As direct API monetization is still a newer concept in some industries, we often consult with customers 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, the risk of pricing the new offering too low and leaving money on the table for a high-value product is genuine.
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: value-testing.
In media, before the value of air-time in specific slots and with particular audiences was well known, media broadcasters and advertisers would partner together to establish the value of advertising at a given time.
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. In that case, you gain first-hand knowledge of the value delivered, which you can use to establish your pricing model and 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 in exchange for providing transparency into the value your solution delivers:
- The partner will receive a fixed discount (which you must negotiate) from your final market pricing. This discount generally lasts at least a year and possibly multiple years in an enterprise-to-enterprise partnership scenario. Similarly, you might offer them the ability to use the solution at no cost for a short period. However, this generally provides 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. Your partner is satisfied, but it is less than the price that they can build the solution on their own. Also, this not-to-exceed price should have a fixed term to avoid permanently eroding your margins.
- 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 several enterprises launching their first offering and hope it helps establish your pricing as well.
