Introduction

Critics say AI app companies can’t survive with low margins, but history shows these doubts are often wrong. Margins don’t tell the whole story.

What’s the problem it solves?

Many investors and analysts dismiss AI apps as unsustainable because of low short-term margins. This article challenges that view, showing how margins evolve, why AI apps are different from past “low-margin” businesses, and how they can build real, lasting value.

Quick Summary

The piece argues that complaints about AI app companies being “low margin” repeat the same tired criticisms used against Amazon, Uber, and Netflix in earlier eras. Those companies proved that margins are only one piece of the puzzle.

AI apps today often start with cheap, unlimited plans, but quickly add usage-based tiers, enterprise packages, and smart routing between models to reduce costs. Critics also miss that most margin “problems” come from a small group of heavy users, while enterprise customers actually deliver strong profits.

The fear that foundation model providers will monopolize pricing is also unfounded. With fierce competition among OpenAI, Anthropic, Google, and open-source players, costs have already dropped massively in just 18 months. Apps are not just “wrappers” either. Many add unique features, train on product-specific data, and build enterprise-grade services that increase loyalty and pricing power.

In short: AI apps aren’t doomed by low margins. Like past tech giants, they can use customer value, product strategy, and pricing to grow sustainable, profitable businesses.

Key Takeaways

• Low margins at launch don’t mean AI apps are doomed - they are often temporary.
• Heavy users can be limited without hurting growth, keeping costs in check.
• Competition among model providers keeps prices from being monopolized.
• Enterprise deals, upsells, and unique app features drive long-term profits.
• The real measure of success is retention, expansion, and customer value - not just early gross margins.

What to do

• Don’t judge AI app companies only by short-term margin numbers.
• Look at conversion, retention, and enterprise expansion to spot winners.
• Use pricing tiers, rate limits, and model routing to protect margins.
• Build unique features and product-specific models for differentiation.
• Focus on long-term customer value, not just cutting costs.

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