What is API Monetization: Models, Strategies, and Tactics

APIs have become popular solutions for both businesses and individual developers, and monetizing them is an essential strategy for increasing revenue streams. APIs have transitioned from technology assets into business products and have become the backbone of the next generation of digital business development. No wonder the global API monetization market is projected to grow at a CAGR of 32 percent by 2028.

Let’s take a deep dive into API monetization.   

What is API monetization?

API monetization is the process of generating revenue from an API. This can be done directly or indirectly. It involves creating a business plan for APIs and ensuring that it delivers high-quality and reliable value to users. 

It's important to find the right pricing model for your business, and to make sure that the cost is fair. Charging too much will scare customers away, while charging too little will mean you're not making enough money to cover the costs of running your API. 

Please note that your API must be really good for it to make monetization sense. You need to make sure it’s up to snuff. It should be well-designed and easy to use. Marketing is also vital. Get the word out there so that people know it exists. You also need to make sure that you're constantly evolving and improving your API. Keep it fresh and keep your users coming back for more.

Popular API monetization models

There are so many models you can use to monetize your API. But this also calls for creativity, so don’t restrict yourself to these API monetization models only. Look keenly at the API, particularly what users are doing with it, then figure out the most lucrative models you can apply and start generating revenue. Having said that, here are the Top 10 most popular API monetization models across all industries.

1. Subscription

This model charges a flat subscription fee to assess an API, either monthly or annually. It is ideal for APIs that provide functionality without large data quantities that may incur unpredictable costs to the API service provider. Furthermore, it allows the provider to retain customers by delivering long-term access to the API. 

A good subscription model allows users to update their subscriptions and retrieve invoices anytime. The use of subscription services is on the rise, and subscription business revenue grew by 437 percent over a decade.  

2. Pay-per-use

This model charges each API request/call separately. API providers can also extend it to transaction volume or gigabytes sent and charge per MB of data consumed. It’s most suitable for providers with a track record of offering digital products. 

The key advantage of this model is that users pay for what they use, thus significantly reducing the cost of the perceived value gap.

3. Unit-based

The user buys their preferred unit before using the API. Each unit has a different value, and different API units have various features. Each unit is also assigned a price and points, which reduce with usage.  

4. Tiered 

In this model, the API provider sets up different tiers of paid access. For instance, the provider may set up platinum, gold, silver, and bronze, each with its own features, services, and access to API resources. Each tier will also have a different prize depending on the costs incurred. 

5. Revenue share

In this model, the developer and provider split up the revenue earned. The API developer and provider will benefit each time a client uses the API. This model also encourages businesses to act as agents and assist in marketing and selling a provider’s API. For instance, a travel website may display an API provided by a hotel or car rental agency. 

6. Ad revenue share

API providers using this model offer API platforms with advertising networks. The users embed adverts into their mobile and web applications, earning the providers revenue. Service providers can also extend this model to a pay-for-ad-free content model, where the ad revenue supports the API fully, but clients have the option of paying for the ads to be removed. This is a popular model for high-volume, low-cost apps.

7. Software as a Service (SaaS)

SaaS has become such a popular and immensely attractive approach for offering APIs and software online to individuals and businesses, with the global SaaS market expected to reach 700 billion US dollars by 2030. 

Typically, a provider will offer core software plus an API to complement it and thus provide more value to users. The provider will deliver the API as an option for premium users or as a component of the SaaS platform. 

8. Affiliate

This model allows developers to include partners’ content or advertisements to drive customers to the provider’s websites. It may apply several sub-models, such as Cost Per Click (CPC) or Cost Per Action (CPA).

The API developer is paid for each click that drives traffic to the business’s site in cost per click. Similarly, the developer earns a commission on every successful conversion in cost per action. 

9. Content acquisition

Though not all APIs offer content and other related resources to clients, content acquisition is an excellent way to monetize APIs. You can allow content from third parties, attracting clients to the API. The API will enable content submission, accessing, updating, and deleting. 

10. Freemium

These API monetization models allow users to access an API for free to a certain limit. Once the users exceed this limit, they are transitioned to a tiered pricing or pay-per-use model. It is among the most popular for monetized APIs because it encourages the uptake of the “free” API until the free user acknowledges the value and opt to upgrade. 

This model makes it easier for providers to predict costs, which are later offset by the revenue earned as users scale up the tiers. 

Getting started with API monetization: 5 simple steps

API monetization is not a plug-and-play approach but involves a planned process to ensure success. Follow these simple steps to follow.

1. Determine the revenue potential

Assess the revenue potential of an API to your business, whether direct or indirect. Conduct a SWOT analysis on your API to understand its strengths, weaknesses, opportunities, and threats. Define its capabilities, its value, and your target audience. You can approximate your potential revenue with your API’s value and target market. 

2. Select a suitable API monetization model

The best API monetization model will depend on your target market, industry, and what value the API offers. Explore the above models and determine the most suitable for your API. Factor in both the direct and indirect revenue you might earn. 

3. Scale API management

There is more involved in monetizing an API; thus, you will be required to implement a complete lifecycle management approach. This approach will manage all the aspects, including designing and developing, implementation, security, and retirement.  

4. Build a developer community around the API 

You will require to build and nurture a developer community for your API monetization to be successful. The community will help to scale up the developer portal and API marketplace. The community must fully understand the API’s design, usability, and functionality.

5. Sustain continuous value addition

One way to ensure that your API continues to bring in revenue in the long term is to provide continuous value to users. The tech industry is highly dynamic, and you must update your API regularly. Your developer community should assist with this. 

Conclusion

API monetization offers an excellent opportunity for individuals and businesses to make money from their APIs. However, you should scan through all the monetization models and decide which one is best suited for your API and customers. You must also ensure that your API provides value that a decent proportion of the potential users will always be willing to pay for.