An Application Programming Interface (usually shortened to API) is a software intermediary that lets internal and external users access, interacts, and pull a company’s digital functionalities and data. With API monetization, you can unlock your digital resources’ value and enable innovative business models that drive growth.
What is API monetization?
It is the ability to produce revenues from the consumption of APIs. Knowing how to make money with your APIs can help in realizing your business goals. You can design an API monetization plan that charges users (or pay them via revenue sharing) for adopting your APIs.
The current proliferation of APIs is creating substantial opportunities for enterprises, developers, and customers. Just like the Internet expanded the reach of businesses beyond their traditional physical locations, APIs enable modern enterprises to expand beyond their boundaries and leverage their digital services into new business models and income streams.
In fact, the global API management market was valued at $1.1 billion in 2018. And it is projected to grow at a compound annual growth rate (CAGR) of more than 22% during 2019-2024 to hit $3.6 billion by 2024. This massive growth is mainly driven by the increased demand for APIs to connect a wide range of devices and applications.
So, in today’s digital economy, having an API monetization strategy can help in mining your APIs for gold and accelerating your company’s growth.
In this article, we’re going to talk about how you can transform your API program into a consistent and profitable income stream.
Table of Contents
- 1 Types of APIs
- 2 Participants in the API value chain
- 3 Business drivers for API monetization
- 4 API monetization models
- 5 Best practices for monetization
- 6 Pricing structure example
- 7 Monetizing with Rakuten RapidAPI Enterprise Hub
Let’s get going…
Types of APIs
APIs come in various forms. As we’ll illustrate later in this article, before choosing the right API monetization and pricing model, you should consider the type of API you’re exposing.
These are the main types of APIs:
- Internal APIs (also called private APIs)—these concentrate on the internal operations of the enterprise. They assist in enhancing efficiency and productivity.
- Partner APIs—as their name suggests, these are exposed to facilitate integrations with select partners and customers. They assist an enterprise in reinforcing external relationships and expanding its presence.
- Public APIs (also called open APIs)—these are available publicly and can be utilized with minimal restrictions. They let third-party developers create applications that fetch the enterprise’s capabilities and data and integrate them into their use case. This reduces development costs and time, improves productivity, and drives innovation.
To generate fiscal gains from APIs, most enterprises usually go with partner APIs or public APIs.
Before exposing their APIs to the public, most businesses usually follow an “inside out” API data monetization strategy.
They start by using the API internally until they’re satisfied with its performance, then expose it to partners and make more improvements, and finally open it up for third-party users with a set monetization structure.
Participants in the API value chain
Before going further, let’s talk about the main participants in the API economy value chain:
- API Provider—this is the entity that creates the API for exposing its digital assets. They are responsible for defining the terms and conditions as well as the monetization model for accessing the API.
- API consumer (developer)—this is the developer who incorporates the API in building applications.
- End-user (customer)—this is the person who benefits from using the application containing the API. They may not see the API directly.
Importantly, for any API monetization framework to be successful, all the three participants must derive value from the API.
Business drivers for API monetization
Several reasons can propel a company to expose an API. Here are some of the API monetization benefits:
- Create a new revenue opportunity
- Gather data from API consumers
- Build customer loyalty
- Create new product capabilities
- Maintain product relevance
Let’s talk about each of them.
1. Create a new revenue opportunity
Obviously, the first benefit of monetizing APIs is to create new revenue streams from selling API calls. If you expose your application’s functionalities via an API, you can charge other developers for using it.
With the increased adoption of APIs, some companies have formed their business entirely around creating and selling APIs. For example, Twilio, which offers communication APIs, is valued at over $35 billion, and Stripe, which offers payment APIs, is also valued at over $35 billion.
It’s interesting that such multi-billion dollar, API-first companies have built their businesses just by exposing their services to others.
2. Gather data from API consumers
Today, data is the new oil. Therefore, to collect data and gain insights into customer behavior and usage patterns, many companies create APIs and offer them for free or at a cost.
These insights provide a deeper understanding of the target market, allow for informed decision making, and improve the customer experience.
For example, Google offers a variety of machine learning APIs that allow developers to incorporate innovative AI capabilities and predictions into their applications. And beyond basic reimbursement, Google utilizes the APIs to gather tons of user-generated data for further training their algorithms and improving the user experience.
