How AI Is Reshaping Business Models and Pricing for Product Companies

Darya Wertheim (0:14)

Hi, everyone, I'm Darya Wertheim, and you're on Startup for Startup. And today we're talking about pricing and how we think about it in the AI era. And for that, I have Roy Mann here with me, co-founder and co-CEO at Monday. Hi, Roy.

Roy Mann (0:25)

Hello.

Darya Wertheim (0:26)

Okay, so maybe we'll start like, say, why are we talking about this?

Roy Mann (0:29)

Yeah, so the AI has brought a massive change to the whole pricing field and how we think about products and how we price them and everything.

Until today, we didn't think about server costs that much, and it was relatively negligible to the whole story. Then the fact that it's become non-negligible, the tokens, changes a lot. And it's hard to understand this. And for me, this is a critical topic, a super, super important topic for anyone building AI products today. And I dove deep into this thing, and I think it's like everyone's challenge, the whole industries. It's not like there are absolute answers to this right now, and that's also what we'll talk about.

Darya Wertheim (1:14)

Exactly. And for us too, we're still in the middle of it.

Roy Mann (1:16)

Yeah, totally in the middle of it.

There are just some clear initial conclusions, and that's why we're recording this episode. Now, we were just talking before we started recording about how deep this is. So for me, when we started Monday, there was already a subscription business model, Cloud, right, to transition people. There was a perpetual business model, right? You buy a disk and it's yours, the software is yours. There was a subscription model, and when we started, that didn't exist yet, but then there was SASTA, which took the whole SAS field, which is subscription business, and built a podcast around it, and Jason Lemkin.

Darya Wertheim (1:54)

Yeah, Jason Lemkin, we've mentioned him a lot here on the podcast and we also did a whole series called Foundations about this whole SAS business model.

Roy Mann (2:01)

So my point is that he built a business just on that. Now for me, that's it. That's, there is a subscription model, and now there's something new, and we need to understand it just as well. It's like, it's an earthquake, it's a complete shift of so many things.

Darya Wertheim (2:18)

Yeah, because basically the business model that most startups have relied on for the last 20 years or even more has changed.

Roy Mann (2:27)

Yeah, now you could say that a lot of them did have other models that were consumption-based. Datadog, Amazon, right? You buy credits and use them. It's not necessarily a subscription model. So some of that is exempt. But I can say from talking to public investors that they don't fully understand it.

Okay, there are no metrics for this. There are no techniques. There are a few companies that did it. Each did it in its own way. There's no business model. Now, let's talk about that for a second.

Darya Wertheim (3:00)

Right. So let's, let's exactly, let's, let's go back to basics for a second. Let's clarify the terms we're talking. Like we said, we're talking about pricing, but we're taking another step back and we'll talk for a second about the business model of companies in general.

Roy Mann (3:13)

Yeah. So, so first of all, let's separate the two because I think they get mixed up a lot. And for us, at least in our internal conversations at the beginning, they got very mixed up. The difference between the business model and its pricing.

Today, there's a question about the business model itself, meaning that's also a question mark that people don't know. Yeah. Let's say Cursor, Anthropic, OpenAI. Yeah. Which are not the same company.

Darya Wertheim (3:38)

Yeah.

Roy Mann (3:39)

Cursor builds on top of LLMs and Anthropic and so on. They have an LLM. So Cursor makes a lot of revenue, and maybe we'll never know because they got swallowed up there inside SpaceX. But they said it's even unprofitable, that it's a loss-making company that loses on the profit it makes, even though they grew revenue a lot.

Most of what you use in Cursor is someone else's LLM.

All the money goes there. If they want to discount the basic package they offer, so how do they do it? How does Cursor do it? They said maybe they're losing money. Okay. So losing money isn't that big of a trick. Yeah. Like basically, when the cost of what you sell is more than what you sell it for, then the money you receive. Okay. Now, I don't know if that's the case or not, and maybe they're making a lot of money there, but there's a question today, and that's my point about the business model. What is the business model? What should the profitability be? In SaaS, it was cost of goods, like the cost of the overall margin was reached 70%, 80%. We're at 80 something.