The use of software and apps is the new norm in the modern world. Customers use these solutions to accomplish a given purpose. However, the customers may desire extra features on the provided solutions.
For many developers, adding these features might be a hard tackle as it requires a lot of time and money to develop them. Again, while the developer can build the needed features, the target customers may prefer using familiar ones. This aspect poses a challenge to developers.
Fortunately, companies offering solutions and the desired features allow developers to customize and modify them to fit their user needs. Others provide them with a computing interface to interact with these solutions.
This interface, popularly known as Application Programing Interface (API), simplifies the developers’ solution creation process. With the birth of the API interface, a new business model was born.
What is the API licensing business model?
API licensing business model involves the development of API and charging developers through offering them a license to use it. This model is a common practice among software companies. The company provides licenses for developers who want to extend the functionality of their applications or platforms without having to develop such solutions from scratch.
For instance, you might need to provide a payment gateway on your online store. Instead of developing personalized payment features, you can integrate existing online payment methods by adding their API to your website. Most of the API is available as plugins or add-ons. So, this business model involves charging developers a fee for using your API in extending the functionality of their solutions.
How does it work?
As noted, the API licensing business model involves two parties. The first party is the licensor, while the next is the licensee. The licensor is the API owner. This can be an individual or company that operates a given solution.
Facebook, Google, YouTube, and PayPal are some companies that own API. The owner decides the level of customization of their API. They can allow the developers to modify it to fit their needs or restrict it to the original use. Some API owners do not charge developers any coin, while others require them to get a license before using it.
The licensee is the next party in this model. This group consists of developers using an API to enhance the functionality of their solutions. The group can include web designers, software, and app developers. To use the API, they must get a license from its owner. The license dictates what they can do with the API.
In this essence, the users sign an API license contract that dictates the terms and conditions of use. The licensee must abide by these conditions and prevent any possible misuse of the API by their subjects. Hence, the licensor makes money through licensing the use of the API.
Examples of API licensing business model
The API licensing business model is part of the approaches that many online platform users use to make money. These companies create API and license users who want to extend their solution functionality.
Google, Apple, Facebook, and Twitter all have API and license developers who want to use them. The developers pay some money to these companies before integrating the API on their software or apps.
Also, Transferwise and PayPal use this business model. These leading payment gateways allow companies such as online stores, freelancing platforms, and web hosting companies to add their API on their websites to help customers check out faster. These companies then pay a license fee for the service. Other companies include LinkedIn and Microsoft.
Pros and Cons of the API licensing business model
Like other business models, API licensing is a superb operation concept. It will help a business run a successful and profitable venture. However, it has a number of benefits and shortfalls that you need to consider before implementing it. Here are some of them:
Pros
Enables API owners to expand their reach
Any software or tech solution provider desires to get many people using it. This aspect can call for investment in marketing and promotion that require a lot of money. Through API licensing, a business can expand the tech solutions’ reach and usage. They do this without spending vast amounts of money and time on marketing.
Allow control of the software and users
Companies have a large number of people using a particular software. For this reason, it is a challenge to control how they customize and misuse an API. API licensing plays a crucial role in curbing such practices. By offering a license, you can manage the number of users interacting with your API and software at a time.
Adds a new revenue stream to the business
Every business seeks to utilize any opportunities available to maximize its profits. This calls for ensuring anything that can generate income is doing so. With API licensing, the company creates a new revenue stream. They offer licenses to any developer looking to use their API to extend the functionality of an upcoming platform or tech solution.
Reduces the software misuse
People are likely to misuse free API. They will customize and modify these APIs and may make them ineffective. By licensing your API, you seal or reduce the chances of misuse. So, users will only interact with them for the intended purposes.
Cons
Opportunity to lose control over the users
Despite licensing your API, this arrangement impacts the control you can have over them. The licensor only regulates the users’ interaction but has no power to control it. This aspect opens room for malicious behavior that can have regrettable impacts on the API provider.
Conclusion
In a word, the API licensing business model is a good option for tech solution owners. The model allows you to extend your solutions while earning revenue from them. Also, offering API licenses help users offer expanded functionality to their target customers.
Hence, the model is a win-win approach for both parties. However, it poses a challenge in controlling API usage.
