread and butter for many applications.

Open APIs are publicly sourced, meaning they are available for free to any developer who wants to make use of them. Providing access to background data, these tools make integrating services and functionality exponentially easier than if developers had to create datasets and communication tools entirely from scratch.

Because Open APIs can add value to a business model, many companies offer them as a tool for freelance developers. Some major businesses with their own Open APIs include Facebook, Yahoo, and YouTube.

This is not to be confused with OpenAPI, the industry-standard API specification.

3. Freemium

Transitioning from free to paid API business models, there are the freemium services. These APIs generally require a subscription before use, with tiered services and additional services accessible behind a paywall.

The freemium API business model includes a service tier that comes at no cost. It might give users 500 calls to the API before the user incurs a charge. Freemium APIs may come with quotas and overage fees as a means to charge users who go over a set monthly limit. Rather than rate limiting, this ensures that users can still access the service while the developers get paid.

Google Maps is one example of a freemium API with additional features and call types available to subscribers. At no cost, developers can access map information, but at a premium, you can also receive greater technical support and usage reporting.

4. Pay-As-You-Go

Further down the payment road, there’s the pay-as-you-go model. This method of charging for API use considers only the calls made to the API by the user and bills them accordingly. If you only make one request to the API, that’s all you’ll pay for.

Smartcar’s pay-as-you-go model, for example, charges $0.15 per request on up to 20,000 calls. The billing dashboard tracks the requests, then the user pays for their monthly use. This model ensures that the user gets what they need, and the API developer gets paid.

5. Points or Unit-Based

Much like pay-as-you-go, the points or unit-based model of API services ends up billing the user only for the calls and features they’ve actually utilized. Different requests can be assigned different point values based on the value of the service itself. This way, developers and users have access to what they need and can budget accordingly.

Points-based payment plans are typically either pre-pay or pay-as-you-go. This means the developer can buy the points they need to use the services they want beforehand or accrue them as they go along and pay at the end of a billing period.

6. Referral and Affiliate

The referral or affiliate model for business APIs makes developers a partner in API revenue generation. This is used to mutually generate traffic and promote product sales, all in the context of a call and response network. For example, an eCommerce site might call up an API’s database of products, and if that action leads to a sale, the developer makes money along with the API company that offers the products.

This method is a win-win for API developers and practitioners, offering incentives for using an API and developing effective services around it.

7. Transaction Fees

Last in this list of API business model terminology is fairly self-explanatory, but you should be aware of how transaction fees work in the context of an API. This model is utilized by just about every payment service-based API, from PayPal to Stripe, because it allows the API to charge a fee when a transaction is processed.

By directing traffic through the API infrastructure, developers can tap into a greater database of information and functionality. This makes for a convenient system for digital transactions, in which the consumer pays the transaction fee to the API. As a result, a network of value is cultivated.

Developing API Skills and Resources

These are just seven of the common business model terminologies that make up the API world. With them, API developers and practitioners are creating new and innovative strategies for building services and linking information. But to produce value through APIs, you’ll need the skills and resources necessary for iterative development.

Define, design, refine, prototype, and test your API business models and functionalities to optimize your potential. Often, this means branching out with not just one but multiple models for generating revenue through an API. Whether you combine an Open API with affiliate incentivizes or charge transaction fees, these are the terms and models you need to know when starting out in the API game.