Why Traditional API Monetization Needs to Evolve

Why Traditional API Monetization Needs to Evolve

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Behailu Tekletsadik, Founder and CEO of Archetype (usage-based billing for APIs), shares what typical API monetization is lacking.

The use of APIs is surging in importance across digital organizations. Impressively, the 2022 Postman Report found that API-first leaders now expend 76% of their development efforts on APIs. For years, APIs have enabled companies to share and reuse common internal functionality, but new studies find an increasing desire to monetize these functions to the outside world. And, we’re now witnessing these ripple effects in the market. Recently, Twitter shuttered its free API in favor of monetizing this data.

Public or partner-facing API strategies represent a novel business opportunity that shouldn’t be overlooked. In recent years, many new API-as-a-Product startups have emerged on the market to leverage this unique opportunity. For example, the API-First Index currently tracks over 60 API-first companies that have raised $50 million or more. These and other enterprises have generated profitable revenue streams through externalizing functionality and data through public APIs.

Yet, traditional API management solutions only go so far regarding API monetization methods. These all-encompassing platforms typically lack the granular tracking and customizable billing required to cover all use cases. Additionally, revenue generation isn’t something that can easily be developed in-house. Instead, with specialized tooling to help manage your API billing, it’s possible to avoid these hurdles and generate advanced self-service payment portals in a matter of days.

Below, we’ll outline the state of API monetization and why it needs to evolve. We’ll also consider some strategies organizations can take to quickly develop new, optimized revenue streams based on their APIs. Because without considering how you can enhance your API monetization, you’re probably leaving potential revenue on the table.

Understanding Traditional API Monetization

API monetization is typically handled in one of two ways. First, there’s volume-based monetization where you have a flat-rate subscription based on usage. Usually, when consumers reach a certain limit of API calls per month, they must upgrade to a higher plan. Larger plans then offer higher rate limits and often include volume-based discounts.

Secondly, API providers may seek to gate certain important features. For example, a free user of a stock data API is granted 200 calls per month to one or two endpoints. But if you’re looking to access integrations or easily export data, you’ll need to become a paying subscriber to be given access to these key features. In this scenario, the API provider implements key-based access control matched to the different account privileges.

As one can imagine, API pricing schemes can get extremely complicated very quickly. Especially, if you are operating hundreds of endpoints, tracking various analytics, and mapping them to numerous unique user permissions. Additionally, billable metrics such as processing time can be challenging to measure and enforce.

The Challenges of Implementing API Monetization

Large enterprises hoping to turn on internal APIs as a revenue stream often hit a problem: how should we track usage and charge for it? Which often leads to the question, how do we build this out? Companies have few options to implement API monetization infrastructure and pricing structures.

First, they might try to build their monetization infrastructure on their own. This is common when companies don’t desire traditional API management — perhaps, due to internal legacy systems that aren’t able to coexist. Developing your monetization functionality in-house is a serious time commitment, and off-the-shelf payment processors are limited and not designed for the nuances of API billing. A tool like Stripe, for example, can help perform user-based billing. But you still must create your own infrastructure to meter usage and perform user base segmentation and pricing experimentation.

Another option is to use traditional API management. API management solutions solve some of the above concerns by providing a self-service portal, key generation, and access control capabilities. And API lifecycle management suites like Akana, Apigee, or Kong often provide monetization as part of their developer portal offerings. However, many companies prefer not to rely on these bulky platforms. Plus, these API management suites only offer out-of-the-box pricing schemes that charge at the endpoint level. This means you can’t integrate conditional logic or introduce smart, nuanced monetization methods.

A third option is simply listing the API in a marketplace like RapidAPI. But, this isn’t an attractive option for most enterprises, as it’s not a white-labeled solution. For one, you don’t get a native way to engage with the product, and you’re not able to access the names or emails of your customers, meaning you can’t contact them. This hurts marketing efforts and is unscalable for businesses that want to become more than just a side project. Furthermore, there are inflexibilities around pricing and analytics using a service like RapidAPI. Not to mention, the 20% fee is difficult to stomach. However, a marketplace is an excellent option for a solo developer or small company hoping to test an MVP, but insufficient for building and scaling a more mature organization.

Benefits of a Dedicated API Revenue System

So, how can organizations introduce monetization that works for them? A fourth option is to leverage a dedicated third-party API monetization engine. One such option is Archetype, which goes beyond just being a billing platform like Stripe by providing more functionality around self-service, metering, and access control. Other niche developer portal generators, like APIable, include monetization as part of their offering too. Using a monetization engine is much simpler than building something from scratch and could shorten the time to market. It also avoids the limitations of locking yourself into a generic API management platform.

Using a specialized API monetization tool could unlock many fine-grained capabilities too. For one, this outsources the headache of constructing complex metering and billing infrastructure yourself, enabling you to quickly implement usage-based monetization and automated invoice generation. This could reduce a lot of time and effort when dynamically adjusting permission rules based on pricing tiers. This is important, as it’s a recommended best practice to avoid building cybersecurity solutions like access control yourself. Finally, specialized monetization solutions go the extra mile to offer discounts and credits based on usage.

To see why API monetization needs to evolve, consider a stock market data API. Suppose a platform aggregates financial and economic data from various sources and offers API access to this real-time data stream as a service. But, the API only charges access to this data on a subscription basis. Without introducing volume-based discounts, content entitlement, or seamless user onboarding, the company is likely losing potential revenue. Plus, as usage scales into the trillions of events per day, they will likely hit significant scalability issues. By linking in a third-party API revenue management solution, one could implement a go-to-market strategy that solves these issues in a matter of weeks.

Don’t Leave Potential Revenue On The Table

Long past are the days of simple API pricing that treats every request the same. Because nowadays, this isn’t how APIs operate. A web API might offer hundreds, if not thousands, of unique methods that require varying degrees of computing workloads and processing times. Each call might request different volumes of data and interface with disparate data sources on the backend, each with its unique perceived value. As such, the pricing methods should match the nuances of the underlying system.

Although API monetization may not be a fit for every company, we’re seeing a surge of innovative API-first SaaS products enter the market in fintech, healthcare, and other verticals. For example, generative AI APIs can programmatically integrate impressive video, imaging, and text-based content. We’re also noticing an exciting level of pull within enterprises as they look to develop SDKs and APIs as an extension of their platforms. These endeavors often aim to treat the API as a product, complete with self-service developer portals and a quality developer experience.

Just as most developers aren’t security experts, most developers aren’t monetization experts either. Therefore, flexible, dedicated API monetization solutions will become another integral component to help composable enterprises quickly productify their microservices to realize their true potential. Because companies that iterate and improve on their pricing faster, iterate and improve on their products faster.