Coming from a product background, I know the tension between the early days of a product — when you let customers get creative with how they use your APIs — and later building targeted solutions for specific customer segments.
I also know how great it feels when you see customers using your product in a way that you didn’t imagine.
In the early days of building a data API product, there’s a tension between building a targeted solution for a specific customer segment and putting your APIs out into the open to see what your customers build on top of them. It’s always a great feeling when your customers builds on top of your APIs in a new way that you didn’t imagine.
Today I spoke with a pricing manager at a large tech company that’s a leader in location data (guess who) and he brought up an interesting analogy for data API products. He said you can think of your product as an ingredient (like a tomato) or as a prepared meal (like a BLT).
Selling your product as a tomato
Your product is a staple. Countless people buy tomatoes, needing them for everything from making a salad for a family reunion to making a signature dish served at a high-end restaurant.
At this stage, you have a variety of people using your API in a variety of ways. You don’t have visibility into what this usage looks like, unless you speak to all your customers. This is scalable in the early days of a company but harder to sustain as your company grows.
Given this, your price is driven by competition, rather than how valuable it could be to your target customers. And if you’re not charging what a consumer believes your product is worth, you could be leaving money on the table.
For example, say your product is location data. You don’t know who is buying it, or if the use of the data is core to the product experience. All you know is that if your data is the best there is, you can set the price higher than what is currently on the market.
Selling your product as a BLT
After researching your customers, you learn that the majority of them are using your tomatoes to make sandwiches, so you pair your tomatoes with the best sourdough in town to create the platonic ideal of a BLT. You sell them via a food truck to tech workers on lunch breaks, and are raking in profits.
At this stage, you are building a vertical full-stack solution (like a sandwich!) that meets the needs of specific categories of customers. Once you are at this stage, it’s easy to command value-based pricing.
Let’s go back to our example of location data. What if it became clear that a critical mass of customers were using that information to determine where beach-front properties are? Knowing this, your customer can charge 20% more for a beach front hotel with an average of $500 spent per beach front vacation package. This information gives you an idea of the value you are delivering, and you can price your product accordingly.
The inherent potential of a tomato
Here is the thing: if you were never selling tomatoes, you might not have learned about the sandwich market. Maybe you thought your best customer was making canned ravioli.
The same could be true of your API. As your product matures and you learn more about your customer, you feel more confident building vertical solutions for your customers.
I love investing in an API’s potential, and going on that journey together. As an investor, I’m always on the lookout for the next tomato. I love investing in APIs that unlock new applications, and to join a founder on the journey to discover who your customers are and key use cases you’re enabling. It’s so exciting when a founder tells me about all the unexpected, new ways that customers are building on top of their APIs.
If you’re building a new API-first product or anything in the space, I’d love to hear about it. You can email me, or tweet at me, or leave a link in the comments!
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