API Monetisation: A Comprehensive Guide (Part 3)

API-Monetisation-A-Comprehensive-Guide-Part-1

This is Part 3 in the series on API Monetisation. Be sure to also read Part 1 on the importance of API monetisation and Part 2 on direct monetisation strategies.

If you aren’t planning on directly making revenue from your API then you may need to draw on indirect monetisation models to build your business case. Generally speaking, indirect API monetisation is where you link the impact of your API through to revenue drivers elsewhere in the business.

This is a common form of monetisation that is mostly relevant for businesses with existing revenue streams, such as existing enterprises and software-as-a-service companies.

Measuring the revenue generated by direct API monetisation is simple. Measuring indirect monetisation is a little more complicated, and you’ll need to work out which metrics and leavers are going to impact direct measures of revenue.

To help you build your API business case around indirect monetisation, this section of the API Monetisation Guide covers:

Revenue Linked Monetisation
Internal Billing

To learn more about the cost-saving benefits of APIs, see Part 1 of this comprehensive API Monetisation Guide.

Revenue Linked Monetisation

You may be able to link your API’s impact to revenue earned elsewhere in the business.

The key metrics you can use to do this are:

Acquisition: Can your API improve the number of new customers signing on for an existing revenue stream?
Activation: Can your API improve the number of new customers that successfully become long-standing customers for an existing revenue stream?
Retention: Can your API improve the lifetime of your customers, the revenue earned per customer, or the profit per customer?
Referral: Can your API help customers refer new customers?

You might be familiar with this as the Pirate Metrics (A.A.R.R.R.) that drive the thinking behind most tech companies today. The third R from the Pirate Metrics, Revenue, was covered in the Direct Monetisation section of this guide.

Each of the metrics is explored in further detail below.

Acquisition

You can use an API to drive signups from new customers or new users. You can then measure the value of your API in the revenue gained from these new signups.

E-commerce and insurance provide examples of APIs that drive acquisition. For example, Amazon provides an API for third parties to build their own applications using Amazon products, fulfilment information, feeds, reviews and more. In insurance, CoverGenius provides an API for the likes of Skyscanner and Ryanair to sign up customers onto their insurance products.

Generally speaking, your formula for determining the new customer revenue driven by your API will take two forms: (1) Looking at overall revenue, and (2) Attributing a portion of the revenue to the API.

The overall revenue is relatively straightforward. You estimate or track the customers that come from the API and the revenue that they bring (or will bring).

The attribution approach recognises that the API isn’t solely responsible for all of the revenue and that other factors may be contributing. For example, an API couldn’t drive the purchase of a product that doesn’t exist. You need to calculate and balance an appropriate portion of the revenue to attribute to your APIs.

Activation

You can use an API to drive the number of new customers that successfully start or continue to use your product—this is called activation. You can then measure the value of your API in the revenue gained from customers that usually would have churned.

Activation is less common for APIs to focus on, and only tends to appear with software-as-a-service or technology-enabled service offerings. For example, an accounting software service like Xero uses an API to help people connect other systems, like bank accounts, which makes people more likely to succeed with Xero.

Just like acquisition, activation can be measured by attributing a portion of the overall revenue gained from having the API.

That being said, many of the API’s activation features could also fall in the retention category. Activation is a less common indirect monetisation approach for APIs.

Retention

You can use an API to help ensure customers stay with your product and increase the amount they pay for its use. You can then measure the value of your API by the revenue gained from the customers that stay or increase their spend.

It seems simple, but it can be quite complicated. There are simple situations where customers stay because of the API, but more often than not it’s a bit less clear. The API may have been just one of the considerations that led them to staying or increasing their spend.

In SaaS, Atlassian’s extensive use of APIs to allow their customers to integrate with and build upon their products is a key reason for their success. Once a customer has comprehensively integrated Atlassian’s products with their systems, it is a difficult decision to shift elsewhere.

Elsewhere, traditional banks are starting to lose customers and partners to the likes of Stripe, Paypal, and neobanks because banking APIs aren’t available or are too challenging to use.

To measure the revenue impact your API has on retention, you can measure the revenue gained from customers, as well as by attributing a portion of the overall revenue to the API.

There’s an opportunity to get intelligent with your attribution. For example, you can run surveys to determine the portion of customers for whom the API is a key factor. You can make estimates of the importance of the API based on the usage of features. You can then use these numbers to inform what percentage of revenue gained from a specific customer to attribute to the API.

Referral

You can use an API to help with referral, although it is less common, so we won’t go into it with as much detail as the other metric areas.

Facebook’s APIs for sharing and other social interactions are a good example of this.

To measure the revenue impact of your API on referral, you would measure the number of customers or users your API brings and combine this with the revenue they generate or are expected to generate for you.

Internal Billing

Another way to indirectly monetise your API is to bill for it internally. This is most suited to larger companies with an established model of internal cross charging.

On the surface it is a simple model: just charge some amount for other departments to use the API. But, as it’s not always immediately clear how much you can charge for the API, finding an appropriate cost can be complicated.

Here are some models that can fit:

Cost plus – You take the cost of providing the API, then add a percentage for loading, margin, or contingency (20-30% is a number that arises often here). You will need to take into account setup costs, base running costs, and per transaction/usage costs.
Using comparables – If the API you are providing has externally comparable APIs then you can replicate their charging model of those APIs. For example, if you were to provide a Stripe like payments API to other business units, then you could use Stripe’s pricing to determine how you price your API internally.
Revenue share – You negotiate a share of the revenue other business units gain by having your API. This does overlap with some of the other models discussed elsewhere in this guide though.

You may also look to combine aspects from each of these internal billing models.

Summary

In this section of the API Monetisation Guide, we covered Indirect API Monetisation. We looked at linking your API to revenue through metrics like acquisition, activation and referral. We also looked at internal billing models.