SaaS Talk™ with the Metrics Brothers The Gross Margin of AI Products
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Aug 18, 2025 Explore the distinct financial characteristics of AI products versus traditional SaaS and how they impact gross margins. Discover the nuances of Cost of Goods Sold for both AI and SaaS, and learn about the classification of expenses in this evolving landscape. The discussion delves into the crucial role of operational expenses and the significant investments required to develop competitive AI products. Gain insights on adjusting pricing strategies and the venture capital dynamics shaping the future of AI in SaaS.
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AI Products Typically Have Lower Gross Margins
- AI products add incremental COGS that materially lower gross margins versus traditional SaaS.
- Benchmarks: typical SaaS subscription gross margins ~70–85% while AI-native products run ~50–70% (often lower).
What Counts As SaaS Cost Of Goods Sold
- Traditional SaaS COGS includes cloud infra, backups, monitoring, support, and professional services.
- Customer support, onboarding, and some customer-success tasks are often classified as subscription COGS.
AI-Specific Cost Categories
- Major AI-specific COGS are model training/fine-tuning, inference platform fees, data storage/RAG and human-in-the-loop ops.
- Observability and RLHF operations also add meaningful recurring costs.