API Strategy and Business Models
APIs form a core part of many organization’s digital strategies, both for companies founded with a technology focus, along with those at the early stages of learning to leverage technology. In this post, we explore what an API is, why they are so valuable to modern business, and how organizations can use APIs to expand and enhance their product offerings and monetize them to drive additional revenue.
What is an API?
API stands for ‘Application Programming Interface’. APIs are increasingly in the public eye but have been around since the first computer applications were developed. With the arrival of mainstream cloud computing in the past decade solving problems of scalability, and mobile computing extending software reach and functionality, APIs have truly come of age.
APIs have a significant impact on a lot of our daily lives, whether we realize it or not. However, too often the exact nature and definition of APIs are poorly understood. So what is an API, exactly? At its most basic, an API is the part of a server that receives requests for data and sends responses back, enabling communication between separate software components.
APIs enable other services to work in harmony, allowing one platform to incorporate data or functionality from another service. By exposing a limited amount of data and functionality, organizations can share value with third-parties without exposing all of their code. Essentially, APIs offer a ‘door’ into software applications, from which data can be requested and used to extend, enhance and integrate with other services and workflows.
Example: Google Maps and Places Search APIs
Google’s Maps API offers a good example of a core application – Google Maps – that is regularly used to enhance other services. For example, in the Yelp app, destinations appear on the map using the Google Maps API. While within the ride-sharing app Lyft, the map which Android users see upon login is provided by the Google Maps Android API, and searching for destinations by name (rather than by address) is enabled by the Google Places Search API.
Breaking it down:
A – Application:
The software application, or part of the software application from which data is requested and sent.
P – Programming:
The endpoint is available (publicly or privately) for developers to build on top of.
I – Interface:
Acts as an interface between the software application itself and its third party uses.
The business case for developing an API
There is a strong business case for organizations to develop an API, or take an API-first approach in their strategy. Many companies such as Twilio, Twitter, Zillow, and Slack are reaping the rewards of making APIs a core part of their business strategy. APIs are making data more accessible and consumable, giving both established enterprise and new ventures the opportunity to get the most value from their data.
Data from APIs can either be consumed internally or externally. Internally this data can be used to obtain better insights on business performance or link together separated systems. Externally an API can be used in a variety of ways, whether monetized on a per-call, freemium or subscription basis or offered for free to expand the functionality of a product or service.
Realize the full value of data
Data from APIs can allow enterprise organizations to operate more efficiently. Consider the example of a firm that generates reams of data across many business units, including suites of internal and external-facing applications. By developing APIs to link these applications to each other, and piping relevant data from these sources to a consolidated database, enterprise analysts can uncover salient trends within organizations at scale. Using data from other (perhaps third party) APIs, these analysts can further drill down and explore inefficiencies and bottlenecks hindering progress.
These insights can inform the roadmap of a product, or even an entire business, allowing product managers and other stakeholders within an organization to make decisions based on numbers rather than notions. A major benefit for enterprise is that APIs can help to break down data silos and allow all parts of an organization to benefit from its data. By creating doorways that enable the movement of data, organizations can make informed decisions faster.
Extend and enhance your product offerings
APIs offer endpoints for any device connected to the internet, whether that is a web browser, a mobile phone or an IoT device. By building APIs and exposing data, the usefulness of a core product can be extended to any internet-connected device imaginable.
This offers organizations an opportunity to monetize their API for developer consumption or to enhance an existing product by encouraging developers to build within its ecosystem, thereby enhancing the original products value.
Example: Moz API monetization strategy
Moz offers an SEO product, Moz Pro. On top of this Moz sell access to the Mozscape API. This API allows developers to build their own applications using data from Moz, and is priced on a freemium basis with fees charged once a certain volume of data is called per month.
The data requested can be accessed by the Moz UI, however, by opening up endpoints to this data, developers can derive even more value from the Moz product and build their own applications using data from the Mozscape API.
This opens up endless opportunities for marketing agencies, product companies and SEOs to pipe and crunch the data, while providing ancillary revenue to Moz on top of its core product offering. Billion dollar players like Hubspot have built applications using the API, along with smaller players using the free tier of the Mozscape API.
Example: Slack open API strategy
Slack has made its API a core part of its growth strategy. Opening up APIs for public consumption allows third party developers to create complementary products and services that increase the value of its core product. Slack’s free API facilitates the development of third-party bots to automate tasks, the creation of custom workflows that enhance the Slack experience and the creation of internal tools to boost productivity.
