Factors Affecting API Monetization Strategy

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Faezeh Pourbarzegar

FACTORS AFFECTING API MONETIZATION STRATEGY

Master of Science Thesis Faculty of Engineering and Natural Science

February 2021

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ABSTRACT

Faezeh Pourbarzegar: Factors Affecting API Monetization Strategy Master of Science Thesis

Tampere University

Degree Program in Industrial Engineering and Management, MSc (Tech) Examiners: Prof. Marko Seppänen and Prof. Nina Helander

February 2021

Nowadays, businesses tend to benefit from technology and use it to interact better with their customers, improve their internal processes, and take advantage of it. Besides, exposing the value of their business asset also become very trending. APIs are at the center of these changes.

Plus, APIs are able to add new revenue streams and change the whole business model, which is a considerable step toward digital transformation. APIs can change the whole business model and add new revenue streams as they can provide value to their customers. Understanding APIs and how they can add value to businesses and the process to do so is essential.

This dissertation aims to study the principal factors that affect the API monetization strategy besides recognizing how these affecting factors play their role and how they influence each other and the whole intention as a system. The problem statement relies on investigating the root causes of affective elements and examining the API monetization strategy as a system to see how the system and its components are running.

The thesis adopts a methodological literature review about critical concepts like API definition, the different kinds of it, the value chain and how they perform in the ecosystem, business model, API revenue model. Moreover, a theoretical framework is provided by applying two methods from the system thinking approach: cause and effect diagram and causal loop diagram. Furthermore, in order to conduct the research, two interviews were accomplished. The framework comprises the outcomes of these two interviews.

This study identified seven cause and root causes: (1) strategic planning as the primary cause and its root causes are value proposition and need identification, (2) market segmentation as the primary cause and two root causes as business partners and developers, (3) API payment method, (4) maturity level in digital transformation, (5) customer dominant logic, (6) co-innovation and co-value creation, and (7) API management-service bundling strategy. Furthermore, a system thinking analysis with the causal loop diagram is provided that finds the API monetization strategy as a system and illustrates how this system is performing and how different component of this system is affecting the whole system.

Key findings shed light on the digital transformation journey and give insight into the pre-req- uisites to earn money with a business’s digital assets. This study also straightens out the API monetization process, which is nearly less investigated in academic papers. Further, the concepts discussed in this thesis present the main aspects of APIs even when the purpose is not about monetizing them. The gathered theories and the findings in this thesis can be relevant when moving toward cloud, integration, and digital transformation with APIs.

Key words: API, Application programming interface, API monetization, System thinking, Cause and effect diagram, Causal loop diagram, Digital transformation, Digital business.

The originality of this thesis has been checked using the Turnitin Originality Check service.

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PREFACE

This thesis presents my work and research about API monetization. I became interested in this topic because it was precisely compatible with my major, which is business and technology. When I was doing my bachelor’s in industrial engineering, I realized that everything has a business side and how the business strategies are affecting our everyday life, so I got interested in this topic. Now, I start and end my master’s degree in the same topic I was curious about.

In truth, I could not achieve my current success without my dearest managers’ support, Auli Peltola, who trusted in me and gave this opportunity to me and Sanna Mattila for all help, support and help and patient. My gratitude also goes to my examiners, Professor Marko Seppänen who guided me during my thesis, and I wish to thank him for his patience during this time and Professor Nina Helander for examination.

Finally, a special thanks to my lovely mom, my dad, and my two brothers, Pouria and Meysam, for their long-distance support, video calls, and for having my back during the pandemic and quarantine, as always.

Tampere, 8 February 2021

Faezeh Pourbarzegar

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LIST OF FIGURES

API functionality process. ... 5

API different types by degree of visibility and access. ... 6

Web API’s growth since 2005 untill 2018. ... 12

Digital or software ecosystem or API value chain. ... 14

API value chain and the main players. ... 14

Simplified API digital value chain and the ecosystem. ... 15

Extented API digital value chain with two APIs. ... 15

API value network creation... 16

Business model (Osterwalder & Pigneur, 2010). ... 17

Digital key component from technical point of view. ... 18

Digital business model (Uwe et al., 2017) ... 18

Revenue model for APIs. ... 20

Revenue model for APIs, the developers pay category. ... 21

Indirect revenue model. ... 23

New product development process for monetizing (Booz et al., 1982). ... 25

Digital transformation level with a focus of APIs (Zulian & Bouza, 2019). ... 27

Cause and effect diagram (Ishikawa, 1943). ... 29

Example of a causal loop diagram for the population system. ... 32

Steps for draw and designing a causal loop diagram for the population system. ... 32

Steps for draw and designing a causal loop diagram for the population system. ... 33

Observed behavior pattern and reference behavior pattern of pollution example. ... 34

Causal loop diagram for pollution example. ... 34

Cause and effect diagram for API monetization strategy from literature review. ... 36

Causal loop diagram for API monetization as a system from literature review. ... 40

Research process. ... 45

Result progressing guideline. ... 53

Customer-dominant logic (Heinonen, et al., 2010). ... 56

Final analysis of cause-and-effect diagram of API monetization strategy as a consulting service. ... 61

Final analysis of causal loop diagram of API monetization strategy as a consulting service. ... 64

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LIST OF SYMBOLS AND ABBREVIATIONS

API Application programing interfaces

B2D Business to developers

RBP Reference behavior pattern

OBP Observed behavior pattern

DT Digital transformation

CLD Causal loop diagram

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1. INTRODUCTION

1.1 Background

How big companies survive and achieve competitive benefits? What do great vehicle companies, logistic companies, or an elevator producer, etc, have in common? All these companies benefit from the potential of digitization (Williams et al., 2018). To increase customers’ interest, companies face stiffer competition due to globalization (Westerman et al., 2011) and are willing to go digital before other competitors (Sayabek et al., 2020).

