API monetization is all the rage, but choosing your API monetization stack can be daunting as it shapes both your current and future product’s growth. There are many solutions, but finding the right one is a major engineering challenge.
What is API Monetization?
The world runs on APIs, and their economic significance is hard to overstate. This is enabling new business models to emerge to productize and monetize APIs. Both productization and monetization are different, yet closely related topics. API productization is the art of exposing your APIs to third parties and treating your API portfolio as a product in itself. While you may not be charging yet, there is already a business case established to productize your APIs such as to expand existing customer use cases or to launch a new partnership program, even if the APIs are free. Product owners typically follow the product life cycle from design and documentation to adoption and usage. API monetization is taking the concept of productization one step further, which is turning your APIs into a revenue center by themselves. The revenue center could start as a side project or even generate more revenue than the original product or service originally sold. Just look at Amazon Web Services (AWS) as a classic example. AWS now generates the majority of the proﬁt for Amazon and without AWS, Amazon would operate at a loss (looking at 2022 ﬁnancials). There are different API monetization models, such as by charging for users, API calls, compute resources or other criteria.
How you charge for usage will depend on your product and pricing model. One way is to encourage commitment through prepaid billing. This can help for cashﬂow and is better suited for enterprise contracts. However, a newer model has also been emerging which is postpaid billing. In this model, customers are billed in arrears after the usage is already consumed. Either model works, we recommend reviewing best practices for API monetization for more background.
What Does an API Monetization Stack Look Like?
In its simplest form, an API monetization stack has three components: Your API infrastructure, your API monetization platform and your invoicing and payments platform.
Let’s look into the role of each of these components.
The API Gateway
The API Gateway at its heart is your infrastructure to provide your API to others. It handles everything, including securing the API, rate-limiting, transformations, generating API keys, etc. Usually, it is part of the API infrastructure. Examples of modern API Gateways include Kong, Tyk, AWS Gateway, or one of many other alternatives. You can also build your own gateway on top of a framework like Java Spring or Node.js.
API Monetization Platform
As the API is being used, you’ll want to gather metrics about that usage. Since the analytics platform is seeing API consumption metrics around every API call, it makes sense for this to be the system of record for tracking usage and sending it to the billing provider. API monetization platforms provide both the ability for you to monitor usage (whether API calls, data volume or unique users) for each customer as well as syncing with third-party tools like Stripe, SAP and Salesforce. The API monetization platform at its heart is your data warehouse for metering and billing.
Billing and Invoicing Solution
Your billing provider will receive usage records from the API monetization platform for each customer and issue an invoice depending on their plan schedule. For example, you could invoice customers monthly, yearly or after a threshold. Good billing platforms allow you to collect overdue payments through a process called dunning and are able to integrate with many solutions.
Choosing an API gateway
When choosing a gateway or proxy for API management, it’s important to understand exactly what functionality you will need. Almost every gateway on the market has some differentiators which may make it more or less suitable for your use case. To really dig into the gateway versus proxy argument, check out this quick breakdown we put together.
Using an API gateway will make securing and managing your APIs much easier. Most gateways support a wide variety of authorization and authentication protocols to control API access, tools for generating and managing an API key, great support for rate limiting and other features such as the ability to apply transformations to requests and responses. An API management platform also usually provides a developer portal so that API users can easily see which APIs are available and get access to them.
Although APIs can be managed without an API gateway or proxy, having one means that you can establish a more uniform way to secure and manage the APIs. Essentially, it allows you to manage all of your API-related concerns under a single pane of glass.
From a scalability and security perspective, there’s no better solution.
Choosing an API Monetization Provider
When choosing a billing provider, as with any technology you incorporate into your stack, you should be aware of current and future use cases and how the technology can support them. You should take stock of your product roadmap and map out the technical pros and cons of each solution. You’ll also want to be aware of what it takes to integrate the billing provider with your current solution. Different providers have different ways to integrate, which can make them more or less suitable for your project. Another detail is to ensure that the billing provider can support your API monetization model.
On top of the technical requirements, there are a few other operational factors that should also go into choosing your provider. These factors are highlighted below.
For most companies, this will be the main factor outside of comparing the capabilities of the technologies. If both billing platforms will technically work for your project, the next focus will be on cost.
The cost of a platform could be calculated in many different ways. It could be done as a ﬂat rate, percentage or a mixture of both. You’ll also need to factor in the volume that you’ll be passing through the system since that can also lead to discounts, which may make a certain provider more attractive.
The reporting tools built into the platform can help the business side of an organization easily see the results of API monetization. Some platforms have a minimal amount of reporting on API usage, while others have extremely detailed reports available. If you’d like out-of-the-box reports versus homegrown ones, this should be an important factor.
If an issue does occur, it’s great to know that the provider can provide quick support to remedy the problem. You’ll want to make sure that you look at different support packages the provider offers, what the SLA is for turnaround on minor and major issues, and also look at some customer reviews to see if existing users are happy with the support.
Monetizing your APIs is a complex project to undertake, but it doesn’t have to be hard. Along with a great API strategy and robust API design, by using reputable and proven technologies to get you to market quickly while keeping quality high, you can quickly drive revenue from your APIs. Choosing the right stack for your monetized API is crucial for the needs of today but also for making sure that you have what it takes to expand into tomorrow, conﬁdently.