Turning APIs into dollars: A beginners guide to API monetization

By Matt Tanner (Head of Developer Relations at Moesif). 

We all want to generate more revenue for our organizations. Much of the time, this requires us to build new and fancy products, market them, and hope we get some traction with customers. Fortunately, generating revenue doesn’t always have to be this hard (or risky!). One of the most overlooked resources to generate revenue in a business’s arsenal is its APIs.

While you may not fully understand what an API is, there’s no way you haven’t heard the term thrown around daily. This is especially true if you work within a tech-centric company or tend to sit near the company’s engineering team. One often overlooked piece of APIs is their significant potential for revenue generation and business growth.

If you’ve heard the term “API” being tossed around, you’ve likely heard whispers about “API monetization” in boardrooms or strategy sessions. If you haven’t, you likely will soon enough. If you want to understand APIs and API monetization, in this brief guide, we’ll explain what APIs are, why monetizing them can be a game-changer, and how this aligns with your business goals.

Lastly, we will touch on how Tyk and Moesif can combine to create an out-of-the-box solution to quickly solve your organization’s API monetization needs. Let’s get started!

What is an API?

If you know what an API is, you can skip this part (unless you’d like a refresher). If you don’t know what an API is, API is an acronym that stands for Application programming interface. If you’re not technical, this won’t mean much to you, so let’s put it in more straightforward, relatable terms:

Imagine you’re at a restaurant. The kitchen, where all the cooking happens, is like your company’s internal services, containing various functionalities and data. The chef is the developer who knows how to operate the kitchen equipment, prepare dishes, and manage ingredients—akin to the code and algorithms in a software system.

At a restaurant, as a customer, you don’t walk into the kitchen to prepare your meal. Instead, you look at a menu that lists all the dishes you can order. The menu abstracts all the complexity happening in the kitchen. It doesn’t detail how each dish is cooked, what techniques are used, or how the flavors are balanced; it simply tells you what you can order and maybe a short description of each dish. In this scenario, the menu serves as the API since it defines what you can request and what you can expect to get served. The menu shields customers from the complexities involved in fulfilling their requests.

API calls and requests

The waiter or waitress who takes your order and brings you your food is like the API call—a specific request for something on the menu (API). Just as you give the waiter your order and expect a specific dish in return, an application sends an API call to request a particular service or data. The API user expects a specific output to be returned to them.

A customer locates which meal they want on the menu (API) and sends the waiter to put in their order (API call/request). The waiter then goes to the kitchen (backend service) to put the request in and returns with the requested meal (API response). Like the returned meal, an API’s value is in the data returned in the API response.

Now, why would external parties want to use your APIs? Because APIs allow other businesses to tap into your services, enhancing their products without the effort to replicate or build the service on their own. This need creates additional usage and value for your services, something people are often willing to pay for. For example, weather apps use APIs to pull data from weather stations, and travel booking websites use airline APIs to fetch real-time flight data. If these companies are innovative, they will generate revenue from these APIs through API monetization.

What is API monetization?

We often see it preached in the business world to monetize anything that brings value, and APIs are no exception. API monetization is when you turn your API’s functionalities into a profitable service. Simply put, you charge other businesses for using your APIs because they either don’t want to build the service themselves or, even more advantageous, simply can’t.

By making your APIs available to the public and charging for usage, you provide a direct revenue stream for your business and have the potential for indirect gains. For instance, if your API enhances another service, its users are more likely to become aware of and interested in your products.

This is pending the fact that the company using your API is publicly advertising that they are using it. If they are, this gives you a benefit similar to word-of-mouth marketing but with a direct revenue kicker.

Of course, deciding to charge for API usage is one thing, but many other steps are similar to releasing any other product into the wild. The two main ones we hear a lot about are API pricing and implementing API metering to calculate usage. Let’s look at the API pricing aspect next and the API metering implementation later in the blog in the How Moesif and Tyk work together section.

Different pricing strategies for API usage

When you hang up the “open for business” sign and sell products, you need a pricing strategy. As with any product pricing strategy, there’s no one-size-fits-all approach with APIs. Understanding your audience and the value you’re providing through your APIs is crucial to figuring out how and how much to charge. Here are some popular pricing strategies that might give you an idea of how to charge for API usage:

1. Freemium:

This is a good starting point to attract users. Offering basic functionalities for free and charging for advanced features allows users to test the waters before diving in. Having a free offering may also be overridden by offering users a free trial instead so they can test features that are typically paywalled.

2. Pay-as-you-go:

This is popular with startups and smaller businesses that may not have predictable API usage. Like billing on most cloud platforms, users pay for what they consume. This allows you to deliver value to your customers more efficiently since they only pay for what they use compared to paying for a subscription and only using a minimal amount of the quota.

