Many companies are implementing API strategies and will need to price API access. Many more want to know how “their data is being used in a world where AI is making data of all kinds much more valuable. One company that recently tried to implement API pricing changes is Reddit. Reddit had good reasons to implement API pricing, and they did say what these reasons are, but they made several mistakes that have led to significant user pushback. Given their recent challenges, what can we learn from the Reddit experience? Steven Forth is a Managing Partner at Ibbaka. He can be reached at steven@ibbaka.com.

The Pricing Advisor, July 2023

TL:DR The pushback on Reddit’s API pricing has lessons for all of us:

• Align price with value: if users are getting value in different ways, consider different approaches to pricing (different pricing metrics, different pricing levels).
• Respect your users and community and the value they contribute to your data. Make sure that you have the rights to use the data in the ways the API access enables.
• Make users and customers part of the pricing design process by engaging them around value.
• Communicate early and often: remember that communication is two way and is only taking place if you are listening as well as speaking.

Most of us participate in one Reddit feed or another. Reddit is a place where many important conversations take place on every topic imaginable. I use it primarily for local issues, there are several robust Vancouver subreddits, and there are interesting Reddits on everything from chess openings and go tactics to various artists, art techniques, coding styles and languages. Reddit covers more things than I can imagine. It has become an essential part of many communities. And I was charmed that Reddit was originally written in my favorite language, Common Lisp (there are good subreddits on Lisp), though it was quickly moved to Python.

Given Reddit’s importance, many of us are concerned about the recent kerfuffle over Reddit API pricing and were disturbed by the Reddit blackout. On June 12, many subreddits went dark and, as of this writing, remained dark. People are upset for a number of reasons, but the quick version is:

• The new API pricing, if enforced, will force some services such as the Apollo App to shut down – see Apollo’s Christian Selig explains his fight with Reddit — and why users revolted.
• The community feels that it is contributing the data that Reddit wants to monetize.
• The community feels that the API enforcement and pricing were sprung on them without consultation or time to prepare.

Why did Reddit feel the need to monetize API access?

• To manage API usage
• To monetize use of data (especially for use in Generative AI and Large Language Models)

Reddit had good reasons to implement API pricing. And they did say what these are. For example, API Update: Enterprise Level Tier for Large Scale Applications provides a good version of the story from Reddit’s point of view.

Manage API Usage

The first reason is that some applications were well over the limits:

Reddit could have just capped access, but this would have crippled a number of third-party apps and would not have been in anyone’s interest. A pricing mechanism to regulate access makes sense.

Monetize Use of Data

A second reason to monetize API access is that some companies have been using this as a way to feed Large Language Models (LLM). There is a general concern that the LLM companies like Open.ai, Google, Nvidia, Meta, Stability AI, and so on are taking advantage of open access to data to create wealth that should be shared with the organizations (and people) providing the data used to train these models.

Reddit should be monetizing APIs, and revenue from API access can fund ongoing innovation that will benefit all Reddit users.

What went wrong with Reddit’s API pricing?

Given the reasons Reddit has given, and the emerging consensus that people should be compensated for the value of their data, what went wrong for Reddit? There are four root causes.

• Price and value are not aligned for different API users.
• The community believes that Reddit is monetizing data that it has contributed.
• Communication was not as clear and consistent as it could have been.
• Conspiracy theories were triggered.

Price and Value are not Aligned for Different API Users

Reddit has many different organizations accessing its APIs for many different reasons. It is unlikely that one pricing model will fit all.

Some organizations have pointed out that, under the new API pricing, they would be paying more to Reddit than they take in. Apollo has been especially vocal about this (see the previous link), but many people accessing the API are communities, nonprofits, and small organizations who are getting only small incremental value.

Reddit has been trying to address this with carve outs and exceptions. This is a sign that the pricing model is broken. It confuses the market and encourages people to shout out “Hey, what about me? I’m special too.”

The first step to take before changing pricing is conducting a value-based market segmentation. A good value-based segment is:

“a group of current or potential users that get value in the same way”

To do this in a way that is useful for pricing design, you need to have a formal value model. Pricing then needs to be designed to align price and value for the target segments (there are almost always some edge cases that cannot be properly priced, but one can generally cover more than 90% of the potential market).

The Community Believes That Reddit is Monetizing Data That it Has Contributed To

The data that is accessed through the API was, at the end of the day, generated by users. The users see themselves as part of communities. They did not engage with Reddit to create data for others to monetize. Pricing API access became a flash point for this concern.

Reddit is not the only place this is happening. The rise of Generative AI and the way that Large Language Models (LLMs) are being built has made this a hot topic for content creators of all kinds.

This is an unsolved issue, but one that we all need to work together to solve (and not just at Reddit). Think about YouTube. YouTube is probably the best source of data to train Generative AI models for video and to pull text from videos into LLMs. Long term, this could disrupt people creating the videos. Is this a use of video content that was contemplated when content was uploaded to YouTube? See Why YouTube Could Give Google an Edge in AI on “The Information” (sorry, behind a paywall). Another relevant article from “The Information” that touches on this is The Law is Coming for AI but Maybe Not the Way You Think.

Reddit, with its active and engaged communities could be one place where we solve this problem.

Communication Was Not as Clear and Consistent as it Could Have Been

One of the underlying issues is that the Reddit community feels they were not heard or respected. No doubt Reddit feels this unfair. They have been communicating about this for a while now. This post – An Update Regarding Reddit’s API – came out more than two months ago and there was a lot of community discussion around it.

But it is the perception that matters here and the perception is that:

• This was imposed without real consultation,
• It is not fair as the price is not aligned with value and the value is not shared, and
• It is not fair as the value is created by the community.

Reddit probably needed more time to develop the value model and value segmentation needed to develop the API pricing and communication needed to be part of that design process. Making customers part of the pricing design is an emerging best practice.

Conspiracy Theories Were Triggered

If you read through all the comments from An Update Regarding Reddit’s API you will find conspiracy theories surfacing. The most common one is that Reddit’s intention is to kill off third party apps. Personally, I don’t believe this, but there are people who do. The following is from the above post.

Part of this reflects people’s experience with Twitter. Twitter’s motivations and decisions were always a mystery to me. Maybe that was what Twitter was doing, but I don’t think that is Reddit’s intention.

Pricing can be used to shape behavior, and this can be an important part of pricing design. But my experience is that you need to be transparent about this. If Reddit, or anyone else, wants to shutdown third-party vendors, or narrow things down to a set of partners that provide value in specific ways, then they should be clear about this goal and not try to do it indirectly with pricing metrics or pricing levels.

What can we learn about pricing design and the introduction of pricing changes from Reddit’s experience?

Many companies are implementing API strategies and will need to price API access.

Many more want to know how “their data” (is it “their data” or “their customer’s data” or the user’s data”) is being used in a world where AI is making data of all kinds much more valuable.

Given this, what can we learn from the Reddit experience?

1. Begin by segmenting API users by how they get value. To do this, you need a value model.
2. Design pricing for each segment: one size will not fit all.
3. Be transparent about what you are doing and why.
4. Show that the pricing represents a fair distribution of value between parties (be able to say what the value ratio is and price to the target value ratio).
5. Engage with customers that are part of the pricing design process (do this by framing the conversation around data).
6. Have clarity on data ownership and rights. Don’t assume that you have rights to do things with data that were not imagined when the original agreements were put in place.