I often see confusion with the words “business model” and “revenue model”. Especially when talking about APIs. The business model covers all aspects of running a business or a product line, from customer segments, to channels, to operational activities, resources, and costs.
Revenue model, indirect or direct, only covers the way in which the company receives money or compensation from a product or service. What we need to consider is that APIs can play many roles in a company’s business model. Even if we talk about “API as a product” it doesn’t mean that it’s a sellable product. APIs can reduce costs, provide extra channels or leverage outsourced resources. I have covered lots of different business models for APIs in relationship to products in chapter 5 of the book API economy 101 and the summary table is also included in the resources of the APIOps Cycles method. You can have the APIs inside of your product, as an add-on to your product or service, or as a means to order or monitor your service, integration etc.
To become a platform, how important is the free business model?
Let’s talk about platforms as a business model, platform economy instead of any digital platform. This is a reasonably well-researched area. Especially with multi-sided platforms, you have to find a balance between the various stakeholders. These stakeholders form the “sides” of the platform. Like in AirBnB or Uber as examples, you only get drivers, if you have customers, or you only get bookings if you have beds. You must maintain a balance between the “sides” at all times. So to gain traction with this business model, freemium or some-type of temporary compensation is essential.
Instead of platform economy, we can talk about API economy or APIs in digital platforms or SaaS solutions. The key things here, too, are scalable and internet business models like the network effect or the long-tail phenomenon. It’s important to offer free trials or some method of trying out the APIs and the capabilities before customers are ready for a purchase decision.
It depends on what resource the API exposes whether it makes sense to provide the resource for free for-ever or just to give a demo for free. I’ve worked with everything from transcription platforms like Rev.com to media, hardware or energy companies or SaaS software vendors and the public sector, which all have different possibilities for offering the freemium model. If you can give something out for free and get your money in the long run then you should do that. Getting your customer to integrate with you via your APIs already makes it harder and less likely for them to leave you. This reduces the customer acquisition cost and increases the life-time value.