3. Build customer loyalty
Another business driver for monetization in API is to build long-lasting customer loyalty. In today’s increasingly interconnected world, enterprises are creating APIs to allow users to incorporate their functionalities into their specific environments—instead of switching to a competitors’ offering.
If a company does not offer an API, and a customer wants to integrate a certain feature, they can easily switch to a competitor.
For example, Slack offers a messaging API that lets users integrate its functionalities with their company’s systems, reducing the chances of moving to a competitor. With the Slack API, you can send automated messages to Slack and trigger functions. This way, it allows users to create custom API integrations that support stickiness to its product.
4. Create new product capabilities
Companies usually expose their data and capabilities via APIs to allow third-party developers to create applications on top of them. This enables developers to build more niche products that couldn’t have otherwise been created.
For example, Trello provides a cloud collaboration API that lets external developers create content extensions and new features, such as checklists for tasks and messaging notifications. This increases the capabilities of Trello beyond their initially envisioned offerings.
5. Maintain product relevance
With the current rapid advances in technology, companies want to stay relevant and maintain a competitive edge in the marketplace. And APIs offer them a great way to keep their fingers on the pulse and adopt new developments quickly and efficiently.
For example, Facebook offers a free social API that enables developers to create other social applications. This way, Facebook can collect data from those applications and use its platform to sell better advertisements and discover new acquisition targets—without losing its relevance.
API monetization models
There is a wide range of models you can pursue to make money with your APIs. The type of API business model you select will be vital in determining your APIs’ adoption and growth.
What is an API business model?
It is an approach used to leverage APIs into new revenue streams. An API model consists of the procedures followed to generate business value from the use of APIs. You can create a pricing plan that best meets your needs for exposing the API program.
Out of the several models available out there, we’ve chosen the following because of their extensive implementation and availability. Find out how you can utilize them to generate revenues from your digital assets.
Here are the four main API monetization options:
- Consumer Pays
- Consumer Gets Paid
Let’s talk about each of them.
In the Free API monetization model, money is not exchanged directly. It is usually used when low-valued assets are exposed to meet a certain business objective.
For example, Facebook provides a free user authentication API that allows developers to ascertain the identity of end-users. While Facebook does not directly charge developers, the API helps the company grow by increasing its reach to a wider audience and collecting useful usage data.
Whereas the free option is a good strategy for monetizing your APIs, it usually works well when combined with other approaches. If you implement a free plan alone, without aiming to achieve a business purpose or upsell your other services, your enterprise may not get the value of exposing data to third-parties.
Why do companies give access to APIs for free?
Companies can provide APIs for free for several reasons, including to drive the APIs’ adoption, enhance brand loyalty, and penetrate new channels easily.
2. Consumer Pays
In the Consumer Pays scenario, the developer pays for the resources or services that are exposed via the API. Since the developer may get downstream revenue through its consumption, the exposed business assets must be of value.
Here are the common sub-models in the Consumer Pays scenario:
- Fixed Quota
Let’s talk about each of them.
Just as the name suggests, the Pay-As-You-Go or Pay-Per-Use model allows the API consumer to pay only for what has been used—without pricing tiers or minimums. Billing is usually done periodically, such as weekly or monthly.
If you implement the Pay-Per-Use pricing plan, it may be essential to provide an option that allows developers to test the API before making the purchase. For example, you may offer a sandbox environment for developers to run tests without any charges. This saves them from incurring huge upfront costs.
Since its pricing scales linearly with the level of activity, this model offers a simple way of earning income from your APIs. However, its main disadvantage is unpredictability: revenue is unpredictable for API providers, and consumers may not budget well on how much to pay every month.
b) Fixed Quota
In the Fixed Quota model, a preset number of requests is purchased for a certain period, such as daily, weekly, or monthly. API consumers can also be billed based on a fixed number of calls, such as $0.50 per 1,000 requests.
It offers a more predictable revenue and pricing structure for API providers and consumers, respectively.
However, developers may incur losses from unused calls for the purchased period, or their applications may shut down after the threshold is reached.
Another popular technique to earn money is the freemium model—where basic features are provided for free and advanced features are priced (while including other pricing models).
Most API providers usually implement this model by establishing multiple tiers of paid access—such as Basic, Pro, Ultra, and Mega—in which there is pricing step up for every tier as well as expanding inclusion of functionalities.
