The Business Case for API Monetization with Usage-Based Pricing

What is a usage-based pricing model?

Usage-based business models are the future of business.

In a nutshell, usage-based business models (often categorized as usage-based pricing) charge customers based on how much they use a certain product or service.

Customers typically pay a fixed fee for a certain amount of usage, metered in unit increments. For example, if they use 10.000 API calls, they pay for 10,000 API calls. Often pay per use models are much more sophisticated. Companies have tiered, volume, or contingent pricing models.

Usage-based pricing is common for products or services consumed on an ongoing basis. It’s common across various industries. A few examples of products or services that use this kind of model are e-charging companies like Elli, insurance providers like Munich RE, SaaS products like Snowflake, and cloud computing services like AWS (to give a more specific example to this article). 

Considering the market slowdown in 2022 and into 2023, pay-per-use is going to become much more popular, especially for competitors of the given examples.

In truth, adopting a usage-based model is not difficult. It means developers pay according to how much they use your product, in this case, your APIs. 

It’s as simple as setting up a pre-defined pricing model, ensuring a high level of clarity over how much your clients will pay, and using a billing and monetization system to manage the accounts receivables process. It gets even better. There’s no minimum (or maximum) price. If your clients use your product sparingly for one month, they’ll pay little to nothing. But if they use it constantly, they’ll pay far more.

The four benefits of a usage-based API product model

Offering your clients pay-as-you-go API services has four significant benefits. It’s fair value for the money spent, provides a better user experience for your clients and their customers, is competitively on-trend, and improves the overall innovation process.

In summary, the benefits of a usage-based API product model are:

1. Fair value for customers
2. Better user experience
3. Growth area for many sectors
4. Overall improvements to the innovation process

Let’s examine each of these benefits in closer detail.

1. Fair value for the money spent

Pricing is preset and transparent. Your clients only pay for what they use—they’re no longer tied to one size fits all pricing plans. As their needs grow, their spending increases accordingly. 

Scaling becomes predictable. And let’s not forget: Spending more money means your clients’ product is performing well, too. A win-win situation for both of you.

2. Better user experience for clients and their customers

APIs themselves provide an improved user experience. Clients can tap into your technical expertise to create custom solutions for their own business.

Compounding, usage-based business models can also enhance the user experience. They organically align the provider and the consumer’s interests. Your clients only pay for the amount of the product or service that they actually use. As a provider, you can react to their usage by scaling your own efforts appropriately. 

This is logical, and fair, and naturally creates a more personalized user experience. It builds trust and a strong sense of control and autonomy. Your clients can choose the level of usage that best meets their needs, or that they can afford.

3. On-trend, but has not yet permeated all industries

Usage-based business models are becoming increasingly popular. But why is this? What do early adopters see that others have not yet noticed? Simple, customer happiness. That is a key priority. 

Businesses have realized offering fair value doesn’t necessitate cutting costs, even through market slowdowns. Usage-based models boost customer satisfaction while improving companies’ financial performance.

It’s worth also highlighting that this model has not yet permeated all industries. Therefore, by adopting the model before your competitors, you could create a crucial competitive advantage for your business.

Another reason usage-based pricing is on trend is it’s tied directly to the staffing needs of a business. Consider a bull market. Usage is up, you have more customers, so naturally you need to staff more. Conversely, consider a bear market, if your product’s usage (and therefore revenues) is down, you can have a smaller team.

If your product sees variance in usage like the example above, usage-based business models enable fluid reactions to market conditions. With the market slowdown of 2022 and 2023, cash flow is going to become front of mind for many people, and a pay-per-use product can help stymie cash hemorrhaging as a result of a bearish market.

4. Improve the overall innovation process

Last, but not least, adopting a usage-based pricing model for your API products is a boost to innovation, both for your clients and for yourself.

For example, you can use your usage data to identify ways to optimize your usage-based business models. This is a very under-utilized cycle. Maybe you decide to charge lower costs to infrequent users to encourage more use.

Or, perhaps you charge more to high-usage customers that clearly derive tons of value from your APIs, and would therefore likely be willing to pay a greater fee. Your clients, meanwhile, can use your APIs to create innovative products and services. Every link in the innovation chain benefits from usage data.

With Apinity’s API management platform and Nitrobox’s order-to-cash platform, you can set up any business model (usage-based or otherwise) from API call to cash.

As all the aforementioned facts show, monetizing APIs with a usage-based payment model is easy to explain and very marketable. Clients and customers appreciate customized pricing models that are tailored to them as individuals.

If you want to take advantage of this promising business opportunity, look for partners who can help you get off to the best possible start.

First, start with the place to sell. Companies like Apinity offer the ability to build API marketplaces to expand your business opportunities. Imagine being able to offer all your different APIs as different products and set up digital marketplaces where you can easily offer them to your clients. This is a great platform to turn your usage-based models into a thriving new business.

Second, process the resulting usage-based business transactions, which can quickly run into the millions, in the best possible way. This is where the Nitrobox monetization technology comes into play.

It helps you manage, automate, and scale your business transactions in one smart platform offering all order-to-cash capabilities from contract management, billing and invoicing, and revenue recognition to payments and dunning.

You too can take advantage of this promising opportunity to grow and differentiate your business with usage-based API monetization. Adopting this approach is a valuable way to unlock extra revenue, enhance every link of the innovation chain, and boost customer satisfaction.

Interested in unlocking the potential of your API products? Schedule a demo.

writer’s note: This article was originally published in January 2023. The Apinity article has since been unpublished. So, we updated this article for accuracy and comprehensiveness and added new insights and improved readability. Happy reading!