Much of the modern business world runs on APIs. As a result of this, APIs are now valuable assets in a business environment, causing a lot of thought for API practitioners. Chief of these concerns is the exact methodology and process of monetization. How does it work? How does an API prove its value and capture value?
Today, we’re going to look at seven common API business models for monetization. We’ll look at how they differ from one another, and we’ll also point out some specific concerns and caveats that any API provider should consider when handling their monetization strategies.
1: API as a Business Function
“API as a product should be focused on the concerns of realizing and externalizing a service based on the needs of partners, suppliers, and consumers. So while exposing APIs will accelerate business opportunities by extending business functionality, companies should also consider their current business architecture capabilities…” – Gary Shepard, Perficient
Often referred to as an “enhancing” type of ROI, this approach is less concerned with directly monetizing the API itself and more concerned with the API enhancing core business functions. In essence, the API, in this case, is not the primary business offering but is instead a secondary, supporting offering.
As an example, let’s assume we have an API that ties into the app store for several popular mobile environments. The API provides free daily rankings of app placement and limited historical data. This is extremely useful to marketers, designers, and even game developers, as it states the relative nature and focuses in the marketing.
While this API is obviously a big value to the API provider and to its customers, it would be hard to monetize this offering competitively. Instead, what can be done is monetizing the business functions it supports. Perhaps your business could offer more detailed reports with historical data and predicted trends. You could provide a detailed analysis of application performance in relation to specific actions, qualities, genres, and more – essentially, you could offer much more in-depth research, and show the value of this paid research through the use of a free API.
In this kind of offering, the free API is really a gateway to the other parts of the business, and functions along the lines of a value proposition – by proving the value of this data and enhancing other business functions, the API pays for itself by directing traffic and interest to the paid aspects of the business.
2: API as a Product
When treating your API as a product in a monetization sense, you’re essentially looking at creating a direct charging environment. When a user utilizes your API in any way, that utilization has a charge associated with it, either through monthly signups or some other sort of charging mechanism. The user can utilize your product as much as they want, typically for a flat fee that decreases the longer the term established is.
This is the most simple of monetization types, but it does have several issues. First of all, it requires the ownership of proprietary or valuable data and information. For many APIs that work on transforming user data or offering functionality, this isn’t really a good option unless it allows bulk data transformation – often the cost is hard to justify. Additionally, it is this cost that creates a high barrier of entry, which limits your user base largely to premium users.
There is the option of doing a freemium-style trial run (which will be discussed a little later in this piece), but ultimately, your API is a product, with both the benefits and the risks associated with launching a new product into an established space.
If you like what you read in this piece, watch our latest LiveCast on API monetization, staring Kumar Kandaswamy and Daniel Giordano:
3: API Tiering and Enhanced Functionality
The idea behind API Tiering is essentially a new look at API as a Product. In this approach, you provide the base level as a free option, but use this to leverage your data offering in an upsell to additional segmented levels of function. This is often referred to as freemium, and it follows a very basic approach – offer default functions, and if more data access or more functionality is required, offer this for a fee. This process works well and is often adopted by mobile applications.
The issue with this approach, and approaches like it, is a matter of transparency. There’s nothing wrong with freemium APIs so to speak, but you need to be transparent about when this occurs. The chief complaint most people have with freemium is that, if the line is not transparent and the payment method is near-automatic, these types of offerings can very quickly balloon in cost and expose the user to greater losses than predicted.
That being said, however, if you are transparent with these costs and you make the line clear, you can absolutely use this approach to great effect. Disabling automatic payments helps this process significantly as well.
4: API Interaction Metering
The last of the so-called “freemium” solutions in this list, API interaction metering is the process of measuring user interactions, and charging an associated cost for those interactions. This can be used to great effect, especially for smaller organizations and businesses – being able to pay only for a small amount of usage while higher usage offsets the functional cost can help small businesses utilize data that they may otherwise be unable to utilize at an effective cost.
That being said, this is essentially a tiered approach with many tiers – as such, all of the issues associated with freemium charging should be considered here.