Once a developer subscribes to a tier that best addresses their needs, they’ll be billed for that quota, whether they consume the entire amount or not. This usually makes developers complain about the likelihood of being billed for unnecessary resources.
Examples of API monetization use cases for this model include when shifting from an entirely free model to a paying one, promoting API adoption by providing an option that tests the API, or targeting different user groups with various pricing plans.
A good example of the freemium model is the Microsoft Text Translation API that provides up to 2,500 requests for free per month. Then, higher quotas are available depending on the desired extent of usage.
How do I monetize an API?
To generate revenues from your API, you can allow the API consumer to pay only for what has been used (pay-as-you-go), buy a preset number of requests (fixed quota), or offer basic features at no cost and charge for advanced features (freemium).
3. Consumer Gets Paid
In the Consumer Gets Paid scenario, the API provider offers a monetary incentive for integrating the API. This revenue sharing model encourages the API’s adoption and helps the provider extend its brand and drive more sales.
Here are the common sub-models in the Consumer Gets Paid scenario:
- Revenue Sharing
Let’s talk about each of them.
a) Revenue Sharing
In this model, the API consumer (or any other partner) plays an agent’s role to assist in selling the provider’s assets or products.
The consumer is paid a commission, which can be a specified fixed or percentage of the generated sales.
For example, the Google AdSense Host API employs a flexible revenue sharing model that allows developers to share AdSense revenue with users visiting their sites. This incentivizes users to create high-quality content.
In this model, the API consumer (or any other partner) advertises the API on their application or content to drive customer traffic to the provider’s website.
For example, content publishers who use the eBay API to advertise eBay products on their sites can earn affiliate commissions when referred customers buy items.
4. Indirect monetization
Lastly, in the Indirect or Intangible monetization model, the API is usually exposed to achieve a business goal and drive revenues through indirect means.
Here are the common sub-models in the Intangible monetization scenario:
- Brand Awareness
- Content Acquisition
- SaaS Offering
- Internal Consumption
- B2B Partnership
Let’s talk about each of them.
a) Brand Awareness
APIs can be used for extending the brand of an enterprise. As a marketing tool, third-party developers can be allowed to integrate an API for free, which provides brand exposure to the company’s products. Furthermore, APIs can be designed to have hyperlinks that drive traffic to a central website.
This way, APIs can be instrumental in penetrating new demographics or geographies, introducing new products to potential customers, and upselling advanced capabilities to existing clients.
b) Content Acquisition
Some APIs are exposed to enable writing and submission of content—instead of delivering the content to consumers.
With such an API that acquires content from third-party users, you can indirectly monetize your digital assets or advertise your services. The API monetization examples, in this case, are YouTube API and Twitter API.
c) SaaS Offering
Software as a Service (SaaS) is a popular technique for selling web-based software to businesses and individual users.
An API is usually included as an add-on offering to the core software, enhancing its capabilities. Apart from adding the API to the core SaaS product, it can also be provided as an upsell option for premium SaaS users.
d) Internal Consumption
APIs can be used within an organization to create customer-facing applications that generate revenues through customer engagement.
When used internally, APIs can enhance productivity, save development costs, meet regulatory requirements, reduce time to market, and more. In most of these cases, internal APIs are not priced.
e) B2B Partnership
APIs can also be exposed to allow partners and customers to integrate into your enterprise easily. If the API offers value to them, they’ll be incentivized to continue using it. And since your systems will be programmatically integrated, shifting to an alternate provider could be costly to them.
This builds customer loyalty, solidifies partner relationships, and enhances the growth of your company.
Best practices for monetization
Let’s now talk about the best practices for monetizing your APIs.
Here are the main considerations you need to make to get the most out of your API monetization strategies:
- Go through a monetization checklist
- Establish a roadmap for monetization
- Implement an effective pricing strategy
- Implement a mix-and-match approach
Let’s talk about each of them.
1. Go through a monetization checklist
You can go through an API monetization checklist to determine how to pursue a monetizing strategy with your APIs.
For example, we created a set of questions that can assist you in identifying the most suitable monetization approach you can use:
- How will the exposed asset provide value to the target audience? Will it be easy to use, well documented, and properly supported?
- Will you be able to generate profits by charging directly for the API’s use?
- Is it possible to generate revenues indirectly by exposing the API?
- Who will own the customer relationship journey—is it you or the API consumer?
- Which API platform will you use to measure success?
