4 Standard Business Models for API Monetization

The process of generating revenue from APIs is called API monetisation.

API monetisation isn’t only about how a business generates revenue from APIs but also about how you expose the API to an audience while keeping it secure and controlling its consumption. API monetisation includes both direct and indirect payment models to drive revenue. Here are some standard business models for API monetisation.

Free

As the name suggests, there is no direct exchange of money. This is a popular way to provide access to an API as anyone can sign-up and start using the API. In this model, the consumers can test the API before they start paying for it. This model also helps drive API adoption and brand loyalty. While there is no exchange of money, it involves the cost of doing business such as advertising or supplying product information.

Facebook log-in is an excellent example of a free API. Facebook provides this API to companies to help them identify end-users. Facebook does no earn any direct revenue from this API but benefits if a consumer signs up on Facebook to use this logon on other sites. It also helps Facebook understand usage patterns to generate extra value from the log-in data gathered. However, the free model works only in conjunction with other models, such as offering paid services to businesses with higher demands.

Developer Pays

In this model, the developer pays the enterprise to use the API to gain a competitive advantage. The developer, in turn, earns downstream revenue through the use of the API. The developer pays model has several sub-models: Freemium, Pay As You Go, Tiered, Points-Based, and Transactions Fee.

1. Freemium – In this model, the basic features are free, and the premium features priced. Dropbox is a relevant example of this model.

2. Pay As You Go – This is a straightforward model in which the developer only pays for the consumed services, without any minimum guarantee or tiers. The billing in this model is done periodically, such as monthly. Amazon Web Services (AWS) is one such example.

3. Tiered – Some API providers set multiple tiered resource access for the developers to choose from, such as bronze, silver, and platinum. The developers can select their desired level and access and pay for it. In most cases, the lowest tier is free so that the developers can test the waters. The developers are billed for the chosen tier during the said period whether they use the entire amount or not.

4. Points-Based – Google Adwords is an example of a points-based monetisation model. Different APIs have different value and are assigned points. The developer has the option to either pre-buy points (tiers) or is billed by the number of points on a pay as you go basis.

5. Transaction Fee – PayPal uses a transaction fee model in which the API provider receives a fixed or percentage as a transaction fee on every transaction.

Developer Gets Paid

This is one of the most common API monetisation models based on revenue sharing. In this model, an e-commerce enterprise like Amazon or eBay makes its APIs available to the developers. When the end-user purchases on the e-commerce site, the developer receives a percentage of the revenue; Expedia earns over $2 million per year through their API leveraging this monetisation model. The developer gets paid model also has sub-models: Affiliate, Revenue Share, and Referal.

1. Affiliate – In the affiliate model, a partner leverages your content/advertisements to drive potential user traffic to you. This type of engagement has further sub-models: clicks, impressions, action/acquisition, and engagement. Examples of this model include Amozon.com and Google Adsense.

2. Revenue Share – In this model, the developer acts as an agent to help API providers sell their products or assets. The API consumer receives a fixed percentage in commission. An example of this model is car comparison portal Cars.com.

3. Referal – This model draws similarities with the affiliate model the only difference being that payment is involved only when the end-user makes a purchase. Payments may be recurring or one time. An example of this model is job placement site Monster.com.

Indirect Monetisation

Indirect monetisation takes an indirect approach to deliver value from APIs instead of generating revenue from direct methods such as API access or advertising. This model too has multiple sub-models: Content Syndication, Content Acquisition, Internal-Consumer, Internal Non-Consumer, B2B Partner, B2B Customer, and Business Expansion.

1. Content Syndication – Distribution of your content by a third-party through APIs is called content syndication. Examples of this model include Twitter and NY Times.

2. Content Acquisition – In this model, a third-party submits content through APIs to attract customers to you. Examples of this model include YouTube and Twitter.

3. Internal-Consumer – Your employees use APIs to create a customer-facing capability for your business, such as developing mobile apps or e-commerce web portals. Examples of this model include Netflix and Citibank.

4. Internal Non-Consumer – In this model, the internal use of APIs enables improved productivity, meeting regulatory requirements, and managing portals.

5. B2B Partner – Your partners use APIs to integrate your enterprise. Examples of this model include government agencies sharing information.

6. B2B Customer – Your customers use APIs to integrate your enterprise. An example of this model is Walmart.

7. Business Expansion – This model is used to expand to new geographies, demographics; and offer new products or upsell new capabilities. A relevant example of this business model is Facebook.

Closing Thoughts

We have covered almost all API monetisation business models in this blog. I hope It helps you understand the options available when deciding your API monetisation strategy.