The revenue-sharing model is a partnership between API providers and their customers, where revenue is generated from using APIs and shared between the two parties. This model offers a flexible pricing structure that aligns the interests of both parties and allows for dynamic pricing based on usage. Product managers must know that this model requires high transparency and trust between the API provider and their partners. They also need to understand how revenue sharing can affect their organisation’s bottom line and how to establish fair revenue-sharing agreements that benefit both parties. Generally, the revenue-sharing model is based on affiliate marketing mechanics:
- A developer (an affiliate) has access to an audience that is of interest to an API provider. They can expose a product or service the API provider offers to their end users.
- An API provider creates an offer for developers that defines a target action and the cost of action that will be paid to a developer once their customers perform that action. For instance, an associate commission from qualifying purchases is paid to developers. E.g. Amazon
- A developer integrates the offer into their service.
- Consumers interact with the service and commit the target action.
- By the end of the billing cycle, the developer gets paid depending on the volume of target actions their audience generates.
This sequence is demonstrated below:
There are two business models - a fixed and a variable cost of the target action. There’s a variety of target actions (click or another more specific action), so we will call CPX for short (cost per X).
Revenue sharing can also occur when API providers open their APIs so their partners can build apps, charging a commission from their developers.
Industry presence and use-cases
The revenue-sharing API business model has gained popularity because it allows API providers to generate revenue from their APIs without developing and marketing their applications. Additionally, it incentivises developers to build applications on top of the APIs by sharing the revenue generated, leading to a mutually beneficial partnership between API providers and developers. There are a few examples:
A developer builds a storefront for something listed on a marketplace (the marketplace is the API provider) and gets paid if something is sold. For travel tech, it’s common to use APIs and SDKs to fuel affiliate developer programs. For example, booking.com uses APIs and widgets to enable its affiliate developers to create apps that drive the volume of bookings. The affiliate developers get paid for each eligible booking made through their apps based on the type of booking, location and the monetary volume of bookings.
Ad networks that provide SDKs to their partners (Admitad and similar). The most common example could be an SDK to show mobile ads in native applications.