As direct API monetization is still a newer concept in some industries, we often consult with customers who are releasing an API-based product with no direct competition. This can make it extremely difficult to set an initial price.
On the one hand, companies fear pricing too high and risking customer adoption by pricing themselves out of the market or risking cannibalization of existing revenue by creating an incentive for existing customers to migrate away from legacy products. Conversely though, the risk of pricing the new offering too low and leaving money on the table for a high-value product is very real.
But you already knew all that, right? So… how can companies balance the risk and opportunity in pricing a new offering?
One solution is a concept borrowed from selling advertisements in the media industry known as value-testing.
In media, before the value of air-time in specific slots and with specific audiences was well known, media broadcasters and advertisers would partner together to establish the value of advertising at a given time.
Under this arrangement, the advertiser would agree to share the sales conversions attributed back to the advertising in an effort to firmly quantify the value of the advertisement. In exchange for the full transparency, the broadcaster would guarantee that the charges would be only a fraction of the value delivered (they might also agree to an ongoing discount for a set period of time in exchange for the partnership). This set up a motivation for transparency between parties and allowed the broadcaster to more effectively sell airtime to future advertisers with strong evidence proving the value of the airtime.
As it turns out, this method translates nearly directly to most new API productization initiatives where the value of an API-based product can be estimated but not proven. However, if you choose to launch your product with a partner (a process we highly recommend) who is willing to share the value of their integration, you gain first-hand knowledge of the value delivered, which you can use to establish your pricing model as well as your marketing message.
To ensure you build a strong value proposition for your first customer and partner, these are the key areas we recommend you consider offering them in exchange for providing transparency into the value your solution delivers:
- The partner will receive a fixed discount (which you must negotiate) off of your final market pricing. This discount generally lasts at least a year, and possibly multiple years in an enterprise to enterprise partnership scenario. In a similar vein, you might offer them the ability to use the solution at no cost for a short period of time, though this generally offers less certainty for your partner than a fixed discount as they are more likely to be interested in long-term cost viability versus a short-term promotional price.
- Alternatively, you might negotiate that the partner will pay a “not to exceed” price of <x>, where x is a price you are confident is below the market rate for what you will offer and your partner is confident is less than the price that they can build the solution on their own. Also here, this not-to-exceed price should have a fixed term to avoid eroding your margins permanently.
- You commit that the partner will get a strong level of influence into the roadmap & features of the first product (be careful not to over-commit here to avoid building a product that does not have broad market appeal)
We’ve seen this method successfully employed by a number of enterprises launching their first offering and hope that it is helpful in establishing your pricing as well.