APIs have transitioned to products on which organizations can build their business. There are certain fundamentals that every API monetization strategy will benefit from.
Identifying yourself with a bank identification service, used for numerous websites and applications, provides a well-known example of how APIs are utilized. If an organization requires customer authentication to conduct an online operation, it can use banks’ electronic identity services to authenticate the customer. Using the personal information that it retains of its customers, the bank provides an authentication service, using APIs, to other companies. As there is a secure solution available, organizations are likely to use it, instead of building their own authentication product.
Another concrete example of a business enabled by APIs is Vaisala Xweather, a business that sells hyperlocal weather and environmental data through APIs. Their solutions include weather forecasts displayed on car dashboards and lightning detection data for renewable energy plants to protect their assets.
API monetization is defined as a concept that drives revenue by providing access to an API (Application Programming Interface) to third-party developers, customers, partners, or end-users. This happens mostly through public and partner APIs as they empower organizations to create new services and provide access to systems, data or functionality that have economic and strategic value to their business ecosystem.
Figure 1. Value creation with APIs
The figure above is a simplified illustration of how APIs can drive value. API owner provides access to valuable data or function to API customers (typically developers). The API acts as the tool that enables the API customer to transform the data from API owner into something of value. For instance, a developer may create an application that leverages the data to meet the needs of other users. This is what I call API product flow, represented in the top of figure as a purple arrow.
API Monetization flow, demonstrated with green arrows, depicts the flow of payments from API customers to API owner for the consumption of API product. How the revenue is generated varies depending on the business model, the product or service being offered, and the target audience of the API. The revenue generation models can be classified into four primary categories: (1) free of charge, (2) payment by developers, (3) payment to developers, and (4) indirect.
Below, I introduce the most common scenarios in the Payment by developers and Payment to developer models.
Figure 2. API revenue generation models
In addition to these models generating direct revenue, An example of indirect revenue is that the APIs are free to use, but they increase the sales of the product, brand awareness and customer engagement. I will delve into indirect API monetization in later blog posts.
Organizations can generate revenue through selling access to APIs or by charging for additional services built on top of the APIs. By opening their APIs to business partners, co-developers, or the public, organizations make their data assets available for use by API customers, enabling them to generate new value for end-users. As the number of API users grows, the API owner can develop additional revenue streams or increase existing ones. Sharing data can even trigger fundamental changes in the organization's business model.
API monetization supports business ecosystems. Through API-based services, organizations strengthen connections with existing partners, establish new collaborations, and explore additional ways to engage customers. By connecting the ecosystem with business APIs (open APIs), organizations can take advantage of innovation opportunities of their own API products as well as those of their partners. A monetization strategy can help the ecosystem to maintain and expand its operations by attracting new developers who are motivated by the opportunity to earn revenue from their applications.
APIs provide multiple opportunities to enrich customer experiences and build loyalty, for example through granting access to value-added services and premium features or providing accessible way to exchange information and extract value out of enterprise data.
While the same approach will not work for two companies, there are certain fundamentals that every API monetization strategy will benefit from.
To summarize, there are two main prerequisites to successful API monetization: valuable data and maturity in API management. Valuable data in this context refers to something that can help improve the performance, user experience, or overall functionality of a product, service, or business ecosystem. In other words, something that creates unique value to its user. In the figure below, I categorize organizations into four zones, out of which three have the potential for API monetization.
Figure 3. Four zones of API monetization readiness.
In the first zone, organizations are advanced in API management capabilities and have valuable data assets that have potential to provide unique value users . These organizations have the capability to implement transaction-based and dynamic pricing models.
The second zone comprises organizations that have achieved a high maturity of API management but don’t have enough valuable data or lack sufficient data management experience. In this zone, organizations can implement fixed-priced models and engage in mass selling.
The organizations in the third zone are immature in API management and lack valuable data or are unaware if they pose data that could create value. These organizations are not advised to start API monetization yet. These organizations could review their capabilities to data collection, management and analysis, and initiate collaboration with other organizations to gain new insights and identify growth opportunities.
The fourth zone encompasses organizations with valuable data but low API management maturity. By investing in API management, these organizations can move up to the first zone, where they can employ high-priced and unique models.
What do I mean by API management maturity, then? Depending on the business targets and ambition set for API monetization, different capabilities are needed. The following figure illustrates the progression of API management across three stages.
Figure 3. Three maturity levels of API management
API inception phase: In the first stage, APIs are designed and used to address individual internal business needs, often using private APIs. This stage emphasizes accessibility, connectivity, and information sharing.
API development phase: The second stage is reached when APIs are used for automating and simplifying different business processes. APIs play the role of interconnectors, for example, between different departments in an organization.
API optimization phase: The third stage is where the use of APIs extends beyond the organization’s boundaries to establish connections with partners. This enables the creation of a digital ecosystem and digital products, which in turn facilitates the monetization of data assets and the evolution of business model.
Would you like to discuss about the opportunities in the API economy and the practices for monetizing your data assets? Contact me and let’s talk!