Pricing Strategies for Monetizing your API
Before you monetize your API, here are some valuable strategies for generating revenue with APIs.
API Monetization
It is the process of generating revenue from APIs. API monetization strategies control how revenue is generated from your APIs and keep a check on their consumption by users.
Today, more and more companies are using third-party APIs to abstract everything from authentication and email to payments, search, geolocation, and more. While there is a lot of demand for APIs, choosing the most appropriate pricing strategy for your API is critical.
User Groups
Generally, there are three groups of users that interact with APIs. These include:
- Hobbyists.
- Small Companies.
- Enterprise Developers.
The usage patterns of each group are different, so while pricing your API, you need to make sure that your strategy covers these user groups.
Pricing Strategies
Here are some standard strategies for pricing APIs.
Free
In free plans, the users do not require to pay for a subscription to consume the APIs. They can simply sign up for the API and start using it. There is no direct exchange of money involved; however, this approach can have indirect advantages. Google sign-in API is an excellent example of a free API. Developers can use it in their applications to identify logged-in users through their Google accounts. While the API is free, it benefits Google when users log in using their Google accounts.
Paid
Paid pricing means that the user must pay before using the API. Developers are unable to test these APIs without paying for them first. The inability to test if an API fits their needs can be discouraging, as developers like to try before buying any API.
Freemium
The freemium strategy is the most common and effective approach for pricing APIs, as it sits between the free and paid strategies. This strategy includes a free tier providing limited quota/features. This allows the developers to try out the API, and if it suits them, they can subscribe to the paid tiers according to their use.
Data collected by RapidAPI tells that developers are three times more likely to subscribe to a freemium API with a free tier than a paid API with only paid plans.
Pricing Models
In freemium or paid strategies, the following models offer different pricing plans.
Fixed Quotas
The fixed quota model is the simplest. It allows developers to pay for a set number of calls per month, but they cannot exceed the quota.
Example: 30000 requests per month
Pros
Pricing is straightforward, and revenue is predictable.
Generates more revenue from developers with less usage.
Cons
The API is inaccessible once the quota is reached.
It is not practical for scalable and high-volume apps.
Pay As You Go
A pay-as-you-go model incurs payment for each individual call. There is no fixed quota, and developers pay for as many calls they make.
Example: $0.01 per request
Pros
Pricing is scalable.
Suits large and high-volume apps.
Cons
It is harder for developers to judge the pricing.
Revenue can be unpredictable.
Overage Model
The overage models combine the above two strategies. It gives a fixed quota to developers but allows them to exceed their quota limit by paying small overage fees.
Example: 5000 requests per month + $0.05 per additional request
Pros
Pricing and revenue are predictable.
API remains accessible even after the quota is reached. Apps are not shut down.
Cons
- Occasionally, a developer will have a bug in their code that may cause a large overage fee. Therefore, proper communication of overage fees and reimbursement plans may be required.
Conclusion
There are no fixed rules which can determine the best pricing plan. It all depends upon your API and its target consumers. However, we recommend that you keep your pricing as simple as possible because complex plans will be bound to scare the developers away.
The overage plan seems to be the most popular because of its flexibility. The freemium pricing strategy with smartly priced tiers is recommended the most. A free entry-level tier can also be very effective for increasing developer adoption.
It may vary for different APIs, but on average, you can divide the pricing into the following tiers for best results.
BASIC: Free plan with a hard limit.
PRO: For Hobbyists and Independent Developers (usually $10 - $25 per mo).
ULTRA: For small businesses (usually around $50 - $100 per mo).
MEGA: For enterprises ($150 or more).