Digital transformation is a broad topic, and it causes many forces. Digital transformation impacts all areas of society, especially economies (Sayabek et al., 2020). There are many definitions of digital transformation but to keep it short it can be said that digital transformation is the integration of digital technologies and business processes in a digital economy (Liu et al., 2011).

The most important aspect of digital transformation is that businesses can use technology to interact in a better way with their customers and how businesses use technology for improving their internal processes. So, from a business point of view, digital transformation has two important parts, first is the external aspect which is about customer-facing and secondly is about the internal aspect (Liu et al., 2011). It means that digital transformation is the integration of digital technology within all fields of business that radically it is changing how businesses operate and deliver value to customers.

While talking about adding value to the customers under the influence of the digital transformation, it is worth to have wider attention on the value chain and the business ecosystem. According to Porter (1985), the value chain is a model of the activities that are related together like a chain that an organization takes to produce a valuable product or service. On the other side, the ecosystem enables organizations to provide new value that the organizations could not create by themselves (Adner, 2006)

APIs are at the center of this digital transformation and this value chain; it can help businesses to do more with less. Application programming interfaces (API) allow applications and software to connect. In other words, an API illustrates how to connect a dataset or business a process with some sort of consumer application or another business process.

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APIs that are linked together can create digital value chains and networks across the Internet to proceed data in different forms. APIs can affect the whole businesses’

ecosystem and its value chain, internally and externally. Each business ecosystem has its digital platform. According to Paloviita (2018), “a digital ecosystem around API management formulates a digital platform, and the business ecosystem is designed around the digital platform.” APIs support developers and customers to concentrate on solving their problems very fast. This new way of developing digital platforms is based on the API economy, where value creation is monetizable.

Since APIs can create new values for the users, it is logical that they earn money by providing these values. Thus, API monetization is the process by which businesses create revenue from their API. Monetization allows API providers to move beyond their current business models, scale API programs, and make more possibilities of value creation for their customers, developers, and partners.

All in all, driving toward digital transformation becomes a necessity for businesses. APIs and especially open APIs are in the center of this transformation and can help companies develop their digitalization level plus earning money at this level. Thus, investigating this process and factors that affect this process might help businesses make a wise decision.

1.2 Objective of the Research

Technology, shifting workforce, competitiveness, and globalization are many other pressures that force organizations to change (Burnes, 2004). Moreover, according to Colombo et al. (2002), executing change within the organizations is challenging and difficult. Being good at changes means applying the right technology with the right strategy at the right time. In order to do so, having knowledge about it is essential but not enough. APIs can provide all these together by initiate new business models and create new value from existing users, customers, services, channels, etc.

In today’s competitive business world, knowledgeable companies are realizing a new channel to market through their APIs. APIs help the companies to expand their business beyond their physical location and they are enabling companies to grow beyond their enterprise boundaries to drive revenue. Therefore, it becomes essential to have a good understanding and having a clear pathway and strategy through API monetization.

To start the API strategy journey, knowing about the process and setting the goal is not enough, and more studies are required. Investigating the causes and root causes of a goal helps discover the bottlenecks in the process. Besides, it helps to prioritize

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additional research and analysis and leads to take the right action. Thus, the objective of the thesis is to study…

…what main factors are affecting the API monetization strategy?

To complete the main research’s objective, the following sub-questions are raised:

Q1: What skills and knowledge does a company need in order to start the API strategy process? What factors cause a good API monetization strategy?

Q2: How are the factors affecting the main goal?

Q3: What is the root cause of the affecting factors on API monetization strategy?

Q4: How are these factors affecting each other in API monetization strategy as a system?

To achieve the research’s objective, the thesis is divided into five chapters. The first chapter is about the motivation for this topic and an introductory and opening that recognizes the background and identifies the thesis’s objective and related research questions that have to be answered. Besides, the first chapter identified the thesis’s process.

The second chapter covers the previous knowledge about different aspects of the topic and communicates a comprehensive literature review. It is essential to know APIs in- depth, their definition, what benefits they might bring, how APIs evolve, and the different types of APIs, what monetization with APIs mean, etc. These are discussed in chapter two. At the end of this chapter, the theoretical frameworks of the thesis are presented.

In the third chapter, the research method and how the research analysis will develop is explained; besides, the research process in a timeline is illustrated. Furthermore, the methodology of data and information gathering are extensively described.

Chapter four is about the results as well as the two interviews. Firstly, it explains the interviewees and a brief background about them. Next, it discussed the principal outcome of the interviews in depth. At the end of the fourth chapter, the research's new framework is presented and debated again based on the interviewees' comments and feedback and all the gathered data.

The last chapter includes a conclusion for the thesis as well as the limitation o the study and gives ideas about future research.

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2. THEORETICAL BACKGROUND

2.1 API Definition

API or application programming interfaces are a set of programming instructions that goes beyond the IT sector and tech circles they are becoming a strong business tool.

Thus, it is not just a technical concern but a business concern as well. APIs have a very notable impact on our daily lives whenever we recognize it or not. Nowadays IT has become a core competitive advantage for companies to be fast in innovation. Thus, companies are thinking about how they can run and build IT to come up with new digital services and gain competencies. This aim drives to advanced software architecture criteria like APIs.

It enables companies to do with less. From a business point of view, they connect business processes, content, data, services to all the participants in the business ecosystem like channels, partners, internal teams, end-users, customers, developers in an accessible and safe way. They are mostly used to expose data or services that can be used by other applications. In other words, APIs have the power to change the way businesses deliver value to their customers in a way that makes a different customer experience.

According to Proffitt (2013), an API is a set of obligations that connects two software or applications. In other words, an API acts as an interface for software that represents the agreement for applications to communicate without user interaction across a network.

APIs can describe the software element’s agreement regarding the protocol, data format, and two computer applications (Brajesh, 2017). To put it simply, APIs are a set of protocols that dictate how to software or application can talk and communicate.

An API provides a structure for developing services that can be used over HTTP by a broad range of consumers operating on different platforms, such as browsers, iPhone, iPad, smartphones, kiosks, connected cars, and so on (De, 2017). API can be used for locating a place on a map like what Google maps do, APIs for Facebook is being used for sharing content or gaming, and some APIs can share a product's information like what Amazon does.

