There are three types of APIs:
Used to do complex things more simply within a company.
Typically used to open up datasets so the public can build on top of them.
Give customers the full superpowers of an entire company in a few lines of code.
The API-First Ecosystem
API-first companies are a subset of Software-as-a-Service (SaaS) companies, with a few key distinguishing features:
Traditional SaaS is a department-head, IT, or exec purchasing decision, while API-first is typically a product and engineering purchasing decision.
Many people in a company interact with a typical SaaS product (like Slack, Salesforce, Airtable, Asana), whereas only the engineers typically work with API-first companies.
The most common SaaS business model is to charge per seat, while most API-first companies charge customers by usage of the product, either based on Pay Per Call (each time the API is pinged, say if you’re sending an SMS via Twilio) or as a percentage of transaction size (Stripe charges 2.9% plus $0.30 for each transaction).
Traditional SaaS products help employees get things done, APIs automatically do those things themselves.
API-first companies each provide a small slice of the things every business needs to do. Almost every company needs to collect money, remain secure, and communicate with customers.
They’re in a position in which companies can’t just rip them out -- imagine not accepting payments for even a day! -- but where it’s probably not worth the resources or defocusing to build a different solution in-house.
The best API-first businesses have data network effects: the more customers that use the product, the better the product gets for each customer, because the API-first business can use data from one customer to improve the product for all of them. For example, every time a company uses
to run a background check on someone, Checkr gets data on that person that it can use to benefit the next company who wants to hire them
it can pick up patterns across millions of people that allow it to perform more accurate checks more quickly and cheaply.
Additionally, API-first companies that negotiate with third-parties on their customers’ behalf -- Stripe with credit card companies on fees, Shippo with FedEx and UPS on shipping rates, Twilio with carriers on messaging fees -- can bring the heft of their collective bargaining power to the table for their customers in a way that none of them could on their own.
API-first companies have scale economies advantages not just over new entrants, but more importantly, over their own customers who might consider just building the functionality in-house. Since they focus on one category and amortize their development costs over thousands or millions of customers, they’re able to build for all of the little edge cases that add up to big advantages. Twilio has relationships and contracts with every phone carrier and telco across the world, meaning that a customer can just plug them in and expect to get their messages delivered or their calls completed anywhere their customers may be. It would make practically zero sense for any one company not focused on the space to negotiate all of those deals for themselves, and even if they did, they wouldn’t have the same bargaining power Twilio does.
Remember, one of the main reasons that companies use API-first products is that doing so gives them peace of mind that that slice of their business is in good hands so that they can focus on their own points of differentiation. Even if a company thinks it can save a little money or get a slightly better experience by switching vendors, doing so requires prioritizing that work over the countless things on the roadmap that are core to what the business does.
Since most API products are building blocks that customers can use to create their own custom solutions and workflows, moreover, switching costs increase as customers build on top of APIs.
Additionally, as an API-first company adds more functionality and products, as Stripe has done with both the Payments product and new products like Treasury, customers become more locked in. This is particularly true if an end user stores anything -- from money to data -- with the API-first company’s products. If a company needs to ask its customers to do something in order to continue using the service as usual, it will likely be too worried about churn or inaction to switch.
This indirect relationship with the end user points to another advantage of the API-first business model:
, we talked about the fact that Slack sold into companies and then grew as they grew headcount. API-first companies have a model that’s potentially even more powerful. Once they convince a customer to embed their code, the onus is on the customer to grow their own customer base. That means that all of the Facebook and Google dollars fall on the customer, and that as they spend money to grow, the API-first company goes along for the ride.