The tech industry as a whole can be a lucrative one. In fact, the global information technology industry was estimated to be worth some $5.3 trillion in 2022. Of course, how big a slice of the pie you can claim depends on how good - and how useful - your products are and what demand there is for them. With a good product, your business can see ongoing success.
One particular area that is performing well is the API (application programming interface) market. With a global market value of $2.39 billion in 2021, it is estimated to reach $13.21 billion by 2030, with an impressive CAGR of 23.83% over that period. It is also expected that the US will acquire the largest market share in those years.
Just what is an application programming interface? And, perhaps more importantly, if you develop APIs, how do you monetize your products to ensure that your organization is making a profit?
What is an API?
An application programming interface (API) is a set of protocols and definitions that help developers to integrate or build application software. APIs allow one product or application to communicate efficiently with other products or applications. They can make app development a far simpler process as APIs offer the following benefits:
- Easier administration
- Simplified design
- Ability to innovate
- Ease of use
APIs make it easier for developers to integrate new components into existing apps or architecture. As things change often and quickly in digital markets, APIs allow companies to develop and deploy new apps (or to improve existing ones) rapidly. As much of the app development, today is cloud-based, APIs offer swifter solutions when connecting microservices application architecture.
Types of API monetization
There are two types of API monetization; direct and indirect. The type your API will fit into will depend on how it’s used.
1. Direct API monetization
While many businesses may aspire to direct monetization, the reality is that this type very much depends on the API you have developed and how it is used. Good examples of API products that employ direct monetization include Google Maps or Stripe. Products like that collect a very small payment each time an API call is made, but there are billions of such calls made.
Any type of API monetization is the goal of any business just starting in APIs or those who have previously only used APIs for internal uses and are now looking to develop for the wider market. They see how successful businesses that use direct API monetization are and seek to emulate them. The reality is that those direct models do not always fit with your product and you need to consider other ways for your API to make a profit.
2. Indirect API monetization
Indirect API monetization refers to scenarios where there is no actual price tag on the API itself; its use is free. However, that API plays a central role in an app or a product you have developed or contributed to. Therefore, although the API itself is free, the app or product it contributes to relies on that API, and the revenue comes from the product itself. When you are considering different products, such as HelloSign vs DocuSign, then you should be looking at whether those products use APIs in any way.
So, while you may think that the API is not monetized in this case, the reality is that the app or product’s success is dependent on your API and, thus is responsible for whatever money you earn from said product. With indirect API monetization, you are still earning revenue from developing the API.
Patterns of API monetization
When you look at API monetization, there are different patterns between the API itself and the product or app being sold that can help you decide whether you will fall into the direct or indirect API monetization models. They describe the different relationships that can exist between an API and the product it works with. This list does not cover all possible patterns but certainly describes the main ones to think about.
1. API as a product
When the API you have developed can be described as a standalone product, then you will likely be in the direct API monetization category. In fact, this is the only API relationship that allows for direct monetization, as your API is the actual product that consumers and companies want and need.
2. API as a data feed
In this pattern, the product relies on the API to feed data into it so that it can work effectively. Good examples of where this pattern occurs is selling platforms such as Shopify or eBay. These platforms rely on APIs to let users add new products onto the platform. When those products are sold, then revenue for the API itself is also generated.
3. API in a sales funnel (or in a distribution channel)
In this pattern, your API helps to sell a product or provides leads to sell the products. Good examples of this pattern include travel websites such as Agoda, where an API allows you to connect with travel insurance providers. In many cases, the API is embedded into the customer journey and can be convenient for the customer by providing a “one-stop shop”.
4. API as a feature
This pattern is sometimes called an Ecosystem API as it is externally visible and can link a particular product to other products. With these APIs, you can automate, notify, and synchronize data across applications or products. Ecosystem APIs allow end users to integrate products (such as a streaming music service) with products they already have (such as a dedicated music player).
5. Internal APIs
This can take different forms, as internal APIs can be either in software or hardware products. Here, the API is not visible to the end user but is an integral part of the product. Internal APIs are what power omnichannel journeys or smart devices. An example of an internal software API would be Amazon Prime. It uses internal APIs to synchronize your settings and preferences. An example of an internal hardware API would be being able to set your home’s heating to come on via a mobile device so it is on when you arrive home.
How to achieve API monetization
So, the main thing to understand is that direct API monetization comes from your API being the actual product, while in indirect API monetization, it is a crucial component of the product that makes that product stand out from competitors. In this case, you make money from the fact that it makes people want to buy the product.
If your business produces products that are not APIs, then moving to direct API monetization is going to take a lot of work and effort. You are more likely to be looking at how APIs can enhance your product(s) and having your DevOps team look at how they can develop and deploy those APIs to make your product perform better.
Of course, you can look at developing APIs that can achieve direct monetization but that, to an extent, means a change to your business model as it entails identifying a new customer base who will want to buy those APIs. Your existing customers are more likely to be focused on the products themselves and less so on an API as a separate product.
However, many tech companies will consider developing APIs that fit the direct monetization pattern as part of a longer term digital transformation strategy. You should first look at indirect API monetization patterns and see whether it is something that you can do in the short term. You may find that some APIs not only suit your products and make them better, but could be used in other products too.
Knowing where your APIs fit into the grand scheme of things is essential when it comes to seeing how you can achieve API monetization. For example, could your API be added to the best-quoting software to make the service better and improve the experience for end users while also selling more products?
The important thing to focus on is that APIs can be monetized. The next step is to decide whether existing APIs can achieve direct or indirect monetization. If only the latter, you also need to decide whether you want to add the development of APIs that can be directly monetized and add them to your roster.
The other thing to remember is that in some cases, API monetization may not be easily achievable. It’s going to depend on your particular business model, whether your API fits with a pattern that will allow it to generate revenue, and how ready your organization is to adopt new ideas (if needed) and move to a monetization model.