Are you strategic about API monetization?

In the last blog post I talked about an alternative to the well-known direct API monetization, called indirect API monetization. As I mentioned, to construct APIs that lend themselves to indirect API monetization, you can follow one of several patterns.  

But, if you want to make the most out of your API monetization opportunity, neither direct nor indirect API monetization is the only right answer. It is about making the right choice for each API and being strategic about your choice. So how to make that choice?

The short answer? It depends. The choice between direct and indirect API monetization depends on the business model you have or want to have, your appetite for transformation and the time-horizon for realizing it. Let’s unpack that:

When to use indirect API monetization

Indirect API monetization supports your current business model – the business model you run prior to APIs entering into the picture. This business model serves your existing (non-API) products to your usual customer segments. 

If you are a bank, your existing product could be a bank account and the customer segments are the owners of these bank accounts, e.g., retail, private or corporate customers. If you are an insurance company, your existing product could be an insurance policy and the customers are the holders of the insurance policy. Revenue comes from selling these existing (digital) products to your natural set of customers.

By and large, your existing business model does not need to change after you have introduced indirectly monetized APIs: You keep serving the same products to the same customers. APIs are used for fine-tuning this business model, to improve aspects of it. Indirectly monetized APIs make the product more attractive and help to sell the product.

The API plays an important role in selling the existing product: It is an important feature of the product, helps to build an ecosystem of complementary products around the core product, creates lock-in, gets relevant leads for the sale of the product, conveniently feeds valuable data into the product, or enables product differentiation. 

As an API provider with an indirect API monetization model, your task is to identify and build APIs that support your current business model. And here, the four patterns of indirect API monetization, that I outlined in the first blog, can be helpful. 

Since indirect API monetization leverages your current business model, you can realize it quickly with smaller changes and adjustments – but without a massive transformation to your business. It will require changes to your business, so don’t underestimate the work, but relatively speaking the necessary changes are smaller than with direct API monetization. 

So indirect monetization is right for you if you want to leverage the benefits of APIs in your digital solutions within the short-term, and without major changes to your business. Incumbents typically choose this API monetization approach, as it allows moving in smaller steps towards the API monetization paradigm.

When to use direct API monetization

It is a very different picture with direct API monetization. With direct API monetization, you attempt to sell access to the API; the API becomes the product. In contrast to indirect, with direct API monetization, the API stands on its own, it is an autonomous product that is not dependent on existing products.

As it is a product in its own right, it extends the company-wide product portfolio. Next to the existing (non-API) products you now have the directly monetized APIs. A bank would put its directly monetized banking-as-a-service (BaaS) APIs next to their existing bank account products. A telecommunications company might put its directly monetized SMS APIs and voice APIs next to its existing mobile, landline and internet products. You might already see where I am going with this – the directly monetized API products are very different from the existing products. And who pays for the API products? 

The API products are typically charged to the API consumers – they are the customers. It is a completely new type of customer – different from the end-users and customers of your existing products. The bank’s customers who are typically interested in a bank account, will typically not be interested in a BaaS API – other customers are buying the BaaS API.  The telco’s customers, who typically get a mobile subscription, are interested in sending SMS messages on their phone as part of their mobile subscription, but will typically not be interested in an SMS API – other customers are buying the SMS API. APIs are sold to a new, additional customer segment, that incumbents typically have not recognized as a customer segment before introducing directly monetized APIs. This new customer segment of API consumers are developers, and they need a different marketing, sales, and support approach than the existing customer segments.

With new products, new customer segments, and new support processes, direct API monetization actually requires you to stand up a new business model. This new business model for your API products does not replace your existing business model, but it typically stands next to the existing one. And starting out, it is still relatively small and fragile compared to your existing business model.

For many existing companies that have products which are not APIs and customers that value their product, introducing direct API monetization would require quite a big change to the business. The organization needs to establish a new line of business (around the API product) next to its existing products. It needs to establish API consumers as a new customer group within the organization, build up the necessary support processes (in marketing, sales, support etc.), and needs to find new customers for its directly monetized APIs. Its existing customers might be happy with the underlying product, but they are not the right targets to buy APIs as a product. 

As you can see, direct API monetization requires a big effort and a change in the underlying business model for existing companies. However, this change is often integral to wider change and transformation. To realize the new business model in an incumbent organization, you need a take a deep breath, and expect to deal with transformation challenges. But as an outcome you get a new line of business that is digital, scalable, with an additional revenue stream.

Many startups choose a direct API monetization approach (such as Twilio and Stripe when they started out). GGV Capital is tracking over 150 API-first companies, the first 50 of which are publicly available. Unlike incumbents, startups don’t have an existing product or an existing business model to start with. They don’t face a transformation and can build an API-only or API-first business from scratch, “on a green field,” and monetize the resulting APIs directly. Assuming that startups offer a glimpse into the future, you will see an increasing share of direct API monetization.

Sidenote

Contrary to popular belief, there is no link between direct API monetization, where the API is the product, and the API product management approach that is sometimes called API-as-a-product. Whether you develop directly or indirectly monetized APIs, your APIs will always profit from an API product management approach. 

In summary: How to monetize APIs

While you do need to decide whether each API should be monetized directly or indirectly, you can have both types of monetization in your API portfolio at the same time. Indirectly monetized APIs can typically be brought to market much faster than directly monetized APIs. And this is not due to technological challenges, but due to the transformation processes that need to happen first. 

A smart strategy might be to kick off both efforts for indirect API monetization and direct API monetization in parallel – but for different APIs, with different roadmaps, and with different expectations on the time-horizons for realizing the benefits.

For direct API monetization, it is important to start the transformation process immediately, and plan for sufficient time to complete it. Indirect API monetization can be realized in the short-term, as it is used to improve your existing products. Explore the indirect API monetization patterns described in my previous blog and see how they fit your current business model.