How To Pick the Best Business Models for Your APIs
APIs are not just a technical concern, but a business concern as well. APIs assist an organization (whether that be an enterprise, startup, nonprofit, or government) to continue growing and to speed up product development, expose datasets and functionalities, and work more programmatically with external partners and third-party providers.
As an organization embarks on an API strategy, it needs to make a number of key decisions. So far we have looked at:
- Building business and technical alignment for an API strategy
- Fostering internal support and creating a team
- Identifying what data and services to open up.
Throughout these stages, keeping in mind who the end customer will be has been crucial; therefore, in this case, who are the developers who will be using your API?
While this series presents decisions as a stepped order, the truth is that in practice forming a team, building internal support, thinking through developer segments, deciding what data to open up and identifying a business plan are closely linked. You may end up revisiting what data to open up once you have clarified your business model.
A business model is a way to understand all of the system components that come together to allow you to create a project and add value, then exchange that project in the wider economy. Often people shorthand this by focusing on the amount of revenue returned from implementing an API strategy. API stakeholders often ask, "What is your business model?" They really mean, "How will you make money from your API?"
API Business Models Explained
John Musser, the founder of ProgrammableWeb, was the first to start documenting the potential business models that spring up from implementing an API strategy. His slide deck of 20 business models is still a key reference for many when they are considering how the API strategy facilitates wider business goals.
"The questions I get asked the most are always about business models, and within that, an API strategy can't succeed unless you can answer who and why," says Musser.
Musser says that to answer who, thinking through "a variety of lenses: internal and external is important; for example, enterprise developers who are building behind the firewall, or startups who are adding features to their SaaS and mobile apps." He says "developer" is one of the most misunderstood terms in business, with a gross generalization of what developer actually means. For an API strategy to succeed, thinking "developers will use it" is not enough. It's crucial to think though a number of key developer segments and create personas to better understand each target segment's motivations, key pain points, and programming languages.
"Many an API program has floundered or failed because of inadequate developer segmentation," says Musser
Régis Martin is a consultant with the French company, Wildnode. He works with businesses and enterprises who want to shift towards an API strategy. He says that often businesses start approaching him because they "see it is a pain to integrate their software with partners. It can take two to three months' effort and is costly." Martin says they turn to APIs because "it would be no burden and the costs of integration would be borne by the partner."
Where partner integration is not a driving force, brainstorming the opportunities and being strategic are necessary, he says.
"I tend to use the business model canvas to think about it. We think about users of their service, the B2B2C pipeline, and the partners that will be developing the apps. What are their needs and who are they? Then we can prioritize and create a roadmap," says Martin.
Jérôme Louvel is CEO of API and software development tooling company Restlet. He says it's important to remember internal developers as a customer target segment. Working with businesses who are taking up the Restlet Studio package of API lifecycle tooling, Louvel has seen a growth in the number of enterprise and medium businesses who are creating internal APIs to accelerate product development. "We are seeing the use of a great deal more internal APIs, and microservices are accelerating. It is an interesting evolution," says Louvel.
Louvel says that often a business may have a use case in mind for its API, and it's trying to start there. However, Louvel says, "Among all use cases, there is always something more central to the approach, and here it is that you need to first understand your consumer. For us, the order is: understanding user experiences, mapping personas, identifying their common needs, next the strategies, and then we can adapt the API lifecycle to that."
API Business Models and Monetization
Scott Ling is founder of API serverless architecture startup InstantAPI. Using the InstantAPI tooling, Ling helps businesses create APIs on top of their existing infrastructure or managed from cloud-based servers. At the moment, Ling says their customer base is growing at a pace of around 100 or 200 new customers a week, with many coming from enterprises. He says new signups tend to fall into one of three categories:
- Those curious about APIs
- Businesses that currently have arrangements with an API management provider and are locked into a two- or three-year plan, but who are looking for alternatives when that period ends
- Businesses with an immediate need for an API
He says among these groups, the "business drivers are different for everyone," but once you get past the unique business context they boil down to two main needs: first, the need to offer integrations, and second, to support enterprise Bring Your Own Device initiatives, where employees need to use mobile apps on their own devices to carry out their work tasks. "Mobile is still the biggest driver of APIs inside the enterprise," says Ling. "Then partnerships and integration."