3. Tiered pricing:

Businesses of various sizes have different needs. Offering tiered pricing structures allows you to cater to small, medium, and large enterprises, each with specific demands and budgets. Sometimes, tiered pricing may only expose features on certain tiers, such as “enterprise-only” features that require users to subscribe to the top tier. Other times, or combined with the previous point, the price per API call or some other metric you are billing on will go down as usage increases.

4. Transactional revenue-sharing:

If your API enables certain types of transactions (like bookings or payments), you can take a percentage cut from each transaction, thereby making money off the value of transactions executed via your API. A great example is payment processing, where a company’s API may handle the payment for a transaction fee, similar to how many banks charge a percentage of sales for POS devices.

5. Subscription-based models:

You’ll offer a flat monthly or yearly fee for a set amount of API calls or some other metric. This provides you with predictable revenue and the customer with predictable costs. The downfall is that sometimes getting subscribers to bump to the next tier can require a lot of work, making expansion revenue a bit more challenging. However, this can be solved by bridging the price gap between different subscription tiers, such as overage fees and customer value.

6. Bundling:

Packaging API access with other products or services can make the deal more attractive to potential buyers and provide an additional value proposition. For instance, some platforms offer a GUI as part of their base product, and API usage is charged as a premium add-on. Sometimes, this also means you bundle multiple APIs together and offer access as an API product.

Depending on the strategy you use to charge customers will inform how much you can charge. It may also make sense to combine some of these models, such as adding pay-as-you-go and subscription-based options. Adding flexibility like this can help increase adoption and ramp up customer usage.

Why API monetization is becoming so important

The API industry is currently valued, as of 2023, at $6.1 billion. Big numbers. However, it is projected to reach $72.6 billion in just ten years. Now, we are talking about massive numbers and massive opportunities. With this, it’s easy to see that API monetization is not a fad; it’s a strategic move that aligns with the broader shifts in business and technology.

There are many reasons why the API economy, or whatever you’d like to call it, is picking up so much steam and has so many companies jumping on the bandwagon. Let’s take a look at a brief look at why:

1. Scalability:

Unlike physical products, digital services like APIs are incredibly scalable. Once the initial development is complete, the cost of adding each new user is marginal, making it a cost-effective revenue stream.

2. Incremental revenue:

As businesses mature and markets saturate, finding new revenue streams becomes more challenging. A monetized API can generate new, incremental income without a complete business overhaul and by publicly opening up existing services and charging for them.

3. Customer retention:

A useful API that delivers value can add another layer of stickiness to your existing services. If your clients build functionalities around your API, they’re less likely to switch to a competitor since moving from one platform to another would require a lot of work.

4. Competitive advantage:

A well-implemented, monetized API can set you apart. It can act as a unique selling proposition (USP) that attracts customers to your ecosystem. For instance, if all other competing platforms only offer GUI access and you offer GUI and API access, you may be able to unlock more use cases for them, giving you a strong competitive advantage.

There are many points beyond these as to why API monetization is becoming important for businesses. However, these alone are strong reasons. To become a viable tech business, you need to offer API access to your services. Many API-only businesses quickly gain steam and use monetized APIs to drive their mainstream revenue.

How Moesif and Tyk work together to monetize APIs

When monetizing APIs, it’s clear that API management, metered billing platforms, and billing providers are essential to API monetization architecture. This is where Tyk and Moesif come together as a go-to solution for many businesses looking to monetize their APIs quickly and scalably.

With Moesif and Tyk, you can:

To learn more about how the solution works, contact the Tyk team for more information.

The API economy 

As we have learned, APIs are more than just technical conduits for data and services; they are powerful business tools that can unlock new revenue streams and foster significant growth. By understanding the ins and outs of API monetization, you can strategically position your company to capitalize on the development of the API economy.

The API industry is rapidly growing and can be a significant revenue driver for businesses of all sizes. Whether you’re a startup or an established enterprise, now is the time to consider how monetized APIs can be a part of your business strategy.

Understanding how to monetize your APIs

Understanding how to monetize your API involves several layers of decision-making—from choosing a suitable pricing model to implementing metering and billing systems. Yet, as complex as it may seem, Moesif and Tyk offer comprehensive solutions that handle the complexities, allowing you to focus on what you do best—innovating and delivering value to your customers.

If you’re ready to leap into API monetization, there’s no better time to start. As a one-stop-shop solution for all your API management and monetization needs, Moesif and Tyk offer an unparalleled combination of security, user access management, metering, and billing. Don’t leave money on the table; harness the full power of your APIs today.