Costs are real, while pricing is a policy decision. My GenAI chatboxes are unable to ascribe this exact statement to anyone famous, although something similar has been mentioned in countless marketing and management books since Drucker's in 1954.
Consider the quintessential case of the MBA exam, that gauntlet of business wit. A questionnaire might proffer:
ABC Corp. is peddling 100 widgets at $100 apiece. The management team faces a smorgasbord of options:
a. Maintain the status quo.
b. Hike prices, P, by 20%, triggering a 10% drop in quantity Q, netting an 8% revenue uptick.
c. Double P, endure a 40% Q nosedive, yet revel in a 20% revenue surge.
d. Slash P by 20%, boost Q by 10%, but suffer a 12% revenue dip.
The analytical would leap at option c, salivating at the math of maximizing money made. The overthinker, sensing a ruse, might hedge bets with options a or b, invoking a litany of arcane justifications about the perils of idle machinery or workforce. Yet, the savviest of scholars—the ones who've been acing exams for the past three decades—would opt for d, citing the long game: the invaluable currency of customer loyalty and the golden goose of market share and impact of all that on the business's valuations.
Ah, the times they were. No wonder the central bankers of those decades did not have the worries of Powell et al. A look at the list of last week's announcements below tells us how this GenAI cycle is materially different from what we witnessed in various internet, social media, and smartphone app heydays:
- Google to charge big businesses $30 per month for AI in work apps
- Microsoft to charge an identical amount to commercial customers for 365 Copilot
- OpenAI rolls out ChatGPT Enterprise to be priced above $20/month Plus plan
- Claude is surveying users to gauge interest in premium plans at $50/month
NVidia's results highlighted how the company does not mind charging the top Dollar for its top products to maximize near-term revenue. Like with airlines in post-Covid days, this behavior is seen across the tech industry. This new pricing trend will have a significant impact on the path of the current revolutions and the players who are likely to succeed: there are going to be few good products available cheaply, subsidized by private investors looking for long-term gains. Rather, the new titans will be those who can monetize as they innovate, fueling a cycle of continuous improvement.
As for those still clinging to option c, perhaps it's time to eye the C-suite of today's leading firms. A new era calls for a new calculus.