When an API is open in a business ecosystem, developers can use these APIs to design creative and innovative apps that can present an enriching and upgrade user experience.

To give an instance, developers can use APIs from various restaurants and create an

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app that can compare restaurants based on customers’ preferences such as price, quality of food. In this example, this app is creating value for the restaurants while introducing it to customers, it is creating value for the end-user, it might even create value for some food delivery companies, etc. So, APIs are helping the whole business ecosystem to improve the user experience.

When a customer books a table in a restaurant online from a food application or portal with her/his credit card, the food application sends her/his booking information to the restaurant’s reservation system to block the table. Beside it transfers the credit card data to a payment application. After that, the payment app communicates with a remote banking application to verify the credit card data and process the payment. If the whole process goes fine, then the table is reserved for the customer.

All in all, as can be seen in the figure below an API is the code that governs the amount of access for the server, so it is not the server or the database itself.

API functionality process.

So, APIs works like a funnel for a business’s data and service over its business ecosystem to partners, customers, end-users, and developers.

2.2 API Classification

Generally, as can be seen in the figure below, APIs can be classified into two groups first, private APIs, and second public APIs. As can be understood by their names, public APIs are open to everyone, but private APIs are not. On the other hand, private APIs are shared in the B2B environment and for the partners which in this case they also have called partner APIs.

Private APIs can be also used just for internal use of the organization, for example, to integrate different units with each other and make the process more efficient, etc in this case these APIs are called internal APIs. Internal APIs can also be used by internal developers for creating mobile apps for the internal use of the organization. According to Brail (2011), there was a misunderstanding of APIs that they have to be public to be

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valuable. As we are explained further both types of API can add value to an organization, plus private APIs have a transformational impact on businesses.

API different types by degree of visibility and access.

1. Internal APIs

Internal APIs are used for internal application integration and B2E apps. This means internal APIs are able to break down the company’s silos and decrease duplicate processing of data and information across department. Besides, according to Bradbury (2016) internal APIs are the elementary units for bulding microservices architecture.

Company’s who start their API journey with Internal APIs approach have the chance to recognize difficulties and challenges related with APIs, but the API provider is the only one responsible of failures.

In this approach, less resources are needed for the operations comparing to other approaches. An important aspect of creating APIs is that providers have to make sure their API are easy to approach (De, 2017), thus, API providers have to try to buils high quality and property API documantations and give developers the support they need so they can recognize the opportunities produced by API.

2. Partner APIs

Partner API is also grouped in private APIs and is created to operate more collaboratively with the business partners in their business ecosystem in order to create trust and in this way, they can serve their partners 24/7 (Boyd, 2015). Technically partner APIs are alike public APIs, except they attribute controlled access, usually managed within a third-party

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(Stoplightweb, 2020). In this approach, more resources are needed comparing to internal APIs, because other business partners want to use them. Partner APIs are often designed for a specific purpose like giving access to a paid-for service etc.

3. Public APIs

Public API interfaces are created to be available through a broader developer association for making web and mobile applications. Developers community, both those inside the organization and outside developers can reach public APIs to create useful apps. When an organization opens its APIs to wider viewers of app developers, public APIs make the opportunity to give the chance to itself to find more creative ways to add value to its core business by innovation. Developers are able to create useful apps using public APIs and with the help of their creative and innovative mindset.

Since public APIs works like an entrance to an organization’s assets, thus there is an opportunity for the organization to add new business value without any direct investment and besides, they decrease development cost as well. According to De (2017), the success of a public API to cause these benefits is highly dependent on the public APIs talent and ability to bring developers and help them build great apps. A great sketched and designed, great documented, clear, and intuitive interface encourages developers to instantly know the functionality of an API (De, 2017).

More accurately, API’s classification can be discussed in the table below. The given table review the APIs based on their availability for use, support publicly available, monetization option, and being open data or not (Niinioja & Moilanen, 2018).

API’s classifications (Niinioja & Moilanen, 2018).

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This table’s critical point is to know that an open API is different from an open data API.

Besides, it is also worth noting that an internal API will not add a new revenue stream to the company.

2.3 Common Business Drivers for APIs

This subchapter shows the reasons why businesses got interested in APIs and what are the common causes that motivate companies to build an API (Glickenhouse & Kim, 2016). Besides, businesses will also understand whether they might benefit from API or not.

1. Need for a mobile application

When organizations recognize they require a mobile application, based on the purpose of the mobile app they might need APIs. This app can be designed for internal use or outside of the company for their business partners or their customers.

2. Request from customer’s and partner’s side

Seldom advanced clients or partners ask if you have an API to support build a technical integration more straightforward. There are many real case examples, such as Silverpop which is an email marketing firm. This company discovered that when big companies wanted to use their product, they required strong integration of email marketing abilities, in this case, the clear solution was APIs.

3. Regulation

Sometimes the reason behind developing APIs are some regulations. For example, in Europe and some other parts of the world, a strong motivation for API adoption has come from new regulatory initiatives like open banking and PSD2. In this case, APIs present a broad method to open banking.

4. Beneficial data to be exposed

It is said that nowadays data is the new oil. Most of the companies have treasure troves of data that can be used more beneficially. It is said that nowadays data is the new oil.

Most of the companies have treasure troves of data that can be used more beneficially.

The Metropolitan Transit Authority in the USA had some data and information regarding routes, schedules, and some other statues of the subway. They open this inforamtion for the public via APIs in Gooogle Transit so in that way developers could benefit from this information and create value for customers, etc.

5. Competition has APIs

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At times, in some industries, some competitors use technology to differentiate themselves and make a competitive advantage and, in this way, they challenge the traditional companies. For example, in the financial sector fintech firms challenge banks.

Therefore, banks have to react immediately and harmonize themselves in the business ecosystem by using APIs.

