Building a Pricing Strategy for your API
An API is a very unique product which pivots from the way we see every other product that exists. There is no presentable UI or outcome that you can directly show and market it as other products. The only way to perceive it’s use is for someone to spend some time and try it out to understand what value it brings.
Given these unique conditions generating revenue out of an API that you expose, also requires a different approach compared to how you make money out of other products. [1] Discuss the various business models such as pay-as-you-go, overage models that you can use to monetize your APIs and how to choose the best fit for your API. This post is to discuss how you can build a pricing strategy for your APIs and what aspects you should consider.
There is this well known concept of the 3Cs in API pricing; capability,cost and competition. API providers should analyse and identity which ‘C’ dominates their respective API pricing strategy. Let’s try to understand this in detail.
- Is there a unique need that is addressed by the API?
When it comes to APIs , you first need to identify a market/unique need for the API you are building and not vice versa. Therefore if your capability is something unique, your pricing tiers can be driven with this uniqueness compared to capability/market that is already fulfilled by other vendors. If you have multiple APIs that you expose you might need to select the APIs that have a good traction as the ones you can monetize.
2. Identify your consumer groups and their usage patterns
This is a key area to consider if you are trying to charge your consumers for an API(s) that you expose. There are various user groups involved ranging from a majority of hobbyists ( developers who are trying to set up a side project)to small scale businesses and to enterpise level businesses. Once these groups are identified you need to observe their usage patterns such as number of API calls made over time, which APIs are heavily consumed (if you are offering multiple APIs) which would help to determine the APIs you can monetize and some price tiers you can begin with. This step is mostly about gaining usage insights and keep observing these results.
3. Come up with price points and package your tiers with a bonus
Once you know your consumers and their usage patterns you can work with the cost factory to decide the tiers you want to provide and what price ranges you can consider.If your APIM solution contains statistics related to API and their rate limiting this can give you a good starting point to determine the number of requests you can include at each tier.
This is also a chance for you to observe your competitors and understand your offering. For example, if this is a well saturated market your pricing tiers need to tally with the market price. However you can specialize your tiers from the rest by including something additional to these tiers such as some tiers could include x number of applications/customers, SSL support etc.
4. Free,freemium is always a revenue generator
It is always a good choice to include a free or a freemium tier in your price plans when it comes to monetizing your APIs. In an API eco system majority of the consumers are developers , and as a developer myself I like to try out an API first before I make a decision on how useful it is going to be. Therefore allowing users to test and integrate your API will nurture this developer community and overtime you can utilize this stickyness and get them to move to a paid tier. It is also important that you pay attention to the cost factor associated with upgrades as well by providing discounts for lower tier upgrades.
In an API based product revenue is not always of monetary value.Therefore is important that you do not discourage this majority of users who would nurture your API visibility by building applications (using the APIs) which means more and more consumers.
5. Finally, keep testing your price points and iterate
Most of the time not all your pricing options would work perfectly. It is a trial an error process where you need to keep observing the results , feedback and usage patterns and better understand how your consumers have percieved your pricing plans. This is a long term process where you can observe and update what you offer with better understanding.
As highlighted in these key points, insights and more insights on your API is how you can define a pricing strategy and also improve it to your fit. You should always consider listing your APIs in various marketplaces as an acquistion strategy.
Once your APIs is known and there is a considerable amount of consumers you can move to the next level. How you can generate these insights is through API analytics that help you understand your consumers. Also understanding your consumers at a personal level through social capabilities of your API Management solution is vital.Capabilites such as API rating, comment sections and forums really build up that feedback loop of your API usage.
[1] https://medium.com/@ama.thanu/what-are-the-different-api-business-models-9709ae45f416
