API monetization is the process by which businesses create revenue from their application programming interfaces (APIs). APIs are the cornerstone of what is widely seen as the next iteration of business development, where having well-developed APIs establishes and maintains relationships in a digital economy. APIs are the wholesale version of a web presence, allowing others to access and integrate your data and resources into their public or private sites and applications.
Hopefully by the time you have put an API management plan in place, you already have a healthy business model as well, which should provide a framework for your monetization goals. API monetization isn't just about how you are going to generate revenue via your API, it is also about how you will keep your API in operation and performing for consumers.
Not all APIs are created equal and reasons for deploying an API can vary widely. Here are some of the common patterns for API monetization that have emerged.
A popular way to provide access to an API is by offering a free tier so that anyone can sign up, start using an API, and understand the value it delivers. This allows consumers to test the API and see if it will meet their needs before spending money. While free is a good option for many API monetization strategies, it works well in conjunction with other strategies. If implementing a free tier of the API alone, without a strategy to sell services to those with greater demands, your organization can face problems.
After providing free access, the next approach to API monetization is to establish a price that consumers will pay for the services or resources the API provides. We are seeing 3 common approaches to APIs charging consumers:
- Tiered. Some API providers set up multiple tiers of paid access, such as bronze, gold, or platinum. Each tier has its own set of services and allowances for access to API resources with pricing stepping up in cost for each tier.
- Pay-as-you go. Another option is a utility-based model, where API consumers pay for what they use. Depending on the amount of bandwidth, storage, and other hard costs incurred around API consumption, providers charge based upon their cost, plus a logical profit.
- Unit-based. Finally, other API providers define each API resource in terms of units and assign a unit price. API consumers pay for the number of units they anticipate using, with the option to buy more when necessary
Some API providers mix and match different combinations of tiered, pay-as-you-go, and unit-based API pricing to recover operational costs as well as generate revenue.
Consumer gets paid
In some cases, an API will drive other revenue streams for companies and can actually share revenue with API consumers. This approach acts as an incentive model for API consumers, encouraging integration and quality implementation of the resources that drive revenue for an API provider. 3 distinct models for sharing API revenue with consumers have emerged:
- Ad revenue share. Some API providers offer an advertising network as part of their platforms. API consumers embed advertising in their sites and apps, providing revenue for API providers. In turn, the API provider returns a portion of the revenue from advertising.
- Affiliate. Some approaches to monetization of websites have been applied to API ecosystems. Cost per acquisition (CPA), cost per click (CPC), and one-time or recurring revenue-sharing models are commonly used.
- Credits to bill. A smaller group of API providers employ a paid model for consumers. Based upon advertising revenue share or affiliate revenue, the provider will credit the API consumer’s bill—reducing a developer’s overhead for integration and potentially reducing the API provider’s expenditure.
Indirect monetization of an API isn't always about generating revenue from API access, advertising, or other revenue. There are indirect ways that an API can deliver value.
- Marketing vehicle. APIs can serve as a marketing vehicle for a company and its online presence. Through sensible branding strategies, developers can become third-party marketing agents, working on behalf of a core company and its brand.
- Brand awareness. As a new tool in an overall marketing and branding strategy, an API can provide a type of brand exposure via third-party websites and applications, thereby extending the reach of a brand using third-party API consumers as the engine.
- Content acquisition. Not all APIs are about delivering content, data, and other resources to consumers. APIs often allow for writing, updating, accessing, and deleting content. Content acquisition via API can be a great way to build value within a company and its platform.
- SaaS. Software-as-a-Service (SaaS) has become a common approach to selling software online to consumers and businesses. Oftentimes an API will complement the core software and its offering, providing value to SaaS users. API access is often included as part of a core SaaS platform, but also can be delivered as an option for premium SaaS users.
- Traffic generation. APIs can also be used to drive traffic to an existing website or application. Designing an API to use hyperlinks directed at central websites or apps—and encouraging consumers to build their own websites and apps that are integrated with the API—provides a great opportunity for increasing traffic.
