AI pricing should track customer value, not just usage

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 41:55

   So do you think usage-based or utility is the right way to price an AI compared to seeds? Ah, that is a fantastic question. So this is one of these giant, this is in my list of what I call the trillion-dollar questions, where, you know, depending on how this is answered, it will drive, you know, trillions of dollars in market value. So, yeah, so usage-based pricing, it's actually fairly amazing. If you think about this from a startup standpoint, from an investor standpoint, it's actually fairly amazing what's happened.

2. 42:20

   And I'm not really talking about this in public because I don't really, I guess I don't want it to stop. I think it's actually quite amazing, which is you have these technology companies, you know, these big tech companies with these incredible R&D capabilities that are building these big models, these big AI models with this incredible, you know, new kind of intelligence. And then it turns out that they were already in a war, they were already in the cloud war, right?

3. 42:42

   And so they were already in the war for kind of cloud services. And this is like AWS versus Azure versus Google Cloud, you know, and then all these other cloud efforts. And so what actually happened was They sort of, like, there's an alternate universe in which they basically just kept all of their magic AI secret and captive and just used it in their own business or used it to just compete with more companies, you know, in more categories.

4. 43:06

   But instead, what they've done is they've basically, you know, commoditize is too strong a word, but they have proliferated their magic new technology through their cloud business, which is this business that just has these, like, incredible scale, you know, kind of components to it, you know, and sort of this hyper competition. between the providers and these, you know, these prices that come down very fast.

5. 43:27

   And so you've got like the most magic new technology in the world, and then it's basically being served up by those companies as a cloud business and made basically available to everybody on the planet to just click and use and for like relatively small amounts of money. And then on a usage basis, which means, and usage is great for startups because it means you can start easily, right? You know, there's very, you know, there's basically no fixed cost. For a startup building an AI app, they don't have giant fixed costs because they can just tap into the OpenAI or Anthropic or Google or Microsoft or whatever cloud tokens by the drink, intelligence tokens by the drink offering and just get going.

6. 43:59

   And so it's kind of from the startup standpoint, it's like this marvelous thing where the most magical thing in the world is available by the drink. It's absolutely amazing. By the way, that model's working and those companies are happy and they're growing really fast and they're happily reporting. massive cloud revenue growth, and, you know, they're happy with the margins and so forth. And so, you know, I think generally it's working. And those businesses are, I think, likely to get much larger. And so I think, you know, generally that's going to work. But to the question, like, that doesn't mean that the optimal pricing model for, for example, all of the applications should be tokens by the drink. And in fact, very much, I think, not the case. You know, we spend a lot of time working. We actually have, you know, dedicated, you know, experts on pricing in our

7. 44:41

   firm. We spend a lot of time with our companies working on pricing, because it's, you know, it's really this magical art and science that a lot of companies don't take seriously enough. So we spend a lot of time with our companies on this. And of course, you know, a core principle of pricing is you don't want to price by cost. If you can avoid it, you want to price by value, right? Like you want to price, you have a price where you're getting a percentage of the business value.

8. 45:01

   You know, especially when you're selling two businesses, you want to price as a percentage of the business value that you're getting. And so you do have some AI startups that are pricing by the drink for certain things that they're doing, but you have many others that are exploring other pricing models. you know, some that are just like replications of SaaS pricing models, but you also have other companies that are exploring pricing models, for example, of, well, if the AI can actually do the job of a coder or the AI could do the job of a doctor or a nurse or a radiologist or a lawyer or a paralegal, right, or whatever, or a teacher, you know, basically, can you price by value and can you get a percentage of the value of what otherwise would have been, you know, would have been literally a person?

9. 45:41

   You know, or by the way, And equivalently, can you price by marginal productivity? So if you can take a human doctor and make them much more productive because you give them AI, can you price as a percentage of kind of the productivity uplift from the symbiotic relationship between the human being and the AI? And so I think what we see in startup land is like a lot of experimentation happening on these pricing models.

10. 46:04

    And I think, again, I think that's like super healthy. You know, I was in this little speech on this. It's like high prices are really underappreciated. that high prices are often a favor to the customer. It's actually really funny. A lot of like, the naive view on pricing is the lower the price, the better it is for the customer. The more sophisticated way of looking at it is higher prices are often good for the customer because a higher price means that the vendor can make the product better faster, right?

11. 46:24

    Like you can actually, companies with higher prices, higher margins can actually invest more in R&D and they can actually make the product better. And, you know, most people who buy things aren't just looking for the cheapest price. They want something that's going to work really well. And so often high prices, you know, the customer doesn't ever say this, it'll never show up in a survey. But the high price can actually be a gift to the customer because it can make the vendor better, can make the product better, and ultimately make the customer better off. And so I'm very encouraged by the degree to which the AI entrepreneurs are willing to run these experiments. And we'll have to see where it pans out. But at least so far, I feel good about the, you know, at least the attitude in the industry about it. Awesome. I actually, as you were going through it, I had probably 10 more

12. 47:04

    follow-up questions. But I'm actually going to go back to a topic you had briefly, the trillion