The Third Party API Economy Part II: Announcing the API-First Directory

How to Monetize an API’s Users

Today, I’m excited to announce the API-First Directory, a growing record of API-first companies across enterprise and consumer industries.

You can find the API-First Directory here and fill out this form to add your API-first company. Any VC-backed, acquired or public company qualifies as long as it has a valid URL and APIs are core to the company’s business.

My hope is that this will encourage the API-first ecosystem of entrepreneurs to continue to flourish, share best practices and learn from each other. As always, if you’re starting an API-first company bringing your users superpowers I’d love to hear from you at grace@canvas.vc!

In my last article, I analyzed the common characteristics of a successful API-first company and why the best API companies bring their users superpowers. Since then, I frequently discussed a common question with entrepreneurs: what’s the best way for an API-first company to monetize?

Even if you have an API product generating meaningful usage, it’s hard to understand the best way to leverage and consequently monetize your user base. As John Musser points out, most APIs have more than one type of ROI which makes it hard to quantify the true value in a simplistic recurring SaaS business model.The best API-first companies not only abstract away complexity and make a function easier, but also become an integral pipe within your software ecosystem, aligning the company’s success with the success of their customers.

First, let’s relook at the initial business models of API-first winners, all of which fall in the “developer pays” category:

Twilio, Current Market Cap: $59B, Consumption-Based

  • Superpower: amplifies developers with text and voice messaging functionality
  • Business Model: Pay-as-you-go with options for volume discounts or committed-use discounts for larger clients, ex: $0.0075 to send or receive a message
  • Twilio CEO Jeff Lawson attributes “the continued success of our platform business model” to the company’s success.

Stripe, Current Valuation: $36B, Transaction-Based

  • Superpower: empowers online payments for merchants
  • Business Model: Transaction fee that scales with usage, ex: 2.9% + $0.30 per successful card charge
  • Stripe provided a more flexible and robust payments platform without requiring companies to build payment transaction infrastructure in-house.

Okta, Current Market Cap: $34B, User-Based

  • Superpower: enables IT managers to easily manage identity & access management
  • Business Model: Per user/month per product offering (single-sign on, lifecycle management, multi-factor authentication), ex: $2 per user per month for single sign on.

The right pricing strategy can be a meaningful differentiator between API-first companies that have multi-billion dollar outcomes and those that fizzle. Do you offer a product for free, pay-as-you-go, launch an affiliate network or a combo of the three? It’s a delicate go-to-market exercise balancing your product, value proposition and your customers.

Based on these insights, here’s my API Pricing framework:

  1. Keep it Simple → The easier it is for your customer to understand your pricing model, the easier to get it approved and deployed. Offer a free or “trial” tier to keep time to value and adoption low and let your product shine. Everyone knows Stripe’s business model and can retort from memory — 2.9% + 30 cents per transaction.
  2. Align Your Success With Your Customer’s Success → What does success look like to your customers? Align your pricing strategy with success of your customer’s key metrics (e.g. financial transactions, messages, events.) The closer you align your business model to your customer’s success, the more successful your monetization strategy will be. For example, Twilio’s consumption-based pricing model aligns Twilio’s success with that of their customers, getting paid more when customers use Twilio to build things atop of their platform.
  3. Match Product Value to Business Model → The 3 C’s pricing strategy provides a simple but useful framework — cost, competitors and consumers. In other words, the cost to offer the product, the competitive offering, and the value you provide to consumers with your product. Leverage the 3 C’s to inform your pricing strategy — for example, if the cost to offer the product is higher, you’ll likely charge more. However, if the product value is more commoditized (e.g. SMS messaging), you’ll have to align pricing at parity or lower than the competition. In Stripe’s case, the company created significant value for merchants who could previously not facilitate payments easily with their payments infrastructure, enabling them to charge a higher price than Twilio, for example, which provides SMS messaging in a more competitive landscape.
  4. Remove Friction → Worry less about making your product cheaper, and more about how to make your product easier to use and adopt. API-first companies often open up antiquated industries or provide software encouraging connectivity and scalability. Many of the best API-first companies of the 21st century removed intermediaries like slow-moving banks (Stripe) or unreliable SMS providers (Twilio). Stripe co-founder John Collison explained: “For us it was quite visceral: these products are not serving the needs of the customers, so let’s build something better.”
  5. Exploit Stickiness → Once an API is adopted, it often becomes embedded into organizational workflow and integrated across numerous apps, putting API company builders at a unique vantage point. What are additional platform services, features and revenue streams you can layer atop of your existing pricing model given API stickiness and set of user needs? Stripe, Twilio and Okta are all model examples of this — beyond the core API functionality, they have all layered additional revenue-generating services like Stripe Treasury (Banking-as-a-Service) and Stripe Atlas (startup incorporation), Twilio video and email APIs, and Okta customer identity features.

Even after establishing your business model, it’s tricky to accurately forecast and measure revenue per customer given your growth rates, customer sign-ups and usage. What is a sales rep quota, for example, when there is not a clear recurring revenue model or ACV per new signed customer? Some API companies I’ve talked to use a different proxy, such as size of customers, number of channels, or months of usage instead of price at signup. The best API companies have strong revenue expansion and community engagement, so consider working a usage and up-sell incentive into sales rep compensation as well.

A cautionary tale is Segment. While it’s an example of a strong API-first company that was a maverick in the customer data platform space, its pricing overtime has become less aligned with customer success. Its visitor-per-month model has become expensive and created a vacuum for companies with business models more aligned with customers like Rudderstack or Snowplow which price on a per-event basis off of open source projects.

I’ve identified a few emerging companies in the API-first landscape and how they are evolving business models to align their success with their customers’ success.

Emerging API-First Companies & Their Business Models:

api.video, Consumption-Based

  • Superpower: enable developers to easily add real-time streaming video to applications
  • Business Model: Fractional cent fee per video ingested, streamed or stored, ex: $0.04 to transcode per minute of video, $0.003 to host per minute of video per month, $0.002 per minute of video viewed and $0.0007 for analytics per play
  • API Video provides high-quality, easily-implemented real-time video streaming without exorbitant costs.

Railz, Transaction-Based

  • Superpower: enable developers to easily access, normalize & analyze accounting data
  • Business Model: Transaction fee that scales with number of users, ex: $5/connected SME account per month with credits for startups
  • Railz provides a robust set of APIs which normalizes accounting data and gives access to advanced analytics without requiring developers to build accounting or ERP integrations in-house.

Stytch, Consumption-Based

  • Superpower: enable developers to improve user conversion, retention & security with passwordless authentication
  • Business Model: Pay-as-you-go with options for volume discounts or committed-use discounts, ex: $0.10 per active user per month
  • Stytch focuses on making user authentication radically simple for both developers and users.

I’m excited for the next-generation of API-first companies that price according to value to meaningfully improve their customers’ experiences.

If you’re starting an API-first company, I encourage you to add your company to the API-First Directory (add your company here!), so we can continue to collect and share best practices on how to build a standout API-first company.

Thanks to Cédric Montet, Sohaib Zahid, Julianna Lamb, Reed McGinley-Stempel and several others for their feedback on this article.

Resources:

Investor at Canvas Ventures