2. Establish a roadmap for monetization
Succeeding with API monetization billing requires strategic planning. You need to establish realistic goals for your API adoption journey. If you begin small, but design for scalability, you can earn the rewards of exposing your APIs.
These are the five steps you can follow when releasing your APIs:
- Start by creating internal APIs to establish your business case and provide initial proofs of concept.
- Promote internal consumption and enhance the APIs’ capabilities.
- Choose a comprehensive API management platform to help you with governance, monitoring and analytics, and many other tasks.
- Expose the APIs to partners and identify how to deliver new market propositions.
- Expose the APIs to the public with a predetermined monetization structure.
3. Implement an effective pricing strategy
You need to establish an effective and simple strategy for pricing your API initiative. Implementing an ad hoc, unstructured, or complicated pricing plan may make it unattractive.
These are the three factors to consider to help you in pricing your API well:
- Cost—you need to evaluate your business expenses and the costs for fulfilling an API request. Then, price your API such that you’re able to make a profit at the end of the day.
- Competition—you need to consider how others in the industry are pricing their APIs. Also, examine if the market is already saturated with several alternatives or if there are just a few. Your selected price should be as competitive as possible.
- Capability—you need to assess the capabilities that your API will provide to the target audiences and if they will be comfortable paying for it at the stated price.
4. Implement a mix-and-match approach
The reality is that relying on a single monetization style may not yield the desired results. Using an assorted, hybridized approach that includes a couple of the monetization tricks may open doors to new opportunities.
These are some recommendations to consider when implementing a mix-and-match technique:
- Always include a free tier—since most developers are likely to “try before they purchase,” including a free tier will help them explore your API before committing to a subscription plan. More so, after integrating your API, they are less likely to switch to another program because of the higher costs involved. So, having a Freemium pricing plan may be better than a Paid-only plan.
- Include an entry-level paid tier—introducing the paid plan by adding an affordable, beginner-friendly tier can allow developers to scale consumption comfortably. Offering such a plan allows developers to familiarize themselves more thoroughly with how the API works without incurring high costs.
- Consider adding premium features—including various premium features—such as unlimited calls, access to advanced functionalities, or higher rate limits—can assist in differentiating between “beginner-friendly” plans and “advanced, production” plans. With these performance enhancements, you can encourage developers to upgrade to higher price tiers once they’ve fallen in love with your API.
- Include overage fees—add an affordable overage fee for every additional request made beyond the allotted quota. This will prevent developers’ applications from shutting down whenever they exceed their limits.
Pricing structure example
Every API is different, and a one-size-fits-all pricing structure may not be suitable for all of them.
Nonetheless, we’ve seen that the following pricing example works well in most cases:
|Type of Plan||Explanation||Price||Use Case|
|Basic||A free tier with a quota||free||Developers getting started with the API|
|Pro||A developer tier||$25||Developers launching a beta application or small projects with limited users|
|Ultra||A company tier||$75||Small and midsize businesses using the API for internal tooling or testing with small groups|
|Mega||A tier for very high consumption||$150+||Small and midsize businesses using the API in production|
|Custom Enterprise Pricing||Specialized pricing tier for large organizations||Customized||Large organizations in production use cases|
Monetizing with Rakuten RapidAPI Enterprise Hub
While monetizing APIs allows you to generate revenues and enhance your enterprise’s growth, exposing your critical business data introduces a new set of security and management challenges, which can prevent you from realizing the full value of your APIs.
The Rakuten RapidAPI Enterprise Hub is a centralized API portal that lets you set up successful API monetization strategies. It is a first-class API marketplace monetization platform that enables you to eliminate the day-to-day administrative pain points of managing your internal and external APIs so that you can get the most out of them.
You can use it to enforce your APIs’ security, get useful insights about their performance, control API consumption, and expedite API discovery.
Furthermore, the Enterprise Hub comes with a wide range of API monetization tools for accomplishing various tasks, including:
- Defining payment plans as free, freemium, or paid (while adding quotas and hard or soft limits).
- Implementing monthly subscriptions or pay-per-use plans.
- Applying private plans that are available through invite-only.
- Enforcing secure automatic charging capabilities.
Ultimately, with the Enterprise Hub, you can avoid concentrating on the risks of monetizing your APIs, but rather, on the sweet rewards.
If your enterprise intends to set up a comprehensive and versatile API monetization platform, send us an inquiry right now.