Statue in Kipling, Saskatchewan, Canada commemorating the red paperclip that

Kyle MacDonald used to start a series of trades that led to him obtaining a house in
that town.

In a previous blog post, I explained how Clayton Christensen’s “jobs to be done”

theory can be used to identify innovation opportunities that are enabled by API
products. The CURE methodology from that blog post is the basis for the group
exercise in the API Strategy Workshops we deliver worldwide. It’s a great way to
determine which API products can improve your customers’ experiences with your
offerings. That works well as a starting point, but to sustain the success of your API
program, it’s vital to look more holistically at your business. For MuleSoft CONNECT
2020, Mike Amundsen and I are presenting a talk titled “Choosing the right API
business model.” In this talk, we stress the importance of having your API products
act as cogs in your organization’s business model. We needed a way to illustrate the
role of APIs in digital business models, and to do this we went back to Clayton
Christensen’s work.

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One of the main concepts in Christensen’s The Innovator’s Dilemma is the notion of
“value networks.” Christensen defines value networks as, “The collection of
upstream suppliers, downstream channels to market, and ancillary providers that
support a common business model within an industry.” To oversimplify the message
of this fantastic book, an organization’s business model can be derived from its
disposition within the value network. That same organization’s path to successful
innovation is intrinsically linked to its value network. Sustaining innovations — the
ones that allow incumbents to stay on top of their markets — come from optimizing
their existing value networks. Disruptive innovations — the ones that topple leaders
and give rise to new players — require the creation of new value networks whose
momentum and maturity may attract stakeholders from other value networks. I
encourage you to read the book for more on the topic of innovation, but for now, let’s
just state: value networks are important!
Value networks and value exchange
In the simplest view, networks are composed of nodes that interact with one another.
In a value network, the nodes are the various stakeholders: the organization in
question along with its customers, distributors, suppliers, and other partners. But
what about the interactions that transmit value? Alex Osterwalder, creator of the
Business Model Canvas, defines a business model as “the rationale of how an
organization creates, delivers, and captures value.” From the value network
perspective, value creation can happen within the nodes, but value is delivered and
captured simultaneously between stakeholders in a transaction known as a value
exchange. Exchanged value can be tangible — such as money or goods — or
intangible — such as exposure or quality improvement. The following value
exchange diagram is adapted from Melissa Perri’s excellent book on digital product
management, Escaping the Build Trap:

Figure 1: A typical value exchange.

Depicting an organization’s set of value exchanges within a value network turns out
to be a useful way to illustrate its business model. Furthermore, this approach can
define business model patterns and archetypes that can be applied to new company
and industry contexts.

Value exchange-defined business models

Take, for example, a business model that was successful for decades, but is now
under threat: print media. The value exchanges in a 20th century newspaper’s
business model could be drawn like this:

Figure 2: A newspaper business model depicted through value exchange.

The newspaper delivers value to customers in the form of content, and captures
money in return. On the other side, the newspaper delivers value to advertisers in
the form of exposure to its readers, and captures even more money as a result. The
final value exchange is between the newspaper and freelance journalists it might
hire, giving them money and exposure in return for exclusive content. In this century,
this business model has been disrupted by the rise of social media. What does
Facebook’s business model look like when mapped through its value exchanges?

Figure 3: Facebook’s business model.

Interestingly, the business model structures are similar (isomorphic in mathematical

terms). What differentiates them are the details of the value being exchanged.
Facebook might capture money from its users in return for third-party apps or
games, but the biggest value it gets from its users comes in the form of data and
relationships that form a detailed personal profile. This profile information is used in
targeted advertising, something that delivers considerably more value to advertisers
than the anonymous advertising of the print media industry. Lastly, Facebook is even
able to have its users — the content consumers — be sources of content
themselves, leading to more time spent on the platform and more opportunity to
present targeted ads. Clearly, the business model can be analyzed and measured by
focusing on the value exchanges within the value network.

Digital value exchange through APIs

In the digital economy, APIs are conduits for value exchange. In the Facebook
example above, Facebook’s APIs would be used by the app developers at the top,
and possibly by advertisers on the right. Value exchange mapping is a great way to
vet API product ideas by putting them in the context of an organization’s business
model. To illustrate this, let’s look at two well known API products.

First, the Google Maps API is one of the biggest success stories of the API
economy. Companies like Uber and Lyft would not have been able to launch without
it. The business model is quite simple. Google Maps API consumers exchange
money for unique geolocations services. Those consumers use the value they
capture from the API to provide location-enabled services to their customers, who
may exchange any form of value in return. The Google Maps API business model
follows the “API supplier” pattern, since it mimics the way a supplier might function in
the manufacturing economy, like a high-end stereo manufacturer for automobiles.
There is one interesting detail in this business model that is specific to the digital
economy. Google is getting more than just money from its API consumers. Every API
interaction provides data that Google can contextualize and correlate with other data.
This data can be used to create additional value for exchange in other areas of
Google’s vast value network.
Figure 4: “API supplier” business model for the Google Maps API.

A more complex API business model example is Twilio. Like Google Maps, Twilio’s
APIs grew substantially in support of the mobile application explosion that followed
the launch of Apple’s app store in 2008. Recognizing that mobile app developers
would need global access to phone- and network-based communications services,
Twilio delivers time-to-market value to its API consumers by providing globally
accessible telco services and superb developer experience. Its consumers have
been happy to pay for this, especially early on in the app economy gold rush when
time was money. On the other side of the value network, Twilio has a vast network of
telco suppliers to whom it pays money in exchange for the services it aggregates.
Twilio’s business model follows the “API retailer” pattern, since they are providing
similar value to their consumers that a retail store might by targeting a specific group
of customers and stocking their inventory from an array of wholesalers. Although
they may not collect and synthesize data the way Google does, Twilio’s unique
digital value comes in their understanding of how to appeal to software developers
as direct customers.

Figure 5: Twilio’s “API retailer” business model.

This Twilio example starts to show the power and potential of the value network
approach. Note how the telco carriers play the role of “API wholesaler” in Twilio’s
digital supply chain. The mutually beneficial relationship and interdependence
between Twilio and the telcos shows they are part of a broader digital ecosystem. I
identify patterns of collaboration in the API ecosystem in a previous blog post, and
will explore the relationship between API ecosystems and value networks in a future
series.

Putting it into practice

Business modeling through value exchange is an excellent method for both
identifying and vetting API product opportunities. The examples above are both fairly
simple since they are scoped down to an individual API product in the case of
Google Maps, and an API product company in Twilio. However, any company can
use this approach to either assess their existing business models to find new digital
opportunities, or assess specific API product feasibility based on their current value
networks. I am excited about applying this technique in helping organizations capture
business value from APIs. I am also heartened by the fact that others have been
using a similar approach — such as The Value Engineers and their e3value
methodolgy. Check out their value exchange map for the Netflix business model.

If you would like to learn more about value exchanges and how they can be used to
choose the right business model for your APIs, make sure you attend one of our free
global CONNECT events. I would be happy to virtually see you there. To apply these
concepts in more detail at your organization, book one of our full-day
API-as-a-Product Workshops, one of MuleSoft’s API Program Workshops. Take care
and stay safe!