At Nordic APIs we live in the backend, where the Application Programming Interface (API) is king. We believe in an API’s ability to make design and development easier, and we trust in its capability to improve the end-user experience. As mobile apps and Software as a Service (SaaS) providers continue to rely heavily on APIs, it’s an ideal time to revisit how APIs can increase user retention rates, and most importantly, how APIs can boost overall revenue.
This piece on API Business Models is a guide to doing just that. We offer you the top 5 API monetization models with the hope of helping you, as an API provider, bring value to developers and end users, and financially gain from hosting your API.
How Can You Measure If Your API Is Profitable?
Rob Zazueta is the director of platform strategy at Intel. His team focuses on Business Models and helping clients manage, market, and monetize APIs by identifying strategies to align with business objectives. At his talk last October at the 2014 Nordic Platform Summit in Stockholm, Zazueta focused on the third tier of Intel’s approach: how to monetize your API.
According to Zazueta, “The success of an API program is measured by how well it moves a business toward its goals.” With everything your business does, you must keep an eye on your return on investment. To avoid an unsuccessful venture, before API development you need to consider common steps toward API monetization and if they apply to your situation.
In order to determine if something is going to be profitable you must measure it. Zazueta recommends using a simple Average Revenue Per User Model (ARPU) to help decide how to increase revenue, whether by increasing price or attracting more users. With any API monetization model, you want to compare the ARPU of your API-using customers against the ARPU of those who don’t.
API Monetization Trick #1: Charge Directly for an API, by Call or Subscription
This is the most obvious method of monetizing anything – directly charging for it. But just because it’s simple to measure doesn’t mean it’ll be successful. The strategy works “if your data has the kind of value that people want to pay for,” Zazueta says. Before jumping right in, you should talk to your customers to see if they’d be willing to pay for these services and for how much.
Direct sales is perhaps the easiest way to sell your API, but Zazueta says it could also be the most challenging as it may be difficult for your developer audience to see the value of it. He recommends to start with a Freemium Model to offer a taste of the data that developers would have access to, and hope it leaves them wanting more.
API Monetization Trick #2: Using API Access As A Premium Upsell Opportunity
This is a trick used in the SaaS world a lot, like with the POS giant Salesforce. Adding API access to a Premium subscription offers a strong motivator to upgrade to a higher package, as it allows end users to customize their experience and workflow more easily. API access is usually one of multiple added benefits that come along with subscribing to a higher package, making this a tricker monetization model to measure. Zazueta offers these attempts to measure this model:
- Compare sale of packages with API included versus those without.
- Have your sales team mark “Level of Interest in API” in sales notes.
- Measure the number of API calls from users on that Premium package.
- Measure ARPU or revenue generated by active API users versus non-active ones.
In addition, you can also measure the subscription renewal rate of API users versus those that don’t use this package feature.
API Monetization Trick #3: Drive Revenue-Generating Activities Through Your API
This model takes the most effort to track because it often supports indirect revenue. Depending on the situation, it could be the API monetization method most applicable to your overall business goals.
For example, email marketing software is often monetized by the email sent, but APIs are used to filter contacts automatically from a customer relationship management software (CRM). Without the contacts, you can’t send the emails, which is why tracking the number of contacts that come in through the API is an excellent way to prove its value. Plus you can compare if users with the API send more emails— which affects revenue— than those users without the API.
Another method is to track if your application is actually driving leads. If you sign a pay-per-lead (PPL) agreement with a customer, you can track that lead via your CRM.
For both of these, tracking can be complex if more than one third-party application is integrated, meaning increasingly granular measurements need to be made.
API Monetization Trick #4: Increase Distribution Through Strategic Partners
In the SaaS world, integrating your API with a strategic partner has the potential to open your API to entire pre-established markets. This enables you to market your brand to a broader audience to attract more potential customers. For example, PayPal and Stripe allow services and sellers to use their API because it offers an easy way to get paid, and, of course, the more transactions, the more money these popular payment services earn.
This strategy can also aid in user retention. If your customers also have a subscription with your strategic integration partner, they are less likely to disrupt their workflow by leaving either of you. There is no questioning the value of these strategic partnerships for the consistently demanding end user, who can now build a customized workflow out of the integrated cloud tools now available. Plus, these type of integrations are on the rise:
“We see the rise of best-in-breed solutions as the next natural progression,” said senior vice president of product at Zendesk help desk software, Adrian McDermott. “If the Internet is the platform, then the need to be integrated by a single provider becomes obsolete – multiple best-in-breed solutions can run seamlessly via the Internet, without needing to be overseen by one organization.”
It’s important with strategic partnerships to create a mutually beneficial shared data agreement. You want to know how much your API is helping their business, and similarly, they want to know the effect of their product on yours.
API Monetization Trick #5: Improve Operational Efficiency and Decrease Time to Market
“Well-built, well-designed APIs help you build applications faster. It helps you innovate faster. More importantly, it helps you fail faster,” Zazueta says. “If you build a well-built API that’s secure and properly managed… and you treat that internally focused audience as your customers, you can actually get all kinds of great benefits.” Zazueta says that he’s seen internal processes in companies speed up from a couple months to a couple hours, solely because of the efficiency gained from an API.
Some additional benefits from using an internal API include:
- Faster customer onboarding
- Deeper access into data
- Tighter control over development
- Faster application building
- Faster testing of an application’s revenue potential
Internal APIs also suit the lean start-up model, where you produce and release to market as quickly as possible. As this is the case, if the API isn’t so valuable, your organization hasn’t wasted a lot of time and resources implementing it – you’re able to pivot rapidly.
Since this is an internal benefit, you don’t use the ARPU to measure it. You start by measuring the time it took to build and introduce a certain function before the API and after. You can also turn that into dollars by way of the manpower needed.
Of course, before making this move, you need to make sure that it won’t take excessive effort and resources to design and start using the API within your internal systems. Review the existing processes before considering implementing this one.
Mix, Match, Measure Business Models of API Monetization
The reality is that your API monetization technique may involve an assortment of these models. Perhaps none are perfect for your particular situation, but it’s very likely that a couple of these API monetization tricks will work to help generate revenue and improve your API Business Models. As always, build what will work for you.
“The goal here is to build a successful API program that moves the business toward its goals,” Zazueta says. “And a program that’s not gonna do that won’t be successful for long.” You might be using one or more models already, but it won’t matter until you measure its success.
Your API Monetization Checklist
We created this checklist to make it easy for you to figure out if you are able to monetize your API quickly. A Yes or a Maybe is certainly worth considering:
- Are you able to profit from charging for your API directly?
- Can giving access to your API be an upsell opportunity?
- Are there ways to drive revenue indirectly through your API?
- Do you have opportunities to make strategic API partnership?
- Can an API improve operational efficiency and decrease time to market?
Then, as you implement an API monetization strategy there are two questions to constantly keep on your mind:
- Are you measuring Average Revenue Per User (APRU) throughout each possible API-related revenue source?
- Are you comparing this APRU with the APRU of customers who don’t use your API?
As with anything, make sure that your API monetization strategy is directly in line with your business objectives. If it’s clearly not, don’t waste your time.
These were the most common ways to generate revenue and monetize your API. Are there any API money-making tricks that we’re forgetting? Tell us below!