What’s the Ceiling on AI Margins?

In this episode of Mostly Growth, the number one podcast in product monetization, Kyle and CJ break down the strange economics of AI margins. They unpack why a 100% markup on token costs still does not look like SaaS, what companies should include in gross margin, why AI pricing is so cost-driven, and whether model costs, open source, or bring-your-own-tokens will reshape the whole category.—SPONSORS:Tabs is an AI-native revenue platform that unifies billing, collections, and revenue recognition for companies running usage-based or complex contracts. By bringing together ERP, CRM, and real product usage data into a single system of record, Tabs eliminates manual reconciliations and speeds up close and cash collection. Companies like Cortex, Statsig, and Cursor trust Tabs to scale revenue efficiently. Learn more at https://www.tabs.com/runLightfield is an AI-first CRM built for modern sales teams that want to manage deals without manual data entry or dashboards. By joining sales calls, reading emails, and maintaining full account context, Lightfield helps teams prioritize deals, automate follow-ups, and stay prepared for every interaction. It’s like having a sales coach, RevOps analyst, and EA in one. Start a 14-day free trial at https://www.lightfield.app and use code MOSTLYGROWTH to get 3 months free.beehiiv is a modern newsletter platform built for creators who want to grow, monetize, and own their audience without piecing together a stack. Its all-in-one platform brings together newsletters, websites, analytics, automations, and monetization tools, and now supports podcasts, webinars, and MCP workflows. Kyle even used beehiiv’s MCP in Claude to audit his site, prioritize SEO fixes, and analyze subscriber trends. Try it free at https://www.beehiiv.com/kyle and use code KYLE30 for 30% off your first three months.—LINKS: Mostly Metrics: https://www.mostlymetrics.comCJ on LinkedIn: https://www.linkedin.com/in/cj-gustafson-13140948/Growth Unhinged: https://www.growthunhinged.com/Kyle on LinkedIn: https://www.linkedin.com/in/kyle-poyar/Slacker Stuff: https://www.slackerstuff.com/Ben on LinkedIn: https://www.linkedin.com/in/slackerstuff/—RELATED EPISODES:Disney World Is a Pricing Masterclasshttps://youtu.be/LwTlFE10Yew—TIMESTAMPS:0:00 Concert parking 3x premium4:08 Show intro4:31 Topic intro: AI founder's 100% markup5:58 Lowest margin businesses8:12 Luxury vs. discount retail margins10:42 Highest margin businesses11:04 Sponsors — Tabs | Lightfield | beehiiv14:05 AI margin survey: 230 companies14:55 Median target: ~50% gross margin16:31 Anthropic, OpenAI, and Lovable data17:01 LLMs vs. application layer18:33 What belongs in gross margin20:02 Free tier AI costs: COGS or S&M?21:40 Token maxing era and Snowflake analogy26:47 Will open source models be good enough?27:52 Shrinkflation: swap models under the hood28:44 BYOT: bring your own tokens30:58 Do gross margins even matter?33:15 Toast: bifurcated margin preview34:05 Prediction: software and AI margins split 80/2035:30 Credits#MostlyGrowthPodcast #AIStrategy #ProductMonetization #Pricing #FutureOfSoftware