TLDR Tech / Founders
When Are Negative Gross Margins Acceptable for an AI Startup?
As an AI product improves and customer usage increases, individual accounts can become less profitable. Harvey reportedly experienced negative 50% gross margins in June due to increased usage under a flat seat pricing model. While subsidizing usage can help attract customers or gather data on willingness to pay, a sustainable strategy is required. Comparing with Legora, three potential solutions are: charging for usage, reducing the cost per request, or setting caps on included usage. A proposed benchmark for customer retention is if the product retains 40 cents of every dollar after covering service costs.
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