What you need to know before building an API for your product
First of all, this is a non-technical approach to API’s, so if you want in-depth tech insights, I recommend you get in touch with Hitch — the API experts.
However, if you’re looking to get insight in why you should use API’s to strengthen and grow your business, and what metrics you should be aware of when taking advantage of an application programming interface (API), you’ve come to the right place.
A whole or core product?
To really understand how your company can utilize API’s we need to understand the concept of the core product and what many call the whole product.
Famous marketer Regis Mckenna that helped launch the first microprocessor for Intel and the first computer for Apple said it like this:
(…) A whole product is a generic product augmented by everything that is needed for the customer to have a compelling reason to buy.
So for example a computer is a core product, and the mouse, the software, the screen and any other necessity being part of the whole product.
It’s very important to understand these definitions, because having insight here will help you know how to approach your customers, potential partners and competitors.
Hacking partnership agreements
As your startup grow, you’ll probably be looking to form partnership agreements with other complementary products and companies.
This can be super valuable, but often takes a lot of time and effort, in other words, it’s often very expensive.
So to hack this time-demanding and expensive process of partnering up with other companies, and API can provide this kind of partnership without all the hassle, often at a fraction of the cost.
The thing with building or using an API is that it doesn’t matter if you consider yourself as a part of a whole or a core product. If you’re able to see through your customers (or potential customers) eyes, you’ll probably discover how your product can transmit value both as an integration into a bigger product, or as an integration to enrich smaller products.
The cost of integration
Integrating your product with other businesses through an API offers many possibilities, but also new costs related to integration.
Development costs: very high at first, but becomes zero when the API is launched.
Maintenance costs: high after the launch because of bugs, and for every iteration you do you’ll have peaks with your maintenance costs, as well as routinely maintaining the API itself.
Support costs: This will depend on how well your API is performing, but the more users you have, the bigger the support cost will be, so this is the really expensive one.
And remember, these costs need comes with each separate integration.
So, is your API worth the effort?
In other words, we need to understand the life time value (LTV) of our integration.
First you need to measure where your customers come from, then you need to identify the new customers that are using one of your integrations within a specific timeframe and estimate the lifetime value (LTV) of those customers.
Then, when you know the LTV of each particular integration, you can easily know which is giving you growth, and which that are only causing costs to rise.
The last thing you need to figure out to see if your integration is worth doing is the payback period (PBP), i.e if your integration or your API is earning you more money than what you’re spending on it.
To find this number you have to take all of your costs (as mentioned above) and divide it by your monthly recurring revenue (MRR), and again, you have to do this for each integration.
Getting to the good stuff — growth!
To be clear, with growth we don’t mean a profitable company, but a business that is multiplying their growth month over month, or year over year. It can even be unprofitable.
So what is growth for an integration?
- In most companies it’s considered growth if the lifetime value of the integration is three times higher than the cost of integration. If not you’re loosing money. Some experts say that 4 times higher LTV than costs is the number to aim at.
- And not enough with with a high LTV, it also considered necessary to have a payback period of less than 12 months. If not, you’re also loosing money.
So remember, if you think about how your company is used in a broader context, and not only how its used as intended, there may be many possibilities with using API’s.