Understanding the Different Types of API Business Models

When creating a new API, there’s something your company needs to prioritize as much as its development: your strategy for monetizing the API product. Building an API costs money, and for sure, your company is looking for a return on its investment. But that entails more than simply releasing a product into the market and expecting it to earn. To get a handsome profit off of your API, you will need to do the following:

• Understand the different ways that APIs make money,
• Get to know the various business models that drive modern API consumption, and,
• Choose the right model and monetization scheme for your own company’s API, based on what’s most appropriate for you. 

Below is a guide on the most common business models and monetization schemes for today’s APIs. After doing rigorous design work on your new product, such as with the Stoplight API editor, it’s now time to make good on your earnings. 

What Are the Most Common API Business Models? 

There are four common approaches to selling new APIs. Getting traction out of each individual product involves knowing how customers will use the API, as well as what they’re willing to pay for. Here’s a briefer on each item so that you can choose the best strategy for your own API. 

The API as Its Own Product

The first of these approaches consists of selling an API as a product and using a direct charging scheme to the clients. This can be in the form of flat fees or in the form of monthly renewable subscriptions. Companies that use this approach typically adhere to individual developers who are already quite savvy with API-related technologies. It is a fairly straightforward business model for an API. But it is best for bigger companies that have the resources to own and develop proprietary API technology. 

The API in Service of a Core Business Function

The second approach entails marketing the API to business clients as a technology that can help them forward their business objectives. For this strategy to work, the API company must argue to clients that using the API will enhance their performance for a core business function. Perhaps the API can serve as a crucial upgrade to the business’s website or mobile app capacities. Or perhaps it can make payment collection more efficient or contribute to marketing activities. If your company can persuade would-be clients to see how your API grants them a competitive edge, they will be willing to spend on your product. 

The API Plus Additional Upgrades

In this approach, a version of the API with basic features is made available for free (the “freemium” version) or at a minimal cost. The API company can then make a greater profit out of upselling additional features, which are more advanced than the ones on the basic version. This may be a lucrative means of earning off the API, but it works best when you are upfront with your clients. If you make it absolutely clear what levels of functionality they are paying for, they will have cause to trust your product more.   

The API as a Co-Branded Partnership between Businesses

It’s important to know that your new business endeavors with APIs aren’t restricted to your own company’s activities. There’s also the approach of using the API for business-to-business (B2B) partnerships, in which one business provides the data and the other, the service. If you have yet to break through in the API industry, your partnership with a trusted name may be just what you need. This is how you can build your own brand’s name recall and strengthen your portfolio for work with future clients. 

What Are the Various Ways That You Can Monetize Your API? 

You can base your API monetization strategy on one of the four business models mentioned above. You can also look at the API’s potential profits in terms of direct monetization or indirect monetization.

Direct methods of monetization encompass the following: 

• The client completes a one-time payment for a full version of the API product. 
• The client pays for tiered versions of the API, where the features are the most sophisticated on the highest tiers. 
• The client partakes of a freemium version of the API and just pays as they go for additional levels of functionality. 
• The client lets their own customers use the API, and the API company gets a certain percentage or cut of each transaction completed on it. (This is a scheme that’s common for payment-related APIs.)

There are also indirect methods of monetization. In these situations, the API is not used for direct profit generation, but is nonetheless involved in valuable activities for the business. Some examples include the following: 

• The API is used internally so that the client company’s business efficiency can improve. 
• The API is used for content acquisition, or collecting valuable data that can improve the client company’s decision-making capacities.
• The API is a software-as-a-service (SaaS) and is used to host other applications.

Conclusion: The Best Methods for Monetizing Your API 

Ultimately, there’s no one right answer for which monetization strategy you should be using for your API. It all depends on your resources, the levels of functionality you want to allow on your API, and what your API will be used for. But there’s no doubt that you should think as carefully about the business side of your API as you do for the technical side. Thinking ahead about how your API will make money is the wisest thing you can do to guarantee its profit. 

FAQ