Many companies start by focusing on launching and evolving their API strategy and gaining essential experience before fully executing on their API monetization strategy, relying completely on indirect value from an API.
While it is better to have a monetization strategy in place early, many are finding success by prioritizing the API first and monetization second. With APIs being deployed in various capacities—within a company, privately between partners, or in the public—a wide mix of monetization strategies can be used.
Some API resources lend themselves better to a pay-as-you-go model, while some markets demand that data be freely accessible without the need to register or be charged for access. There is no one-size-fits-all approach to API monetization.
One way to think about an API is as an external research and development lab within a company. A lab that accepts ideas and integrations from partners then incubates these ideas, applications, and business relationships. Companies are using APIs to allow the introduction of outside ideas and talent in hopes of inciting innovation.
Some API providers will hand-select the best integrations and invest in individuals and companies, sometimes resulting in acquisitions of companies and technology.
Just like there is no one-size-fits-all approach to API monetization, there are few constants in pricing or access. Successful API providers are constantly adjusting, tweaking, and experimenting, trying to find the most competitive approach possible. APIs are about business development and finding new ways to monetize your new and existing resources.
API providers and API consumers are constantly building trust and establishing relationships with one another. One key facet of this trust, and the foundation for the relationship, is sharing a common roadmap. API providers need to actively involve API consumers with where the API resources are going, so that consumers can prepare for these changes, adjust to them, and provide feedback that may influence the roadmap. Nothing will upset API consumers faster than keeping them in the dark about what to expect from the APIs and surprising them with changes to or failures in their applications.
APIs start with deploying an API area to hang and manage a handful of APIs, where they can be accessed and put to use by consumers. But the goal is take an API area and evolve it into an active community of API consumers, in hopes of transforming it into a self-service, self-managing ecosystem of passionate partners and consumers.
Sustainable API ecosystems are symbiotic. They’re not just about API providers generating value, they’re also about API users getting the resources they need to be successful and engaging in new approaches to business development.
An active API will attract new users. The users who get the value they are looking for—and the support they need—will ultimately spread the word. A viable API ecosystem is equal parts technology, business, and politics. A balance needs to be struck that doesn't just deliver value for API providers and consumers, but also for end users of web or mobile apps that are integrated with API resources.
Beyond these trends in API usage, there are several opportunities emerging for both businesses and developers to take advantage of. The simplistic, web-based approach of providing access to resources is moving into emerging areas, like:
- 3D printing. With the help of web APIs, 3D printing is moving beyond hobby and art. And it has serious potential for redefining the global manufacturing landscape. There are several platforms focusing on providing APIs for 3D printing.
- Automobiles. Major automakers, like Ford and GM, are turning vehicles into API platforms, creating opportunities for businesses and developers to provide new products and services in-vehicle.
- Home. Devices play a central role in our daily lives. We carry smart devices from home to work, and everywhere else. APIs have made their way beyond our computers and integrate directly with our homes. The next generation of home automation technology is being developed, ranging from thermostats for heating and air conditioning to lighting and home security. While much home automation technology is still without APIs, many providers are introducing developer ecosystems and are using APIs to stimulate innovation around home technology integration.
- Buildings. Many buildings already have automated heating, air, electrical, water, and other systems. Building equipment manufacturers are quickly seeing the importance of allowing API access to their hardware and software. Imagine if were able to teach us to reduce energy consumption, diagnose problems in real time, and self-correct when necessary or call a service provider when repairs or tuning are required.
- Quantified self. Devices that allow the wearer to understand more about themselves are ubiquitous. Sports and fitness-realted personal activity measurement devices are common among quantified self devices. They can be used for everything from lifestyle tracking to healthcare.
These 5 areas represent just a few of the opportunities available with APIs. APIs aren't just about applications on the internet, they're connecting our physical worlds to cloud computing and the data streams we rely on.