March 10, 2011

How do I monetize an API?


In speaking with hundreds of companies about their API strategy, a common question is about monetization - "How do we monetize our API?" We thought this would be a great conversation for our first post. Our friend Dave McClure has a quick and simple answer - "bake your business model into your API." It might sound a bit too simplistic, but Dave makes a great point. The primary business driver for launching an open API is to drive new business opportunities. This might come in one of two form 1) new business partners or 2) brand awareness. If you think about the traditional long tail chart, the people at the "head" are already our key partners who pay you for access to content in some form today. The API just simplifies the revenue model you have today. No more CSV files being FTP'd! The "shoulder" are the people you want because they are big enough to be an interesting source of revenue, but there are too many to respond to.

The same API you use for your strategic partnerships is now used to drive new partnerships. To not cannibalize your strategic partnerships, you can limit the type of content by data fields, or to a specific date range, or volume of results. The long tail is the masses who want your content to help supplement their niche sites. The business opportunity here is really brand awareness. Take another subset of the content and services you offered to the "shoulder" and make it available for free. Manage the brand through your terms of service. Restrict the use of content to B2C type sites and require a link back to your site. Let's consider an example like Compete: Compete is a seven year old company that provides qualitative "click stream" information to find consumer behaviors. They started out their company selling their data based on industry; 90% of all revenue is made from this service. They had some of their data that they threw away - they decided to use this data and make it available for free. They launched and gave away the stats for free.

The traffic to doubled! In May 2007, they opened their API so people could use their data on other sites across the web. They saw a huge spike in traffic and awareness; the traffic had doubled yet again. They got more visibility in 6 months of their open API, than in 6 years of PR. In addition to brand awareness and visibility, Compete also identified an additional revenue stream when they established a new segment by partnering with major search engines. They also established new partners who brought them awareness - ZooomInfo shows Compete stats on each page seen by over 1 million users/month and over 100,000 Firefox users leverage a Compete search stats plug in from their browser. Ok, so you get all of that, how does a company like Compete structure the deals with these new business partners? Mashery has several customers that have both a free and fee based API including Compete, Urban Mapping, and Much like Compete, some of our customers do not make their entire catalog of data available because they prefer to reserve the information for their traditional clients. They then leverage their API in two ways: 1) they have a paid API which allows access to a subset of the master data and 2) they have a free model which is a subset of the already reduced data. For the paid API, there is charge per transaction, anywhere up to a penny. Other companies structure the fee as a combination of a fee per query, and a monthly minimum. Of course, the great part of the monthly minimum is the recurring revenue stream. The query part of the fee is typically be based based on a tiered volume Opportunities to monetize exist. It just needs to make sense for your business and your customers. Don't forget to evaluate alternatives to monetization - brand awareness, building a business development funnel for the paid API, extending the reach of your service, etc. Let us know how you monetize your API. We would love to hear from you.