The AI margin cliff

For two decades, SaaS operated under the principle of prioritizing power users due to the negligible marginal cost of serving additional users, but the advent of AI products has disrupted this model. In AI-driven platforms, heavy users incur significantly higher costs as their engagement increases, leading to the "AI margin cliff" where the cost of serving a customer surpasses the revenue from their contract. Despite decreasing per-token prices, overall costs rise due to increased usage, similar to Jevons' observation that efficiency can increase total consumption. Token pricing appears linear but is complex, influenced by factors like output costs, model routing, and tool calls. To address the disconnect between static pricing and fluctuating costs, the Lago Agent SDK offers a solution by tracking the real cost of model usage and applying a markup, allowing for flexible pricing strategies like separate metering for premium usage, setting a margin floor, or billing based on actual spend. This approach aims to maintain predictability for customers while ensuring companies are aware of and can manage their margins effectively in the AI landscape.

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