5: API as a Marketing Tool
In this approach, the API itself is not really a monetized service but is instead a marketing tool. The API is a free entry point to the rest of your ecosystem, and your utilization of said API is really akin to a demo. This is when we start moving away from direct monetization, and more towards secondary monetization, where the value itself comes not from the API, but from the business that the API facilitates.
As an example, let’s assume we have an API that utilizes machine learning to contextualize images and provide specific images when invoked. This API is free, and can be used to deliver specific images for specific queries – and for this reason, the free users love the API. Business users, however, might see greater value in the underlying technology. While the free API is what gets the company name out into the market, business users might see the value of the underlying machine-learning systems, and would, therefore, find greater value in contracting with those very specific business systems.
In essence, your API is a billboard – a usable, functioning billboard that provides a free, lightweight example of what your underlying systems can do in an isolated use case.
6: Strategic API Partnerships
“The partner API program incorporates collaboration with other businesses. Companies begin by working with one or two strategic partners, who will create apps, add-ons, or integrations with the API. Ideally, the API will have been tested and, because the API is used across organizational boundaries, the API team learns lessons about support, documentation, and authentication schemes…Partnering using APIs can be useful in creating new channels, helping partner organizations to use your value proposition to expand into an adjacent business, or enabling a partner to complete its offering. They also enable deep visibility into business interactions with partners that can help inform and refine partner strategies.” – Apigee
In this monetization approach, your API is not value-generating through the data it provides, but through the data it handles – by partnering with business organizations, and offering your API as a business API, you’re essentially positioning yourself as a facilitating resource. Business will integrate with your APIs because of what they can do, and provide value specifically through this facilitation.
This can often take one of three forms. The first form is in direct licensing. If your API can manage large amounts of data using a proprietary algorithm or handling process, it can be licensed to those who would find value in that approach. In this case, this is almost akin to direct monetization, but often takes the form of a private business-to-business relationship.
There is also the option of integration. In these cases, your APIs, and the data systems that support them facilitate the building of additional resources. Fitbit, for instance, is a revenue-generating product – the watch itself has a cost and a revenue strategy. The real value of a Fitbit, however, is the underlying APIs that facilitate it. In many cases, products such as this may not use just internal APIs and may leverage external B2B APIs.
Finally, there is the enterprise approach to partnership monetization. In this case, you provide a free, public API to anyone who wants to use it – additional functionality, however, such as bundling, routine calls, and mass calling, can be reserved for enterprise users, who are considered their own service tier, and thus on their own subset of the API. While this is akin to tier monetization, the difference between enterprise and total free public use is the defining feature of this approach.
7: Value Through Business Improvements
“An enterprise should develop an API strategy consisting of both public and private APIs. When an enterprise business releases public APIs that power consumer-facing applications, it enables new ways to engage and connect with its customers through web, mobile, and social apps. And by developing private APIs, businesses can offer their employees and partners new tools that help them streamline operations and serve customers even better. In this dynamic environment — as more and more businesses create and incorporate APIs — it’s increasingly critical for innovative businesses to develop and execute successful API strategies.” – Mulesoft
This type of monetization might not seem obviously valuable at first blush – after all, no actual money changes hands in this type of approach. The value comes instead from the improvement to business functions. In the business world, saving money is making money – every cent saved can be saved, redirected, or reinvested, so even minor cost decreases per process can result in huge cost decreases over the entire business environment.
APIs can thus monetize themselves by optimizing prices and reducing the operational overhead for processes. These decreases essentially pay for the API itself, and in many situations, can result in greater investment in the API itself to multiply these savings.
Additionally, these types of APIs can affect the time to market for a system, the automation of data collection and utilization, and even drive down the cost of traditionally manual functions. These significant cost savings can save millions over the course of a year, thereby “monetizing” the API functions in essence.
Monetization of an API can be a hard thing to get right. If you present too high a barrier of entry, these costs can stymie growth and result in loss of potential userbases. On the other hand, undervaluing your API or skipping monetization altogether can result in your API being unable to prop itself up. Ultimately, the solution is not really any of these options in isolation – the best approach is going to be a combination of approaches, married to your specific use case.
What do you think is the best monetization strategy for most APIs? Let us know in the comments below!