6. New revenue stream

As said before, APIs present digital assets and services that are of true value and benefit to end-users and partners. As companies are providing value via their API to so it makes sense to monetize with their services and data.

There are some other factors that force companies to create APIs, for example, like, the company wants to scale integration with their partners and customers, or making some potential partners as their business partner, etc.

2.4 APIs’ Business Benefits

After introducing APIs, it is important to study what are the benefits of APIs for businesses and public sectors. In this subchapter, the benefits of API in businesses are pointed out. APIs have many benefits from both the technical and business side. In this paper, the focus is on the business side of APIs. All in all, the main APIs benefit from a business point of view shown in the table below.

General API business benefits (Boyd, 2015: RedHat, 2021).

Benefits Description Unlocking the

value of your data

APIs are able to give access and open the data and resources while considering security and control over your data and resources.

Easy control over data

Get more value from existing and legacy data sources. APIs allow business to more easily extract data from older servers and databases by hiding the complexity of the legacy solution.

Integration with compliance

APIs decrease the requirement for building an individual solution for each consumer, thus it brings flexibility for the provider and user.

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New revenue streams

By opening APIs to business partners or the public, it can create new values for them to build new revenue streams or increase the current ones.

Business Growth

By opening APIs, the possibility of co-innovation and open innovation would increase. Besides, opening APIs causes collaboration and external development, and they would increase efficiency.

APIs’ benefits can be more detailed, depending on their degree of availability. Some of the private, partner and public APIs' main advantages are discussed in the coming sub- chapters.

I. Internal APIs’ Business Benefits:

According to Boyd (2015), there are some specific business benefits of internal APIs like (1) a good start for API strategy, internal APIs can initiate the journey. (2) modernize organization, by using internal APIs in order to manage the internal processes, companies oftentimes find new opportunities to restructure and improve their business (3) improving business intelligence analytics (4) improve the internal communication and collaboration and the same way the productivity, according to Mckinsey GI, they have estimate that 20-25% of increase in produtivity cause by imroving the internal communication, (5) managing supply chain.

II. Partner APIs’ Business Benefits:

Partner APIs have also many benefits (Boyd, 2015). These kinds of APIs are a very good basic principle for small businesses because in these organizations the main productivity comes from the Partner APIs and not private APIs. (1) Partner APIs can create trust with the business ecosystem’s members like suppliers and partners. When opening some sort of data and information to business partners, they can manage their process and business far better.

(2) Partner APIs support scale partner onboarding. When an organization works with new business partners or agents, this can make a lot of extra regulatory work. This process is usually repeated with every new partner or agent and partner APIs can speed up this process. (3) Opportunity for entering a new customer market. (4) Developing the external relationship. As can be understood from the partner API’s title, they are able to improve and develop the team’s integration with external business partners in a more

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secure and constant way. (5) Recognize commercial API possibilities, watching a partner’s use of the organization’s business information can improve recognize new commercial possibilities.

III. Open APIs’ Business Benefits:

While creating public APIs after the success of partner APIs the benefit graph increase sharply. According to Boyd (2015), some of the open APIs are (1) accelerating the automation of the process; by opening APIs to the business ecosystem members, many workflows can be done faster. (2) Improving customer experience; one of the biggest challenges for organizations is the specific features of each customer segmentation.

APIs make a new perspective of both providing general products and services and customizing the experience by using contextual and user information to enhance commitment.

(3) Open APIs help to reduce costs. Entering a new market has some cost and open APIs can help to decrease these costs by leveraging other business ecosystem’s members who already have access to that market and customers. Another example of cost reduction is the telecommunications power that enables reseller markets to promote other related products. (4) Open APIs integrate with compliance, open APIs decrease the requirement for building an individual solution for each consumer, thus it brings flexibility for the provider and user.

(5) Open APIs give the global ability to suppliers, channels, markets. (6) Open APIs increase customer lifetime value, when on open API is involved in a developer or customer’s value chain, they will continue as loyal customers for a long time and are satisfied with their experience

2.5 APIs’ History

Investigating the history of API allows for tracking the development and improvement of APIs over time, which provides crucial insights. This knowledge and wisdom might be necessary for managing the business.

API concept has been since the start of computing. Nevertheless, in the past years, it has grown significantly not in the number of APIs but additionally in sophistication.

Nowadays they play very different roles like being the main product or promoting the main product, they are extensible, monetized etc. The following presentation is a brief story about APIs through the years (Collins and Sick, 2015).

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API History.

Year Description

1960–1980 Primary inter-operable allows the initial programmatic transfers of data and information. Easy interconnect within network rules and protocols. Meetings set to transfer information and data.

1980–1990 Building interfaces by function and reasoning. Data and information are distributed in significant methods.

Communication over a network is remote.

1990–2000 Modern platforms increase transactions within middleware.

Now, interfaces are described as services

2000–today Businesses create APIs to allow and expedite innovative service improvement and offerings. API layers control the OSS/BSS of integration.

Web API’s growth since 2005 until 2018.

The graph above presents a report of the APIs growth in recent years. According to the programmable web reported by Santos (2015), the total number of new APIs added since 2015 is 8076. The average number of added APIs in each year is 2019.

The question of who has invented APIs is a fundamental question for the technology industry. The answer to this question is quite blurry, but according to Bloch (2018), the

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conceptual structures toward the APIs start with the work of Maurice Wilkes, David Wheeler, and Stanley Gill. They are known as the godfather of software and programming. Their excellent work in the 40s and 50s is the foundation and groundwork of what happened in the 70s and 80s, known as the software revolution.

They are known as the godfather of software and programming. Their excellent work in the 40s and 50s is the foundation and groundwork of what happened in the 70s and 80s.

The software revolution further supported personal computing development and most of the personal devices that people enjoy today.

2.6 API’s Value Chain and Ecosystem

While talking about monetizing with any product, studying the customer value chain will help understand value creation for customers. The value chain is a theory to explain and show the whole activities and tasks to deliver value like a product or service from an idea into the various stages of production, shipping to consumers, and final placement after use. This concept was introduced by Porter (1985). So, this means when a product or service is moving from one player in the chain to another, in some places they are creating value (Hellin and Meijer, 2006).