This open API encourages a harmonious relationship with third parties, with many companies building Slack apps that leverage their own APIs within the Slack app itself. This product ecosystem, centralized in the Slack App Directory makes the Slack product ever more useful and functional, and spurs product innovation external to the company itself.
Example: Zillow open API strategy
Zillow, a real estate marketplace provides an open API network that ‘turns member sites into mini real estate portals’. Zillow allows other services to leverage its data. The company itself also relies on open governments API for data, and is a major proponent of public APIs and the sharing of data.
When data is readily available and free in a particular market, whether it is real estate or stocks, good things happen for consumers.
Spencer Rascoff, Zillow CEO
While this data presents B2B monetization opportunities for Zillow, the API and data remain free. This allows the company to establish itself as a primary source of real estate information in the market, and to drive traffic and ad sales, the company’s main source of revenue generation.
Pursue an API-first product strategy
Instead of seeing APIs as a secondary part of product strategy, Twilio puts APIs first. The company doesn’t sell a product wrapped in a user interface, but rather it offers a suite of APIs specifically aimed at and marketed to developers.
This developer-centric approach to growth has seen Twilio adopted as a communication tool in a variety of software products. Essentially these products borrow small parts of Twilio’s functionality to enhance their core functionality. It’s a considerable value proposition, developers using Twilio’s products don’t need to spend their time and energy building advanced communication protocols from scratch.
With a pay-per-call API pricing model, users of Twilio can scale their use of the service as they need it. Many high-profile products use the Twilio service to send SMS to authenticate user phone numbers. Notable tech giants such as Airbnb and WhatsApp use the Twilio API for this purpose, while Morgan Stanley recently adopted the service to facilitate more effective communication with their wealth management clients via text message.
It’s common wisdom to think that software is eating the world, but more specifically, we think that APIs are eating the world.
Jeff Lawson, Twilio CEO, Signal 2017
How can APIs be monetized?
Wait, what’s the value of an API?
APIs are an increasingly important part of revenue generating activities for business. In a recent survey of IT decision makers, Mulesoft, a vendor of integration software found that 50% of large enterprises (10,000+ employees) surveyed were making more than $5 million a year from API initiatives. With trends in the marketplace indicating that the use of APIs to extend and add value to business will increase, we predict this average figure will continue to rise in the coming years.
API monetization models
There are a number of ways that organizations can monetize API business models. The choice of how, and even whether, to monetize is dependent on a company’s goals. For example, if brand awareness is the goal of an API play, it may be best to pursue an open API or freemium subscription model, while if the aim is to drive direct revenue, a simple pay-per-call model may be the best route. As always, within any monetization model there are subtle nuances between different products, industries and verticals that influence the best possible choice.
A few to consider:
Per call basis
A pay per call model charges users of the API for each request that they make to an API, or limits the amount of calls they can make on a tiered basis. Twilio, as explored previously, use this as one of their pricing models, along with additional discounts for greater volumes.
Open APIs offer indirect revenue generation opportunities. In one way, revenue can be driven by driving traffic (for sites reliant on advertising, more impressions = more clicks = more ad sales). In another way, open APIs allowing for extensions of functionality that can drive product adoption (open API ecosystems = more integrations and extensibility = better user experiences = more happy users).
Freemium services can offer a certain number of calls to the API, after which payment is required for further use. Alternatively freemium models can offer free data which is throttled at the rate which you can request it, available only for a limited duration or available in delayed time (vs. in real-time) as is the case for some live data services.
SaaS companies such as SalesForce (incidentally also the producer of the first fully web-based API) offer access to their Web Services API once users subscribe to a certain tier of their product. This upsell strategy allows users to get a feel for the core product while dangling potential extensibility (and the prospect of an upsell) from day one.
In a revenue share agreement, an API provider allows a strategic partner to use their APIs in their product (e.g. web or mobile app). This partnership is beneficial in two ways: the API provider can earn more sales through referrals and drive greater traffic and awareness to their offerings, while the business leveraging the API benefits from both it’s functionality and a percentage of the sales they drive through their product. The Expedia Affiliate Network is a good example of such a model, with the company offering a suite of APIs to B2B partners and a percentage on sales made through referrals.
APIs offer a range of compelling opportunities for business and government, from simple commercial strategies such as extending existing product offerings, to forging unexpected commercial partnerships and even facilitating the development of smart cities through the availability of open data.
And while the API economy is blooming, the full scope of opportunities remains to be seen. In a climate of digital innovation, governments along with a broad spectrum of industries, including media, finance and real estate will increasingly tout API-focused strategies and use APIs to define entire business models.