What is an API and how it fits into a business strategy?
APIs act like a bridge and are used to communicate between softwares inside and/or outside a company. They represent opportunities to optimize processes internally, between business partners and also offer great opportunities for innovation by making available functionalities from already existing applications to developers.. Allowing them to benefit from technologies that would be too resource-intensive to develop. In turn, companies that provide access to their applications can generate direct revenue streams such as offering a subscription to access a service or less direct ones such as attracting new users to their platform.
1. What is an API ?
An API, which stands for “Application Programming Interface” is an IT solution that allows independent software to communicate and exchange services or data. In contrast to a user interface, which connects a computer to a person, an API connects computers or applications together.
With APIs, developers or companies can use ready-made solutions instead of spending time and money reinventing the wheel. APIs allow small applications to benefit from technologies that would be too resource-intensive to develop, such as machine learning algorithms, complex image recognition software and reliable online mapping technologies.
Major tech players like Google, Amazon, and Twitter create their own APIs to ease developers’ lives.
Let’s define three roles of an API value chain :
- API provider : the company that creates and offers an API
- API consumer : the developer or the company implementing the API
- End user : the person who uses the application containing the API
To use a service provided via an API, the API consumer must define its requests following a precise documentation called an API specification. This describes how to build or use such a connection or interface and may include information such as the framework for using the API, i.e. what data is accessible, the conditions of use, the availability and performance guarantees, the duration of support for the API version, etc.
a) Types of API (Private – Public – Partner)
APIs feature varying levels of security and privacy as it can be seen with the following types of API.
- Private or internal API: this type of API is only exposed to internal systems and are not meant for usage outside of the company. These APIs are usually used for efficient communication or reuse between services.
- Public or open API: Public or open API is the entry-point to a service that has been made publicly available on the internet to allow developers to programmatically access a service.
- Partner API: This type of API is exposed by a company to strategic business partners, there’s no public availability. A special and specific entitlement is needed to access them. Software as a service providers usually provide APIs to integrators so that their developers have access to a special developer portal.
b) REST VS SOAP
REST (“Representational State Transfer”) is a type of API that is often described as a set of architecture principles whereas SOAP (Simple Object Access Protocol) is a protocol maintained by the World Wide Web Consortium (W3C).
On the one hand, RESTful APIs are usually done using the HTTP Protocol (Hypertext Transfer Protocol), a protocol used all over the web.
On the other hand, SOAP is a protocol which means that SOAP APIs have to follow a strict set of rules to enable the communication between the client and the server. SOAP APIs use the XML to communicate and exchange information. They are usually more difficult to set up, harder to read and harder to develop.
|SOAP API||REST API|
|SOAP VS REST||Relies on SOAP (Simple Object Access Protocol)||Generally transports data in JSON but allows Plain Text, HTML, XML as well|
|Data Transfer||Transports data in standard XML format.||Generally transports data in JSON but allows Plain Text, HTML, XML as well|
|Methods||XML data format only||HTTP methods : GET, POST, PUT, DELETE…|
|Protocol||Works over HTTP, HTTPS, SMTP, XMPP||Works over HTTP and HTTPS|
|Structure||Highly structured/typed||Less structure|
|Designed with large enterprise applications in mind||Designed with mobile devices in mind|
|Usability||Cannot use Rest because it’s a protocol||Can use SOAP Web services|
2. In concret, let’s analyse a use case with Uber
Uber is an application that provides mobility as a service by enabling users to plan, book and pay for multiple types of mobility services. In order to offer these services, Uber makes use of other applications provided by third parties via APIs.
For example, when you enter the address of your destination in the Uber application, the most optimal route, in terms of time, is calculated between your position and the destination to be reached. Instead of spending thousands of hours drawing a map and adding routing functionality, Uber has implemented a map using the Google Maps API and pay to use it.
Uber paid over $58 million over three years (from 2016 to 2018) for map services to Google.
Once the journey has been completed, Uber relies on the payment service provided by Apple using the Apple Pay API to settle the payment for the ride.
In this case, Uber has used two services provided by different third party companies via their respective APIs.
The API providers, in our case Google and Apple, take care of their applications maintenance so that Uber does not have to worry about that. The developers of the Uber application just have to integrate these services into the functionality of their application. These service integrations are not visible to the user, who only interacts with the Uber application.
3. API as a business strategy
As a growing number of consumers and businesses incorporate web and mobile apps into their daily routines, businesses are discovering valuable new uses for previously isolated data sources or functionality. This drives innovation by inspiring developers to create new business opportunities and improve existing products, systems, and operations. As more and more businesses create and incorporate APIs, it’s increasingly critical for innovative businesses to develop and execute successful API strategies.
An API strategy may include the implementation of different types of API. For example, when a company releases public APIs that power consumer-facing applications, it enables new ways to generate revenue and to engage with customers through web, mobile, and social apps. And by developing private or partner APIs, a company can offer their employees and partners new tools that help them streamline operations and serve customers even better.
a) The purposes of an API strategy
The purposes of developing APIs for companies producing a service also called API providers are the following:
– Create a new revenue stream and improve business performance. The most direct and obvious reason to create an API is to get an additional revenue stream by giving other people the opportunity to create something revolutionary based on your product.
– Drive users to a platform. A company’s API can be used to drive traffic on its application and improve the company’s reputation.
– Make products less complex. A company that provides a complex SaaS solution that has wide functionality can offer to its customers only the functionality they want. Thus, Thanks to the APIs, users do not have to pay for the whole product.
– Exchange information with business partners. The introduction of this type of APIs made possible continuous and effective data exchange. For instance, DHL’s APIs allow companies to track, manage and create shipments.
b) The different API Monetization models
Monetizing APIs can be done in different ways and the most well-known monetization models are the following :
A subscription model involves charging directly for the API itself, typically on a monthly or yearly basis. This model seems the most straightforward, but to successfully monetize an API using this model, potential customers need to be convinced that they will benefit from this solution before subscribing.
One way to attract developers is to create a sandbox where they can test functionality before they sign up for a subscription. This is the strategy used by PayPal. Another way is the freemium model where basic functionality is given for free and more advanced functionality is charged.
The pay-as-you-go model
The pay-as-you-go model or usage-based model means that a developer pays only for what they use (for instance, $1 for 100 API calls).
There are several options for billing API consumers. For example, one API strategy used by Amazon Web Services is for an API consumer to add a credit to their AWS account and Amazon then charges monthly based on usage, sending a detailed bill.
Share from ads
In this model, the API provider offers advertising that API consumers embed in their applications, generating revenue for the API provider. In return, the API provider shares a portion of this advertising revenue with the API consumers.
For example, TripAdvisor uses this model. Integrating their API into other applications has brought TripAdvisor a lot of new traffic and increased brand awareness. This has resulted in increased revenue for the company and additional revenue for API consumers.
To conclude, APIs can serve different purposes: Private APIs can optimize internal processes, while partner APIs enable a continuous and efficient exchange of data between business partners. Last, but not least, public APIs drive innovation by inspiring developers to create new business opportunities and improve existing products.
As a growing number of consumers and businesses integrate web and mobile applications into their daily lives, it is increasingly important for innovative companies to develop API strategies. APIs allow API consumers to leverage already existing applications. In turn, these represent opportunities for API providers to generate new revenue streams through a suitable monetization model.
We hope APIs don’t have any secrets for you and you will understand how they can fit into a business strategy.
If you need support in your projects, don’t hesitate to contact HeadMind Partners !
Anicet Tshiani & David Vandenitte