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API Management

Building a Pricing Strategy for Your APIs

When setting a API pricing strategy, consider which of three aspects is most important: capability, cost and competition.
Jul 25th, 2022 6:27am by
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Himasha Guruge
Himasha is a lead solutions engineer in WSO2’s Solutions Architecture team that specializes in building API-led integrations. She works closely with EU-based customers, acting as a trusted adviser in designing and building enterprise solutions. Himasha has provided technical and architectural consulting to a number of companies based on her hands-on experience with WSO2’s products during her years in the engineering team.

An API is a unique product. There is no presentable UI or outcome a developer can show and market similar to a regular product in the marketplace. The only way to perceive its usefulness is to spend time testing and understanding the value it brings.

Given these unique conditions, monetizing an exposed API requires a different approach compared to monetizing other products.

This post discusses how to build a pricing strategy for your APIs and which aspects you should consider.

Three areas must be considered: capability, cost and competition. API developers and vendors must analyze and identify which of these three is most important. To explain and provide examples, we will use WSO2 API Manager and its analytics dashboard.

Let’s dive in.

Does This API Address a Unique Need?

Identify APIs with the most traction.

As with any product or service, there must be a market or unique need for an API. Therefore, if your API can accomplish a task that is of value, you can adjust your pricing based on the API’s capabilities or by determining how existing vendors satisfy the need for this unique requirement. If you have and expose multiple APIs, consider choosing those with the most traction, as shown in Figure 1 above.

Identify Consumer Groups and How They Use It

Usage patterns

This is crucial if you want to charge consumers for using your exposed API. Users may range from occasional users to small and medium enterprises to large organizations that demand heavy use of the API. As shown in Figure 2 above, once you identify your key user groups, you must observe how many API calls are made over time, which APIs are consumed frequently if you have several, which groups use a particular API the most (see Figure 3 below), and what times the APIs are called, etc., to help determine possible pricing tiers.

Decide Price Points and Package Your Tiers Accordingly 

Rate-limiting trends for APIs

Upon identifying your consumer groups and understanding their usage patterns, you can work with the cost factor to help decide your price range. For example, if your API management (APIM) solution contains statistics related to APIs and rate-limiting, it is a good starting point to determine the number of requests you can include in each tier.

API usage by application

As shown in Figure 4 above, you can observe the relevant market players/consuming applications and understand what your API offers. For example, if the market is highly saturated, your price must be at an appropriate market price. However, you can specialize your price tiers against the competition by offering extras. For instance, some tiers can include API calling for a fixed number of customers/applications, SSL support, etc.

Free, and Freemiums Are Possible Revenue Generators

Adding a free or freemium tier is useful when seeking to monetize your APIs. In an API ecosystem, your consumers are developers who test an API before deciding its general usefulness. Allowing users a chance to use and integrate your API freely will make it more receptive among the developer community. Over time, you may leverage this stickiness and have developers upgrade to a paid tier. It is also important to focus on costs associated with upgrades if you provide discounts for lower-tier upgrades.

In an API-based product, revenue isn’t everything. Thus, do not discourage your primary users who would nurture your API and improve its visibility by building applications using it, thereby giving more visibility to new consumers.

Keep Testing Your Price Points 

In practice, your pricing options will unlikely stay the same. There is a lot of trial and error involved where you need to observe your results, take feedback and monitor usage patterns to better understand how your consumers perceive your pricing plans. This is a long-term process where you can observe and update your offerings with experience.

Insights on your API can help you determine a pricing strategy and improve its market fit. As a possible acquisition strategy, consider listing your APIs in several API marketplaces. Once your APIs are known and there are significant consumers using it, you may move up a pricing tier by leveraging your analytics. It’s vital to better understand your consumers by using an APIM solution. Other capabilities such as API ratings, comment sections and forums will help build a strong feedback loop and help your API become popular over time.

Conclusion

The accelerated growth in use of APIs has made them a great revenue source. However, creating monetary value is a collective process of identifying which APIs can generate profits and iteratively building a strategy to make the most of them. Analytics provide great insights in this process to determine which APIs can be monetized, identify potential consumers, understand pricing tiers and help nurture strategies in a dynamic environment.

To learn more, we encourage you to visit our product page.

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