Ling says the majority of his time working with clients during onboarding is to clarify the business model, and this often means understanding how to monetize the API. "I would say well over 80% of the companies we talk to have APIs they are selling. Generally, businesses are looking at a price per API call, but that doesn't really work for the majority of API platforms. It doesn't fit for most systems," says Ling. He gives the example of a marketing company with demographic data to sell via API. If that is charged by API call, the company ends up with either no money because customers only buy the smallest amount they need or the purchase is seen as overpriced if a company wants a lot of data.
Ling works with customers to create a scoring mechanism to establish the value of the data. The end result may be that some more common datasets are made available at lower price points (or for free), with more detailed, specific data at a higher price point. For information-based API products, this sort of slicing of value in the data that is provided via API is a better pricing model. "The best pricing is where you don't charge for the API calls, but instead on where the value of the data is. It is one of the biggest issues out there right now. Companies have information services to sell, and APIs are the best way to monetize that," he says.
Using an API Strategy to Move Towards a Platform-Based Business Model
Not all APIs need to generate direct revenue for their business model. Often an API strategy is the entry point for a business to move towards a platform business model (we discuss this in greater detail in ). API integrations that connect external SaaS tools to a company's own value chain are an important starting point for many exploring APIs in a platform approach. Here the business case is to leverage a platform model to create greater stickiness and increase the value received by customers, which increases customer lifetime value by augmenting the value they receive. For example, Evernote told ProgrammableWeb in February 2014 that end users who have integrated their Evernote app with at least one other SaaS tool are 50% more likely to become paying customers. They also end up using their Evernote app more often, making it central to their business workflows. They gave the example of those using Evernote with the read-it-later app Pocket. Users who had integrated Pocket with Evernote spent 80% more time using Evernote than those without an integration.
Integrations can also make reaching new customers outside a company's usual market possible. In Africa, mobile banking is the dominant financial behavior. Small businesses — the fastest growing business sector in many countries in Africa — often open a bank account when they visit their mobile phone operators. Banks like Barclays have made APIs available to telcos to assist their resellers' support of their small business customers to open bank accounts when setting up a business mobile phone plan. Rana Peries, experienced digital and innovation executive at Barclays, says by creating an API strategy, they're able to get "more businesses using our platform than we could if we tried to get the business to come to our bank in the first place." Here, the platform business model is not about direct revenue growth but about reaching new customer markets via partners and resellers.
Tyler Singletary, vice president of Platform at Tagboard, has identified five business models for generating value through APIs. While direct revenue is one way to create business value, perhaps the most interesting platform business model case he has identified is one he calls the "Trojan Horse." In the early days of Klout, a reputation-measuring social media service, one of the API business models included making the data available to a third party for free in order to be entrenched in their product. When that third party was bought by Salesforce.com, Klout's API went with it, giving them an entry point to talk with the large CRM SaaS provider and giving Salesforce.com an opportunity to gain them as a customer.
But even with all of the best guidance (such as ProgrammableWeb's decision series) and intentions, organizations should be prepared to reconsider their business model decisions. For example, when Ziggeo CEO Susan Danziger piloted her video recording and playback API service out of the gate, she was focused on one business model. But, as you will come to learn in ProgrammableWeb's case study showcasing Ziggeo's blockbuster success, Danziger reconsidered the company's original business model and made a risky, gut-wrenching decision to pivot to an entirely different approach.
Now that you've created internal support, built your team, identified initial opportunities to open data and services via API, and defined the business model that will support your API strategy, you've one more decision to make before getting into the actual API development process. In the next chapter, I'll help you answer: How Do I Product Manage my API?