A digital value chain is a series of transformation activities for example like a production line of a manufactory but spread over different businesses and industries so they can create value by participating in the chain. Each company and business are applied to a particular responsibility and has their position in the chain. According to Paloviita (2018), in the API economy, a digital value chain is a software-based chain.

A value chain is made of activities, each activity gets information and input from the previous process. So, the value-adding activities are connected to each other to build the value chain. Thus, in the API economy, the digital value chain is an automatic chain of APIs that builds a set of activities with data and information Paloviita (2018).

Nowadays, most of the software is operating in a software ecosystem, and software results, products, and services have participated over a shared technological platform within business actors. In this context, a software platform API is an interface of the software and the actors. A business wants to open some of its digital assets, for other business partners to use it. API provider has the idea to create an API for users to use it, so the provider publishes its API for customers to reach it. After that, the API customer (developers) builds a creative application, and the end-user finds the application and installs it to use it. This chain is shown in the figure below. According to Knauss et al.

(2016), this chain is also called a digital or software ecosystem.

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Digital or software ecosystem or API value chain.

A simplified picture of the value chain can be seen in the figure below. It includes backend systems and data and an API provider, the API itself, and the person who uses the API, or it can be said the developer. The API user is using the API to create a value from it.

This value can be an application for some other users who can benefit from it.

API value chain and the main players.

To have a successful and sustainable digital ecosystem, a constant stream of value must be produced and delivered to its actors, and the end-user (Knauss et al., 2016). The dashed line in Figure 6 is showing the flow of the value through the value chain. The value grows within the chain from the left-hand side to right.

As shown in the figure below, the value provided from the business side and the assets they have to the users and finally to the customers. This flow is shown with the dashed line from left to right. The value grows within the chain from the left-hand side to the right.

On the other side, the usage flow or the need is from right to left, and it is demonstrated with arrows.

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Simplified API digital value chain and the ecosystem.

The added value in the chain is not always free of charge and the value providing actor can charge the users for the value that is providing. The way that the participants can pay for their use depends on the business model that is applied in the ecosystem (Paloviita, 2018). In some cases, besides applications, other APIs can also use this API.

This provides excellent adaptability to create new additions on top of the current digital value chain (Figure 7).

Extented API digital value chain with two APIs.

This chain can get very long, this happens because of the high usability of APIs (Paloviita, 2018). Following, in the basic and extended level of value chains, if the left side APIs are the same, then this specific API is creating a link and connection of value network. In figure X these links are shown with a cycle.

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API value network creation

This high usability of APIs allows multiple business models to show up in the close future (Paloviita, 2018). All in all, the principal objective of organizations is to provide value to its customers and due to the competitive strategy, which helps organizations to gain a sustainable competitive advantage again its rivals. Besides, a value chain provides the opportunity to investigate in each activity and process from the beginning process to the end process, and this helps to find new possibilities to add value for customers and end- user (Kumar, D. and Rajeev P., 2004).

2.7 Digital Business Model

Nowadays, digital transformation is affecting every industry, and business and digital business is becoming a very significant topic for most of the organizations. Nevertheless, there is a lack of connection and good communication between the business and the IT sector. A common language is needed to examine, investigate, and plan opportunities that enable businesses to benefit from the digitalization of business.

From a business point of view, the business model canvas is a good starting point to design and shape the way a company builds, delivers, and captures value. A business model is an effective description of the particular way in which the company creates added value for its clients and sustains itself. The objective of such a description is to represent the organization’s main trading and business logic. A business model also describes how the business succeeds in making the customers happy and satisfied in comparison to other businesses that are aiming for the same objective.

Business model canvas is one of the most popular and successful descriptions of a company’s core activities. This specific business model was used by Osterwalder and

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Pigneur (2010) and after that, this model has been used by many practitioners. As can be seen in the figure below, the business model canvas has nine main parts.

Business model (Osterwalder & Pigneur, 2010).

The business model canvas consists of nine components: (1) value proposition, (2) key activities, (3) key resources, (4) key partners, (5) customer relationships, (6) channels, (7) customer segments, (8) costs, and (9) revenue streams.

As can be seen in Figure 10, the business model can be divided into four parts and each part is going to address four main questions: what, how, who? The value proposition has to answer the question of what is the company's main value to be offered to the customers? Key activities, key partners, and key resources are grouped into the value creation group and they have to answer the question of how the company is going to do its mission.

The next group is called value delivery and customer segmentation, customer relationship and channels are included in this group. In the value delivery section, the company has to answer to the question of who the main target of their proposed value is. The last section is called value captured and includes the cost structure and the revenue stream part and this section is going to answer the question of how the company is going to offer value. All the different parts are related together, and they complete each other.

Focusing on the digital business model is quite challenging since there is a lack of a shared language between the business and IT section. Besides, while executing a digital strategy, organizations face difficulty and gap between using incremental innovation or

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disruptive innovation. To overcome this difficulty organizations, try at “innovating the adjacent possible” (McQuivey, 2013).

From the IT side, a similar and alike model is needed to design digital abilities. According to Uwe et al. (2017), a similar representation of a model from the IT point of view is based on the five key components (1) people, (2) business, (3) things, (4) data, (5) cloud (Figure 11). These components are digital key elements from a business viewpoint.

Digital key component from technical point of view.

Along these lines, the cloud converts to a service model and coherent environment for all other elements like people, businesses, and things to join together to interact and expand data in addition to use the digital services. The digital business model focus area is shown in the figure below. The value proposition in the digital area is more outcome driven. Digital technologies have increased their influence on the end-to-end customer journey.

Digital business model (Uwe et al., 2017)

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According to Uwe et al. (2017), the main goal of customer relationships is to increase and strengthen the connection digitally and put extra importance on this component. Due to the value co-creation within the organization and its customers, the customer relationship has become more important and it has become the main component to innovate. Prahalad and Ramaswamy (2004), define the value co-creation as a common value for the organization and the customer and enables customers to re-build the receiving service to change their circumstances.

