API monetization: The road to premium starts with freemium

Get ready to have everything you knew about business monetization turned upside down and inside out. It’s been right around a decade since businesses have started effort at formally monetizing APIs and there have been notable successes (e.g. Twilio, AWS), failures (e.g., Edmunds, ESPN) and creative pivots (e.g., Twitter). After 10 years of watching these efforts closely and helping enterprises scale their efforts at API monetization, there is one counterintuitive lesson I want to share with the community: Don’t charge for the first APIs you bring to market.

The developer community you imagine doesn’t exist… yet

When enterprise leaders hear about API monetization and the revenue potential that exists within their systems, they start pushing teams to launch products to market. These leaders are missing the steps in-between launching products and generating revenue from them. If digital products and transactions are already part of your offerings, then you might be in the clear — but if your enterprise doesn’t have an active API-driven channel of revenue, that’s another story. There are some major obstacles to API adoption and revenue generation that have nothing to do with the lack of a product in the marketplace. Without an established digital product offering, you not only don’t have a customer base with a “reason to believe” yet, you also don’t have a developer community waiting for your API to become available.

Every global enterprise lives in the world of scarcity. Scarcity not only applies to natural resources, but it also applies to labor — in this case, “developer capacity.” After close to 30 years working in the corporate technology environments, I’ve yet to come across the enterprise with a set of developers on the bench waiting for unplanned project work to come around. Development capacity in any company that has an annual budget process is amongst the most scarce commodities in the corporate world. Projects and budgets are set months — if not years — in advance. Getting access to your target customer’s developer capacity for something new requires not only a compelling offering but also a sense of trust and confidence that your enterprise is capable of delivering a reliable and robust product service. If your enterprise isn’t already in the business of delivering APIs or publically available digital products, your brand is just not elastic enough to support the significant change in your target customer’s IT spend.

Let’s say one of your partners/vendors came to you and your leadership with a proposal to divert your existing ROI justified project plans in favor of leveraging their APIs within your business-critical value streams. If this partner had no existing track record of digital products and services (no APIs with existing customers, no vibrant development community touting them and no history of performance or reliability stats) how would this proposal sit with you and your leadership? This seems like a large leap of faith for anyone to consider. Now let’s add to the risk and change they are asking you to take on, that they want you to pay to use them! I just can’t see how anyone would take such a proposal seriously. But don’t give up hope yet — there is another way.

The “freemium to premium” channel strategy 

The solution to the chicken-egg problem above is that rather than seeking to create paying customers, enterprises should instead be seeking to create “qualified prospects” with a “reason to believe.” To borrow a phrase from Moneyball, teams shouldn’t be interested in buying players, they should be interested in buying wins. In order to get wins, they need to get runs and to get runs they need to get players on base. 

This same idea can be applied for enterprises seeking to open up a new channel of revenue. Companies seeking to earn revenue from a new API channel should not create new products — they should be interested in creating new users and deepening relationships with existing users. In order to create new users, they need a new channel of developer engagement and to do that they need to make something easy to engage with. The easiest path to developer engagement starts with a product that is free. 

While this shouldn’t come as a surprise — it does to many of the enterprises I work with. Much of the world wide web operates on the back of products that started (and many times continued) as free offerings, such as browsers, web mail, social networking, maps/navigation, games/apps that are free to download, etc. Despite the long list of success stories where online offerings have a “free/freemium” tier as a mechanism to cultivate an audience, many leaders and participants in API monetization programs struggle with the business justification to take the first step. However, these same leaders and participants do not struggle with generating the appetite to take the second step — developing and launching a monetizable product for an audience that doesn’t yet exist.

When your enterprise doesn’t have already established track record and customer base for digital products and services, you will need a rational and deliberate strategy for market development. If your enterprise goal is to launch and eventually monetize a public API product set, the 3 step path to that destination is: Build the channel, fill the channel, scale the channel.

Phase 1: Build the channel 

In this phase, your enterprise will take the foundational steps to establish a new system of engagement and connect with the people and organizations that shape and mature your product set and business architecture:

  • Research and define customer segments that are aligned with your business strategy.
  • Develop your brand, business, and operational architectures for serving the high priority customer audience segments.
  • Instantiate initial identity, authentication, and credentialing postures for the first round of potential customers and partners.
  • Establish a connection with the first set of potential partners through the new channel of engagement and gather feedback to plan, refine, and improve the customer experience.
  • Launch an initial product set with low/no barrier to entry to targeted partners.

Phase 2: Fill the channel

In this phase, your enterprise will flesh out your offering set and bring in a wider range of customers while hardening your channel capabilities and operational processes:

  • Begin broader customer outreach and gather feedback to ensure your offering and strategy are resonating with your target audiences.
  • Refine brand, business, operational architectures — specifically in the area of onboarding complex use cases.
  • Launch a richer product set that extends the value being delivered into more complex offerings that begin to round out your platform and larger value proposition.
  • Operationalize your ordering and authentication models and integrate your touchpoints with an enterprise lead-to-cash value chain and formalize your organizational designs to reliably support your new service offerings.

Phase 3: Scale the channel 

In this phase, your new channel teams will dig in and exploit the leverage you’ve built:

  • Continue and expand your efforts in customer outreach while making any needed refinements to your onboarding processes.
  • Launch “gap-filling” products that cement your platform strategy with a jobs-to-be-done mindset.
  • Formalize a merchandising approach to your engagement portal with bundles, packages, add-ons designed to maximize customer “basket size,” and minimize “cart abandonment.”
  • Optimize the customer consumption journey with a relentless approach to reducing friction in both the “ordering” and “consumption” phases while simultaneously making potential and actual value transparent to your prospects and customers.

Easy as 1-2-3 only works when you start with 1

The critical gap that API monetization failures have in common is the lack of building a business-context sensitive audience strategy prior to developing a product strategy. In layman’s terms: a product without a channel is neither scalable nor defensible. To be successful in digital product delivery, enterprises must first adopt the digital marketing practices that made modern enterprise software shops successful. Free or nominal charges for services that create an appetite for more services (i.e., “freemium”) is the first step on the path to getting the audience to desire the services that can be delivered with more substantial charges attached to them (i.e., “premium”). Once your low barrier to entry services have the attention of your target audiences (i.e., you’ve built a viable channel) that’s the moment when you can start to surface the advanced high value offerings (i.e., fill the channel) and then address and serve larger markets (i.e., scale the channel). In short, you can’t score any significant amount of runs without first getting on base.

To learn more about API product strategy, check out the API-as-a-product workshop, one of MuleSoft’s API Program Workshops



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One Response to “API monetization: The road to premium starts with freemium”

  1. awesome blog and mulesoft is one of the best middle ware tool but i m not with dataweave still need improvement..if i m using ace tipco iib where coding is convenient.