This post was originally published on the Nordic APIs blog as “How to Release a Free API and Get Paid Indirectly”. API-related business models usually involve a customer actively paying to use the API itself. But consider this: What if you could allow anyone to use your API freely while you retain the power to generate revenue from it? And what if by doing so, you could actually increase your chances of generating even more revenue?
The free use of your API will lead to increased revenue because third-party developers will implement on top of your API. Consequently, your product will benefit from its increased usage. This article explores some ways of indirectly generating revenue from API usage. Read on if you’d like to understand what business models can be used to provide this indirect revenue generation, and how you can adapt them for use with your product.
A number of different business models benefit from the fact that you are offering a free API. You will increase the prospect of consumers getting in touch with your product. As more consumers discover and use your product, the number of opportunities for additional revenue will increase.
Let’s start by looking at models that are not directly associated with your product’s features. We’ll then explore how to sell more of your app to API consumers.
A business model worth investigating is the content acquisition model.
Businesses that are based on user-generated content usually have to find ways of increasing the amount of quality content. This often involves rewarding users in some way each time they publish additional content. Alternately, they can create a user interface that will encourage and assist users in producing more usable content.
Most businesses in this model depend on quality user-generated content that will result in more sales. Typical examples include:
- Auction websites;
- Travel and hotel e-commerce platforms; and
- Any website that allows users to write reviews.
A free API allows third-party developers to build apps that make it easier for end users to generate content. The more third-party apps the better, because different user groups will be able to engage with your product. This produces the content that is most likely to generate more revenue.
A good example of this strategy is the eBay Selling API. Access to the eBay marketplace is implemented through the item listing functionality. Third-party developers can easily use this API to list items programmatically, helping eBay grow their inventory and, in the end, increasing their revenue.
While content acquisition is focused on how to motivate users to produce more material, content syndication works the other way around. Here the goal is to open the content highway as widely as possible, allowing more consumer traffic, and, eventually, more interaction with your product.
These are typically media related-companies, but lately we’ve been seeing a number of other businesses employing the same strategy to attract more users. Typical examples include:
- Product comparison apps;
- Classifieds; and
- Vertical search platforms (such as flights or car rentals).
By offering a read-only API that is free and easy to use, these businesses enable parties to include their own offerings within the external apps. Developers will feel more encouraged if some sort of revenue sharing is used. In this case, the best revenue-sharing model is the affiliate model, in which third-party developers receive a cut of each item sold to users coming from their app.
Amazon is one example of a company that uses content syndication to distribute their inventory on as many third-party apps as possible. They do this with their Product Advertising API which provides programmatic access to their product selection-and-discovery functionality. Third-party developers are able to use this API to offer product search and detailed information, including product reviews and recommendations. As an added plus, they also receive a share of the revenue generated from sales.
If your business doesn’t revolve around content, and you have the typical list of user plans with associated features, you can still use the API to help you generate more revenue. By offering access to higher plans through the API, you encourage third-party developers to offer those features on their apps. Third-party apps users must then switch to a higher plan in order to continue using those features.
Another option is to make API access available only on certain plans. With this method, you do not charge directly for API usage. Instead, you are making a feature on a specific plan. This usually works for fairly sophisticated apps that offer a comprehensive set of features distributed among several plans.
Engaging third-party developers in a revenue-share plan will increase the chances of selling more to end users. Developers feel more motivated to integrate with your higher-paying features when they know they too will profit from the additional revenue you receive.
Companies like Salesforce are following this strategy. If you look at their plans page, only the enterprise edition offers API access. They generate more revenue by doing this, because users will upgrade to the enterprise plan in order to access the API.
Another way to generate revenue with a free API is to use it as a part of your branding strategy. Although brand building does not generate extra revenue immediately, your brand will be reinforced. In the long term, you will attract more customers.
Companies that might benefit from this strategy are those that are looking to expand their market to include a more sophisticated and technology savvy audience. By targeting technical people, including developers, a company stands out as innovative and trendsetting.
Absolut, the popular vodka brand, recently launched what they call ADDb, the Absolut Drinks Database. This API lets you access Absolut’s drink recipe database and related assets. Launching this API, and a set of example apps, shows that they care about innovation. It also indicates that they are open to new ideas, and willing to be influenced by their own customers. If you want to know more about how Absolut used their API to build their brand and connect with their partners, check out their presentation from one of last year’s Nordic APIs conferences.
This article proposes different ways of releasing a free-to-use API, and using indirect business models to generate revenue from it. You should now have a clear idea of whether this strategy applies to your business and, if so, which business model you should choose to implement it.
We’ve analyzed three main business models that are adequate for different types of apps:
- The first one, the content acquisition model, focuses on obtaining more user-generated content by exposing your free API on the highest possible number of third-party apps.
- Next, we explored the content syndication model, which has the goal of spreading content to as many users as possible. The strategy here is to drive content syndication by making it easy for third-party apps to consume and distribute it.
- The third model investigates how a product can upsell features or plans by offering an API, or a part of it, that is only available to paying users.