It is also significant to point out that the main focus and concern of the digital paradigm is on the actual cooperation between the organization and the customers that is the customer relationship and the value co-creation components. The channels for an extensive customer relationship need the adoption of new digital channels to enter global markets and develop connections with customers. The next component of the digital business model is key activities. With the transform of value proposition and channels, etc, new activities are also needed. For example, in order to do so, for managing the new channels new analysis are needed to increase the value proposition.

Key activities are based on the key resources, thus a digital transformation in key resources or partners is also needed. A new type of communication requires a new revenue stream and pricing model as well. The digital paradigm is usually direct to cost optimization.

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2.8 API Revenue Model

In the API monetization concept, one of the important contents to invest in is API revenue models. According to Bednár et al. (2017), the revenue model is a framework that shows how revenue is generating and it works as a conceptual structure for profit-making, return of investment (ROI). Revenue model answers to two main questions; first, what is the value, to whom, who is going to pay for it, and how much, second, what is the source of the revenue or what source of revenue to pursue. The figure below presents a comprehensive picture of all possible revenue models for APIs.

Revenue model for APIs.

As can be seen in the figure below there are four main models for the API revenue model.

These four main categories are: (1) free, (2) developers pay, (3) developer gets paid, and (4) indirect. These four models were mainly used in early 2005 but due to technological evolution, these four core models have been developed by the time of 2013 (Kothalawala, A., 2018).

First is the free category and model which is the simplest API driven revenue model, and it enables the users and developers to use and reach APIs freely. Public and government sectors are mostly using this model, besides Facebook is also using this model. Since the focus is to monetize with APIs so this model is not the main focus in this research, but another question is why companies are using this option since there is no direct exchange of money. There are four main reasons: (a) forces adoption of APIs, (b) usually low and economical valued assets, (c) energies brand loyalty and (d) open different channels (Brajesh De, 2017).

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In other words, it can be the price of doing business like providing information on the products, advertising, and et cetera. Facebook provides APIs and other companies use these APIs to identify their users. Facebook does not charge any company for using these APIs, but it has business benefits for them for example Facebook can recognize usage models that can give added value. Users might use their Facebook login option since it is easy and convenient.

The second category is the developers’ pay. When developers (both individuals or other businesses who are benefiting from APIs) are using specific APIs and getting value and revenue of it, they might get charged. A very common example in this category is called

“credit check API”. In this case, the developer wants to ensure that their customers are creditworthy for the situation they are proceeding. This category has five different submodels as can be seen in figure 14. Pay as you go, tiered, freemium, unit-based, and transaction fee.

Revenue model for APIs, the developers pay category.

The first subcategory is very simple, the developer has to pay for what he or she has been used and there are no tiers or minimums for it. Habitually, this model is billed periodically. Besides, it may be required to present some sort of ability for the developers to try the API before purchasing it. Amazon’s web service is an example of this model.

The second model is called tiered. There might be multiple options for this model and each of them provides a different level of resource access. The developers will go for the one which fits their needs, and they will pay for that level of using the resources. This scenario is similar to old mobile phone plans which a person could choose to pay for a certain length minute per month. In this model, the tiers are mostly based on the number of API calls, but other determinants could also matter and be used. The lowes tier is free

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so in that way, the developers can try the APIs. After choosing the level of the tier, the developer will be billed for the selected level of the selected tier. The “vertical response”

is an example of that model. An example of this subcategory can be seen in Appendix A Figure 30 from Vertical Response website.

The third subcategory is Freemium. Features in this model are free but it gets priced with higher value featured. There are many examples in this like Dropbox. Dropbox has three levels for the provided services, the first level is free and is called “Dropbox Basic”, it gives 2 GB od space safe, reliable backup, access from everywhere and has a simple file sharing. The second level is called “Dropbox Pro” and for one month it provides limited amount of services. The third and last level is called “Dropbox Business” and it cost more for user per month and it gives unlimited services.

Unit based model, in this model, the payment depends on the amount of usage, for example, different API features or APIs have several values and are indicated several amounts of usage and the developer or the user can pre-buy several points which are like the tiers method or is billed by the amount of usage like the pays as you go method.

Google advords is an example of this submodel and can be seen in Apendix A Figure 31. The last subcategory in developrs pay is called transaction fee. It is a fixed or percentage of a transaction is paid to the provider or API provider an example in this method is paybal.

The third category is developers gets paid. This category is the other way of the previous category, it means that the developers get paid for their API usage. In this catgory the product provider wants to promote its product so she-he will pay the user like an API provider that provides a monetary incentice for a user or developer to leverage her/his web API. Typical scenarios in this category are revenue share, affilliate, refferal. It is like the case when someone wants to sell a product throught an agent.

In the revenue share model, the developer or the user which is using the product will get paid a share of the total revenue made from the buying coming through customer referrals. Examples for this model are car matching sales or travel matching sales as API users with hotels, airlanes, car dealers, etc.

The subcategory model is called affiliate. In this model, a partner involves in the advertisement or content to encourage possible customer traffic to the developers.

Based on the way that the end-user becomes engaged with the developers’

advertisement several payments could be applied and it has other sub-models like click per actions (CPA), cost per click (CPC). An example of revenue share could be the Expedia which is shown in Appendix A Figure 32.

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The next subcategory is called “referral”, this model in some papers is categorized in the affiliate model and it is also similar to it but paid in the case when the user purchases the object. Including a link to a book while reading an article is an example of this revenue model example; it means offering customers concentrated suggestions and recommendations related to purchasing history. Other examples in this model are streaming music services, insurance companies, or job placements.

The last category is called indirect and it is shown in Figure 14. In this model, the use of APIs is more in line with the business strategy and business model. For example, they help to increase the knowledge of a specific offering or value, or it might help to improve the internal use cases to decrease the time to market, customer retention, etc. As can be seen in the figure below, there are many indirect categories as; …

Indirect revenue model.

