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API Monetization – What Does It Really Mean?

By Alan Glickenhouse posted Tue October 17, 2017 06:34 PM

Every time I get into a conversation about API Monetization I feel like quoting from The Princess Bride, “I do not believe that word means what you think it means.”  Many businesses are excited about APIs and the API Economy and have heard of a terrific opportunity for API Monetization.  This is true, it just most likely isn’t what they think the opportunity is.


Many that I talk to believe that API Monetization means, “charging for the use of your APIs”.  The business will build APIs to access an asset and a third party will pay you per API call, or in groups of calls, to access the API(s).  There are some use cases where this makes sense, but fewer than you would expect given the number of people that believe this to be the meaning of API Monetization.  Using this definition is very limiting and will probably lead to disappointment in your API initiative.


A better definition of API Monetization is “driving revenue using APIs”.  There are many business models under this definition and charging per API call is only one of them.  This definition is much broader and incorporates many additional business models to drive revenue.


When does it make sense to charge per API call?  The primary factor is that there is an audience that wants to pay for it.  Just because you want to make money with APIs does not mean there is a buyer for your API product.  But, there may be other business models for the API (as we will see) that may generate revenue and be attractive to a potential audience.  Beyond that, the asset value needs to be relatively consistent such that each call to the API provides roughly equivalent value to the consumer and consumes roughly equivalent resources from the provider (you).  Variations on this model might support a free level of low usage (freemium), or lesser functionality APIs versus higher functionality at a higher cost (tiered).  These models do exist and my point is not that you should avoid them.  Just use them when they are appropriate.


Let’s look at some additional business models that might also drive revenue but don’t fit into the simple pay per API model.

  • Transaction fee – as an example for a payment API you probably want to charge a percentage of the value of the payment, not just a flat fee per API call. This also applies to the value of the data or transactions executed in many other scenarios.

  • Free – yes, I said Free. Why have a free API?  To attract customers.  Facebook’s Login API is free which is just one way that Facebook supports increasing its user community.  This allows Facebook to charge advertisers through a separate set of APIs.

  • Developer gets paid to use your APIs – Really! This scenario includes situations where the consuming developer is acting as your agent, selling your products or offerings.  Your API usage payment to them is like a commission.

  • Indirect – this is by far the most common scenario. In these scenarios, you use APIs to facilitate the on-boarding of partners to reach new customers and new markets or enable an internal project coming to market faster.  You create a partnering relationship and financial reconciliation between the companies is not related to the API usage, the APIs are just a far simpler way to integrate to the partner.


In many of these additional business models the value is in obtaining new customers or providing new channels to market to reach new customers.  Obtaining customers is typically far more profitable in the long term.  The challenge for many of these additional models is that it is more difficult to directly associate the revenue generated to the API initiative.  The simplicity of paying per API and having the direct correlation is very tempting.  But, forcing the wrong business model on the API for the simplicity of measuring its success will probably cause the API not to be successful.


There is a huge opportunity in API Monetization – if you view this in the broader context.  Having a limited view of API Monetization as only one model will cause you to force fit APIs into that model that are not appropriate.  While the APIs might have been successful with an appropriate business model, they might fail because of the pricing model imposed.


For a more complete view of API Monetization from a business perspective please download the white paper, “API Monetization Understanding Business Model Options”.  The following diagram outlines the models described in this paper.


The IBM API Connect product supports monetization.  Please see the following blogs for a description of the API Monetization capabilities included in API Connect:


To understand more about IBM’s thoughts on the API Economy visit the IBM API Economy website.  IBM API Connect is IBM’s complete foundation to Create, Run, Manage, and Secure APIs.  You can find more information about IBM API Connect at the API Connect website.  And you can also experience a trial version of API Connect.


If you have questions, please let me know.  Connect with me through comments here or via twitter @Arglick to continue the discussion.