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Money, Money, Money - Monetization of APIs needs more than just a business model (1/3)

27.10.2022 | 5 minutes of reading time

Welcome to my blog series on the topic of my bachelor's thesis, "Real-time dashboard with distributed streaming". To summarize, it discusses the visualization of API-related data that is essential for business owners.

How is this series structured?

This first post will provide the reader with some context for the problem. In the second post, I will address this issue by designing a solution based on project requirements. Finally, part 3 will be about finishing the project and reaching a conclusion.

Introduction to the problem

As Sir Francis Bacon mentioned in his published work, Mediationes Sacrae (1597): “Knowledge itself is power.” Businesses and people in the contemporary world are trying to obtain wisdom to achieve greatness. Because data is the new oil, many businesses are beginning to view it as a strategic asset that has to be acquired, transformed, and analyzed to generate actionable business decisions rather than an operational cost that must be minimized.

In relation to the current development of APIs, both the importance of data and APIs have increased significantly in recent years.

APIs have progressed from a technological asset to a product from which businesses can generate revenue and are now commonly appearing in automobiles, fitness trackers, and mobile apps. The API provider benefits from the publication of an API. They generate revenue by marketing their new product first and monetizing their API afterwards. The API consumer benefits greatly from using them as well because they are not required to reinvent the wheel, which directly translates to an improved user experience. After all, using an API allows enterprises to provide a broader range of services in less time. Furthermore, the use of so-called API analytics tools, which are occasionally offered by the API provider, enables developers who integrate the API to analyze its usage. Complications can be quickly identified and resolved by examining the collected details. Unfortunately, the depth of information has its limits: As previously stated, the information is primarily geared toward developers in order to detect and fix bugs. It is not intended for the business owner to make informed business decisions, which is why, as part of my bachelor's thesis, I attempted to solve this problem. The primary emphasis was on cost management. Typically, APIs are billed at the end of each month, quarter, or year. During this time, it is extremely difficult for the business owner to retrieve any type of information. Daniel Kocot and I devised a real-time analytics dashboard with distributed streaming as our solution.

But how does API Monetization work?

As previously stated, APIs expose business/digital assets to end-users without jeopardizing internal functionalities. Since users gain advantages by using various APIs, API providers monetize these services and generate new revenues from their consumption, which is also known as API Monetization. However, the term also encompasses other business models, one of which is compensating an agent for selling your products. Both scenarios are referred to as direct payment models. Another option is the indirect payment model, in which advertising and marketing are frequently the primary drivers of revenue.

Some API monetization models and submodels are depicted in the following image.


API Monetization Options Figure 1 API monetization models and variations API Monetization – Understanding your Business Model Options (Whitepaper by IBM)


Free: API providers expose their assets without charging their consumers (free trial). The model is primarily chosen for lower-value assets, which they use for promoting their businesses and extending their customer reach. The model is also a good opportunity for API consumers to test the API and understand the value it delivers.

Developer Pays: Consumers of APIs are happily willing to pay fees for using the services. The costs can be generated from different submodels: For example per transaction, which is a utility-based model. Here, API consumers pay for what they use. Another submodel would be a subscription of a specific tier or several units for a specific period of time.

Developer Gets Paid: The API providers share their revenue with third-party developers, who are using the APIs, expanding their customer reach, and generating new affiliation programs. These models provide various approaches to charging their consumers, which are offered within a rate plan. A rate plan defines the procedure of monetizing APIs and depends on the different charging models. The plans are connected to API packages, which offer a collection of API products. These packages can contain various combinations of products and are also associated with one or multiple rate plans. In addition, an API product is simply a collection of APIs. A rate plan usually contains information such as a description of the rate plan, the frequency of payment, the due payment dates, and some additional information.

Indirect: This model is not dependent on direct revenue. Instead, marketing and advertising may bring a potential customer to the company, potentially establishing a new business relationship and recurring relations with new customers.

Nevertheless, the decision to monetize an API is not simple. Many variables have to be carefully evaluated to guarantee success. The API provider's main goal should be to determine the value of an asset they want to share as well as the audience size, as the publication necessitates new infrastructure, stakeholder support, and an API strategy.

The following questions should help with reaching a better understanding:

  1. Is the asset you want to share rewarding, or will it increase the expenses?
  2. For whom is the asset valuable?
  3. What should the relationship with your customer look like?
  4. Do you rely on your customer or do they rely on you?
  5. When pricing your asset, how might it affect the customer?
  6. Do they seem hesitant to use your service?

Answering questions like the ones above can assist in determining the best method.

But how do we measure the success of our monetization?

In this case, the value must be obtained by all API value chain participants, the API provider, consumer, and end-user/ customer. The API must be beneficial to all three participants.


API Value Chain Figure 2 API economy value chain API Monetization – Understanding your Business Model Options (Whitepaper by IBM)


Summary

This article provided you with a good overview of the benefits of using API monetization. Monetizing APIs is a useful way to generate new revenue streams, expand customer reach, and form new partnerships. However, there is still a need for improved consumer information sharing. Keep an eye out for the next post, in which I will propose a solution to this issue.

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