The content acquisition is the first category, and, in this submodel, the APIs allow the third party to use the content in order to attract the customers to the provider’s business.

Thus, the revenue stream might be through the monetization of the provider’s assets or through advertising. Some examples of this submodel could be youtube or twitter.

The next category is called content syndication, in this submodel, the APIs enable the third party or developers to share and spread the content. So, it can have various financial models between parties like freemium, free (marketing), subscription, etc.

Examples in this sub-model are twitter, NY Times, etc.

The internal use: this submodel is when the internal employees use the APIs to add value to their customers by creating a different experience and making a different facing capability like mobile applications or web commerce sites and so on. Another possibility of internal use of APIs is to make some sort of access easier and some integration systems.

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In this case, since only the APIs are used inside the company there is no direct revenue stream but there maybe chargeback accounting or billing. Examples in this submodel are Twitter again, Netflix, etc. Another internal use of APIs is non-consumer use of them.

They are used to improve productivity, meeting the business strategy requirements, etc.

Saas: B2B usage: this model allows companies (e.g your customers or the partners) to pay for enterprise licenses and access specific APIs available on a platform. In this case, customer value lays in the use of APIs so they are eager to use the APIs. For the API provider, it also brings value e.g the use of APIs brings customer retention. If the partner is using the APIs it can help both parties to improve and expand their relationship etc.

Saas: Business expansion: in this sub-model APIs are used to expand the business into new geographies or new demographics or even presenting and upselling new products/services to existing customers or increase awareness of business capabilities to potential clients.

API Monetization is an essential center for many businesses beginning API initiatives.

While talking about API monetization and different methods of it many other factors have to be taken into consideration for example Taxes, supplementary billing factors: value, response codes, payload size.

2.9 Monetization Process

A digital product as API can open and present some other digital assets and services for the customers like developers, end-user, etc. While they are providing value to the other actors in the business ecosystem, thus, it is reasonable to get paid and monetized for the proposed value. Hence, it is very important to point out the exchange value and also put emphasis on who is going to receive the value and pay for it. To do so, the business model is a powerful approach. In the previous sub-chapter, the API business model, and the API value chain/ ecosystem have been discussed.

Most of the time, the API monetization strategy and the API revenue model or the payment methods confuse each other. So, it is essential to explain and discuss both subjects. The API monetization process has to be investigated more since API can have different concepts and can play a different role in the ecosystem which might cause a different revenue model. Thus, in the coming sub-chapter, a definition of monetization itself is presented and then different concepts of API and API revenue model are investigated.

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To start to monetize with any product some pre-requested activities and steps are needed. To do so, a business plan or a business strategy is needed, but there is no standard rule for a business strategy (Holcomb et al., 2006). According to Booz et al.

(1982), there are six steps (1) new product strategy, (2) concept generation and screening, (3) business analysis or economic evaluation, (4) development, (5) test, and the last step is (6) commercialization and launch.

New product development process for monetizing (Booz et al., 1982).

The first step is to connect the new product development process to the company's purposes and concentrate on concept generation and guidelines for organizing experiment criteria. The organization has to know about its basics, to know its direction, its goal, and make an accurate decision. In this phase, internal analysis, interviews with employees, and external interviews with customers, business partners, etc come into play. At the end of this phase, the organization should have good enough information about their own situation, recognize the main unfulfilled need in the market, with a good view and infromattion of the business ecosystem.

The second step is to explore ideas that meet the company’s objectives, after gathering information now is the time to have a statement of what the organization is going to do?

What question is the organization aiming to solve and for who and how? In this phase, the organization should build the best scenario with its gathered information. The organization should have a clear understanding of its target market and customer segmentation. Besides, the company should know their product’s attribute for its specific customer segmentation. To generate and select the best scenario and concepts qualitative and quantitative methods can be used (Ristagno, 2016). Moreover, screening

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is a primary analysis to define which ideas are relevant and credit a more accurate analysis.

The third phase acts like a stage-gate and it will check the company’s capability to capture the opportunity and involves the quantitative analysis. It includes market research, financial factors, resources, etc. Developing a digital product is the fourth phase. Writing codes, creating the user experience by designers are some of the actions that are needed to be done. It is about to transform an idea into a verifiable work and demonstrable product. Testing is the fifth step and includes commercial measures required to confirm former market estimates.

The next step is launching the product. In this phase, the product should be available for the customers and then the organization should see how the market and the business ecosystem react. The idea is to get feedback and monitor the product and the experience and then try to improve the product again and again. In this step, is also recommended to put five to seven indicators to measure them and apply them for improvement (Ristagno, 2016

When monetizing with APIs as a product or in a package (a collection of API products) the business strategy or business plan is needed and then thinking about APIs attributes that might affect the process and then launching step and the technical matters (Brajesh De, 2017). The next stage is setting the best revenue model for the APIs and the technical operation to launch the API. The APIOps cycle method can be insightful at this level.

2.10 Digital Transformation

Why digital transformation is essential, and why there is a need for it? According to (Verhoef, et al., 2019), there are three main reasons for it; first, digital technology changes the way we live and forces companies to change digital. The second reason is because of digital competition and due to these new technologies’ competition is changing sharply. Thirdly, consumer behavior is shifting as a response to these technologies and the digital revolution.

Moreover, APIs are in the center of digital transformation. Frequently, businesses seek to digitally transform to be more competitive and promote new types of business models that require complex partnerships or new kinds of product distribution (Sayabek et al., 2020). The sign of digital transformation for organizations is to do business with customers, wherever the customers are, over different interaction types.

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Nowadays, everything that helps organizations do a business more digital, for example, creating a new customer experience, making and developing software ecosystems, and going to multi-cloud environments and environments, requires and involves APIs. It is essential to understand digital transformation and API usage. Diving straight into a useless app or making a new website and considering its digital transformation is not digital transformation and does not help monetize with API. It is not about any technical solution or a fancy AI solution, it is not about machine learning and super algorithm.

