How to Manage API Costs in Software Contract Negotiation

Aug 18, 2023

How to Manage API Costs in Software Contract Negotiation

Small-to-midsize business (SMB) leaders and those in charge of sourcing, procurement, and vendor management often have to tangle with high application programming interface (API) costs after purchasing software for their company. The ballooning API costs may feel like a necessary evil for some businesses, especially as they are integral in making web apps convenient for users.

For most businesses, forecasting and managing unbudgeted API costs during the software negotiation process is difficult because it can be challenging to assess precisely how many API requests your app will get. Estimating what percentage of requests will imply better business outcomes may also be tricky.

This article provides you with three ways to negotiate API costs in software contracts, giving a breakdown of how API-based pricing works and some best practices to keep in mind while considering your options.

API-based pricing refers to charging software customers based on how often they use API services. The actual price depends on the number of API calls the software makes. An API call is a request a software makes to a different application using an API. As the API "interfaces" between the two software systems, it sends messages and calculates API-based charges/costs for users based on the number of sent messages.

For example, consider buying an investment management application that uses API to provide live pricing quotes for saleable commodities, such as iron ore, that your customers may be interested in purchasing. Here's how the API-based pricing structure could play out:

Zero to 100,000 requests per month will cost you $0.02 per call, provided you pay a minimum fee of $1,000 per month. If you review your 100,000 requests, each request after 100,001 will cost $0.75 instead of $0.02.

You could negotiate a discounted rate if you anticipate getting far more than 50,000 requests per month. For example, you could pay $0.015 per request for 200,000 monthly calls. However, in this case, you'd have to pay a higher minimum monthly charge, such as $2,500.

For SMB leaders, getting the right API-based pricing structure is critical to maintaining predictable budgets that your finance team can depend on. This is particularly important given the rise in API request pricing. By 2026, 50% of SaaS and software contracts are projected to use this pricing structure, significantly higher than the 5% we see in the market today. [1]

Having the right price structure will affect business decisions. It will

Impact how you price your offering

Give you the ability to scale up users easily

Empower you to prevent software fees from threatening the viability of your business model

Make it possible to realize more attractive profit margins

You can leverage three complementary strategies to get a contract that aligns with your budget goals.

Negotiating API pricing tiers may start with comparing pay-as-you-go subscriptions to commitment models. A pay-as-you-go model involves paying only for the requests that API makes. You may often have to pay a minimum fee every month.

With a commitment model, you get a flat rate for a certain amount of requests. If you go over that amount, you pay an additional fee.

If you're confident that you won't go over a certain number of requests per month, a commitment model may be a good fit. For example, if you're using the software for your internal employees, it may be relatively easy to gauge likely usage over a month.

Similarly, if you have a limited number of customers and you add new accounts gradually, you may be able to estimate a reasonably accurate request ceiling.

On the other hand, if you're in a more volatile market, such as retail, you may want to go with a pay-as-you-go model. Using this pricing structure, you would pay less during slow seasons and more as the business grows.

Hence, it is best to compare pay-as-you-go and commitment pricing models in the context of likely demand before you choose which one would be the best match.

Consider using API management tools to boost demand accuracy. With an API management tool, you can throttle the number of requests using the amount you’ve budgeted for as hard or soft parameters.

An API management tool can also alert you when approaching your volume limits. In addition, these tools can provide you with analytics to help you negotiate prices. For example, you could negotiate a low trial price that you pay for a quarter or three months. During this time, you can use an API monitoring tool to analyze the number of requests you get and the different factors that make them rise or fall.

With this data, you can negotiate a longer-term price, such as one that lasts for an entire fiscal year.

Similarly, negotiating flexibility in your contracts may be a better option. For instance, you can reserve the right to switch from a pay-as-you-go subscription to a commitment model if the number of requests exceeds a particular figure or if you have to scale your business up. In this scenario, offering a decent minimum monthly payment can be a win-win for you and the software provider.

There may be significant secondary API-related costs depending on the software you're purchasing and how you'll use it. For instance, you may subscribe to a software service with different tiers, with each successive tier having more advanced features. The higher tiers may also come with more API requests included.

If your business needs to move up a tier to take advantage of superior features, you may have to bear different API-based costs. In this case, you could negotiate something like this: "If our company has to move up a tier, we want to reduce the cost of the next tier by X because we would still need only a maximum of Y number of requests."

In some situations, you may also need to consider data transfer costs associated with rising API requests.

Incorporating APIs may imply a rise in security concerns. Hence, consider upgrading your cybersecurity tools or services before you finalize the software.

Some software providers may be willing to accept payment terms based on fluctuating demand or even your business outcomes.

Suppose you have an ecommerce web app with more users during peak shopping seasons. You can negotiate a rate for out-of-peak times and another for peak times.

Linking your business' API-based costs to planned outcomes can be a way to attach a definitive ROI to your current API investment.

To illustrate, suppose you have a company that provides a customer relationship management (CRM) solution, which includes a social media API. You can use this API to reach prospects on Twitter, Facebook, and Instagram from within your CRM.

You could negotiate an agreement saying, "In addition to paying X amount per month, for every paying customer earned via social media interactions using the API, our company will pay an additional Y." You can accurately demonstrate the link between the API and revenue by collecting a monthly customer acquisition statistics report and presenting it to your internal team and the software provider.

By following certain best practices, you can avoid API cost creep and negotiate a software contract that benefits your department and other stakeholders.

Monitor API calls while considering pricing tiers. This way, you will be able to predict your monthly fees better.

Proactively identify unseen pricing metrics. Spotting overlooked pricing metrics may include factors such as overage charges and user-based pricing, where the price increases with the number of users.

Look for APIs generating many requests. While you negotiate your software contract, make sure to check for APIs that generate many requests, especially when many of these requests don’t imply positive business results.

If you negotiate according to pricing tier structure, consider secondary API-related costs, and negotiate pricing based on demand or business outcomes, you can walk out of your next negotiation with a deal stakeholders can stand behind. These tactics can also give you the confidence that comes with knowing your API-related costs aren't going to inflate overhead.

If you're considering software with an API, trying to cut costs, or getting an advisor to help you make a fiscally sound decision, your next step is to check out these resources for more info:

How To Renegotiate Software Contracts When Cutting Costs

3 Ways Connecting With an Advisor Will Help You Make the Right Choice

3 Ways an Advisor Helps You Buy The Right Software

1. How to Negotiate API Pricing in Software and SaaS Contracts, Gartner 2023