It’s no secret that the API business is big business. Over $500m was pumped into API-driven firms just last year and that number is only likely to rise. But how do companies make money from an API and how should you price API usage to get the best return? Lindsey Kirchoff over at Nordic APIs tells you everything you need to price your API for all possible users be they hobbyists, businesses or enterprise devs.
Lindsey explains that there are effectively three ways companies monetize APIs. Data collection is Facebook’s preferred method, which involves collecting data from third party apps to use in your own product or advertising efforts. Product adoption involves letting devs build custom integrations that increase the value of the product and keep users locked-in. Developer usage is the more obvious route to monetization: simply charge devs for API calls.
If you go for the developer usage model, you’ll need to think carefully about pricing. There are three pricing models you can choose for developer usage: fixed quotas, pay-as-you-go or overage pricing. Pay-as-you-go simply means paying for each API call. Fixed quota means paying for a fixed number of calls per month that can’t be exceeded. Overage model is like the fixed quota model only developers can exceed their call limit in exchange for a small overage fee.
Each model has its pros and cons but Lindsey recommends going with the overage model because it offers the predictability of the fixed quota plan but the scaling advantages of the pay-as-you-go model.
Lindsey’s company RapidAPI has collected benchmark data on over 1,800 commercial APIs. They show that a good pricing arrangement involves having a limited free plan, a hobbyist plan for at least $10 to ‘$20 a month , a small business plan for $90 to $100 and then an enterprise plan beginning at $150 and potentially becoming much higher.
Lindsey recommends always having a free testing plan since research shows developers are 3X more likely to pay if there’s a free tier. Of course, how much you should charge for paid plans depends on your business. Consider the following three Cs when pricing: cost, how does it cost you to respond to an API call; competitors, what are other players charging and how many are there? Content, what does a developer get for an API call and how valuable is it?
Lindsey concludes by emphasizing again that the overage model seems the most popular and best pricing for your API. She stresses however that you should keep a free plan to encourage developers to give your API a try.