As APIs can help the digital transformation happen, but how this journey progresses?

What is essential about using APIs in order to earn money with them is to consider how we are using them? It is about changing the business to the new and brave and agile world. It is crucial to make sustainability and the right mindset an essential part of the business’s cultural backbone. All in all, it is about designing a new way of doing business and working, marketing, trading, and replacing the old methods and habits to a more meaningful with technology.

The figure below represents a coherence usage of APIs in different digital transformation hierarchy levels and the difference between them. (1) Digitization is the basic level of using APIs. Building tools, collecting data, using analogue methods, and digital devices’

cooperation make them more useful and digitally executable and create everything digitally available. At this level, API could be about accessibility, connectivity, and information data.

Digital transformation level with a focus of APIs (Zulian & Bouza, 2019).

(2) The second level is called digitalization. At this level, organizations have to think about what value does their API generates? How does the business want to do it? How

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do they want to implement it to affect the business’s workflow, service, or product? It is mostly about saving money. Some examples at this level might be automating the business processes, content management, etc.

(3) The third level is almost the last level of digital transformation. This level is all about the organization’s business model, hybridization, strategy and approach, monetization, and getting everyone in touch. What is trying to emphasize here is that this level depends highly on the previous two steps. In short, digital transformation has three levels while discerning the APIs’ role. Additionally, it is vital to consider the company’s status and the situation in digital transformation before deciding about APIs’ strategy (Zulian & Bouza, 2019).

2.11 Cause and Efffect Diagram

When organizations set goals to reach, sometimes some variations cause the process and influence the desired destination. What is the reason for these variations? The cause-and-effect diagram aids to summerize the causes of variations in a circle. The cause-and-effect diagram or Ishikawa diagrams, also known as the fishbone diagram is a visual illustration and representation which supports the thinking processing and set of opinions, conceptions, ideas to be expressed, and showed in a case of the final outcome and the description of their causes (Lapadusi, 2017). This diagram is a technique to determine and analyze or examine all the affecting factors in recognizing the features of work output quality (San, Tjitro, & Santoso, 2003).

The fishbone diagram can be used in many activities and objectives. This diagram can help to recognize, classify, and present likely causes of a specific issue or quality characteristic. It can show the relation and connection between an outcome and all the circumstances and factors that affect the outcome (Dashpande, 2008).

This diagram is called the “Ishikawa diagram” because Dr. Kaoru Ishikawa, a Japanese engineer, invented it (1943). The diagram is also referred to as the fishbone diagram because the figure and design of the diagram look like the skeleton of a fish.

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Cause and effect diagram (Ishikawa, 1943).

A cause is a thing, principle, aim, movement, or person that makes an action, phenomenon, or condition to appear. The root cause is the most profound centrally cause of positive or negative signs within any process that, if ended, would eliminate, reduce the signs radically (Preuss, 2003). It is noticeable to mention that the successes, together with the failures, have root causes.

By analyzing the roots of success, the analyzer might find some strategies that can be used to fix, develop, and improve the process and the outcome. While dealing with problems, some symptoms might be found; they bring attention to the problem. Root cause means that it is needed to dig deep to find the initial cause because they regularly are not direct and apparent causes, and on the other side, they are in the third, fourth, or fifth layer of the process or the system.

The cause-and-effect diagram can summarize the outcomes of a brainstorming sitting to help determine the root causes of a specified undesirable outcome or desirable outcome.

It helps to identify root causes and guarantees a common and general knowledge of the causes. By analyzing and studying the causes, a healing and corrective action plan can be taken.

The next important concept about cause-and-effect diagram is identifying when a cause is a root cause? In complex systems, this issue is challenging to determine which cause is a contributing cause and which one is a root cause. Ammerman (1998) has recognized three principles to discover if each recognized cause is a root cause or a contributing cause. The next concepts will provide a direction to identify root causes or contribution causes. In order to do so, three questions have to be answered. According to Uksw (2016), these three questions are:

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I. “Would the outcome or the problem have happened if the cause had not been present?” If the answer is no, then it is a root cause. If the answer is yes, then it is a contributing cause.

II. “Will the outcome or the problem reoccur due to the same cause if the cause is fixed or dissolved?” If the answer is no, then it is a root cause. If the answer is yes, then it is a contributing cause.

III. “Will correction or dissolution of the cause lead to similar events?” If the answer is no, then it is a root cause. If the answer is yes, then it is a contributing cause.

Why cause and effect analysis become essential? Firstly, it reduces unsupported beliefs, discrimination, and organizational myth. Secondly, it decreases bad and wrong starts, covers signs, wastes limited resources, and thirdly transforms data to information, knowledge, intelligence, and last but not least, it raises data‐based decisions (Preuss, 2003; CityProcessManagement, 2008).

The fields of the fishbone diagram are when the focus is on one specific outcome or issue, the focus is on the causes not on the signs or symptoms, arrange and represent graphically the numerous theories about the root causes of an outcome or problem may be, illustrates the relation of different factors impacting an outcome or problem, also shows the link between different variables and causes, and gives further penetration toward process behaviors.

2.12 System Thinking and Causal Loop Diagram (CLD)

In the last 60 years, system thinking has been evolved and is frequently having more impact on science (Haraldsson, 2004). System thinking works like a microscope that reflects a comprehensive, universal view of the system connectivity by modeling and shows the whole system behavior (Richmond, 1994). By applying this method, researchers can describe and illustrate system behavior (Meadows, 2008).

In the human environment and nature, everything is connected with some interactions.

According to Rosnay (1979), a system is a web of various variables correlated and connected within causal relationships and represents some behavior and function, which can solely be identified by observation as a whole. System thinking works as a language for talking about interdependent and complicated results managers challenge every day.

So, system thinking helps researchers to understand the relation of different elements of a complicated problem. In order to do so, the causal loop diagram can be used to develop a qualitative theoretical model.

Factors Affecting API Monetization Strategy

Faezeh Pourbarzegar