When API Monetization Does and Doesnt Make Sense

Called “the next big thing” and “critical for digital transformation” by Forbes in 2020, the API economy is very real. Massive investment into API-based products is becoming increasingly common, but that only covers a small portion of the API space.

Elsewhere, APIs are developed as side projects, subsidiaries of existing products, or as internal tools that outgrow their initial scope. And unsurprisingly, whether to cover costs or generate an additional revenue stream, there’s plenty of appetite to monetize APIs.

But, there’s a catch-22 at work here: start charging for an API too early, and you deter potential users, but wait too long before you charge and risk angering users who’ve been on board from the early days. So is there a middle ground when it comes to charging people to use your API?

API Monetization

In simple terms, API monetization is the practice of generating (or attempting to generate) revenue from an API. In other words, treating APIs as a product. And that’s one reason why API monetization is such a hot-button issue: you wouldn’t give away any of your other products for free, so why should APIs be any different?

It’s worth bearing in mind, however, that any attempt to monetize an API transforms what might currently be an interesting and experimental side-project into a legitimate business offering. With that in mind, downtime and bugs won’t be treated with the same sort of forgiving attitude that they might currently be…

Let’s get into some of the different ways you can monetize APIs.

Pricing Models

We’ve previously written about levels of API monetization and how there are a few different pricing models you can consider, including:

  • Flat rate
  • Usage-based (pay-as-you-go)
  • Freemium
  • Tiered

There’s no right or wrong approach to implementing a pricing model, but one of the most important steps to doing this effectively is to consider your usage patterns.

It may well be, for example, that a large proportion of your API usage comes from a handful of power users. If that’s the case, a freemium approach might allow 90% of users to continue using the API for free and only monetize users making large numbers of calls.

Or, if your app has significant seasonal variation, you might consider a usage-based model that allows API consumers to pay for more requests when they need to scale up, preventing them from paying as much throughout the year.

The Larger Platform Model

For the sake of argument, let’s say that you already have a product with a tiered pricing model and that you’ve been dabbling with offering an API. You’d like to monetize the API somehow, but you’re not sure the API has enough functionality to be a standalone product.

You could consider including the API in one or more tiers of your existing offering. Customers who find the API valuable enough will consider upgrading, while those who can do without it will likely look elsewhere to achieve the same outcomes that your API currently offers.

As with a partnership model (see below), this is a process you’ll need to handle with some delicacy; longtime users will never appreciate feeling discarded, but if you can convey that doing this will help dedicate more time to improving the API, then most users will understand the move.

Partners Only

If maintaining an API is costing you money, but you don’t want to monetize it in the traditional way, you could always take the Netflix approach. At the end of 2014, Netflix shuttered its public API and took down various apps with it.

Today, a few hand-selected partners can achieve similar things via access to private Netflix services. Were users of Netflix’s public API happy about this? Probably not. But using an application process to vet potential API consumers and figure out where there’s potential for partnerships is an option.

In fact, Airbnb uses a similar model with its API. Despite releasing an API back in 2017, those hopeful to use it have no option but to wait by their inbox for an invitation to join the program. To date, Airbnb still actively promotes just 26 top-performing partners.

For APIs with enough demand, a partnership model is an attractive option — being able to handpick who can use your API allows you to retain significantly more control over the whole process and ensure that your brand identity is upheld.

Revenue Share

Similar to the partnership model, there are plenty of ways to work more closely with folks using your API. If encouraging wider use of the API is important to you, for example, then a revenue share model could be a good way to go.

If you reward API consumers with a percentage of sales or revenue from traffic generated, whether through affiliate marketing or a more direct selling model, you might be able to turn some of your most dedicated users into true evangelists.

It’s worth remembering, however, that a revenue share model is not a silver bullet for creating evangelists for your API. If usage of your API is low, you really need to get to the root of that problem before you start to think about monetizing or splitting revenue.

For API consumers who are already actively engaged with your product, a revenue share might be just the thing to motivate them to spend more time talking about it…

Wildcard: Keep It Free

Think seriously about how much money (and time) it costs to run and maintain your API, and compare that figure with how much money you could realistically stand to generate by monetizing it.

If both figures are big, you should probably consider monetization options. If the first is enormous and the second is small, you may need to think about whether the API in question is adding value at all. For anything in between, the correct approach might be more nuanced.

APIs can have value far beyond a dollar figure. They might contribute to brand awareness, for example, or be useful for upselling or cross-selling by embedding your other products into people’s routines. Or, as simple as it sounds, they might generate traffic to your main site.

And the latter of those is particularly valuable. In 2017, Neil Patel bought the keyword tool Ubersuggest for $120,000 even though it wasn’t generating any revenue. He bought it with the aim of generating relevant, quality traffic without having to write blog posts every day. And it worked.

Consider the things you currently do to generate traffic: Social media? Blogging? Networking events? It may be that your API can achieve some of the same goals, allowing you to spend less time (and money) on those other activities.

Final Thought: Talk To Your Users!

Although you’ll probably want to avoid questions like “would you like to start paying for our API?” (because no one will ever say yes to that question…), there are things you can ask your users that will help you start making decisions on the subject of API monetization:

  • How does this API make your life easier?
  • What value does the data it provides add?
  • Could you achieve the same outcomes without the API?
  • Are there any competing tools that do similar things?

Such questions will help you understand the value of your API and if it justifies a potential expense. Or, just maybe, ways in which making the API free to use has benefitted your business in other ways. Once you’re armed with that information, you can consider whether or not to monetize.