Finding value in the API economy

By Danny Bradbury

The API economy is here, according to Gartner — and it’s huge. Harvard Business Review reported that Salesforce generates over 50 percent of its US$3 billion in annual revenues from APIs. That’s a sign that it’s time to sit up and take notice of the API economy. How are companies building profitable business models around APIs, and how do they work?

In 2011, venture capitalist Marc Andreessen famously said in The Wall Street Journal that “software is eating the world,” and it’s still hungry. Software-based services drive an increasingly large portion of our economy. That portion is expanding as mobile applications continue to bring software services to users wherever they are.

How the API economy changes everything

APIs allow different software applications to communicate and offer services to one another. In this way, your web collaboration application can “talk” to a cloud-based conferencing service and ask it to create a video chat session between all the members of your team.

Originally, software products exposed highly technical services to each other that wouldn’t make sense to businesspeople. As API technology became more standardized and software applications evolved to work with each other across the internet, companies began using APIs to offer business services in software form. This was perhaps the biggest leap forward in creating the API economy.

Business service APIs enable companies to create entire ecosystems around their services. This online accessibility enables companies to create instant channels for their products. Partner networks that would previously have taken months or years to build can now grow quickly through developer programs that promote and guide partners in the use of business APIs.

A real-world example

What do these API ecosystems look like, and how can they be profitable? Walgreens is a good example. Like many retailers, the company provides a photo printing service that takes digital photos and turns them into physical photographs.

Walgreens expanded its reach in a crowded market by exposing this service as an API, according to TechCrunch. Partners can use the API to include photo printing capabilities in their own applications. Walgreens pays them a commission on each photo printed through their app. This example of the API economy in action creates an instant distribution channel for Walgreens’ photo service, expanding its potential customer base. It has also provided launch partners such as Big Blue Chip, creator of photo collage app Pic Stitch, with a photo printing service that would have required a significant investment to create themselves.

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Leveraging APIs

It’s important to choose the right monetization model when taking advantage of APIs. Tech startups that offer purely digital services with a low fulfillment cost may want to offer their APIs for free to anyone who wishes to use them, which can be a great brand-building strategy.

Conversely, more established companies or those with services that have a higher fulfillment cost — such as photo printing or physical delivery — may want to make their APIs available to a more qualified group of developers and charge a fee or use a revenue sharing model.

However you do it, it’s important to incentivize the developer partners using your model in a way that accurately aligns your respective goals and creates a positive customer experience. API monetization models should encourage the creation of sustainable business models that capture the value of the API service while also adding extra value to the customer. Those that simply flood customers with advertising or focus on delivering volume leads for the API provider in return for one-off payments may not be sustainable in the long term.

Ultimately, APIs turn business products into innovation platforms that can be used to develop still more services. For new companies, APIs can be a valuable tool for growth; for established firms hoping to expand their services, they can be a stepping stone in their digital transformations.

In either case, the ideal success story in the API economy is one in which the combined software services deliver more than the sums of their parts.