tokens are getting more expensive - by Ethan Ding

ethanding.substack.com · 2,063 words · saved by 4 readers

note: i’m kinda tired of the “levered beta” metaphor, i have one more topic i want to cover on this topic related to cognition, and then i’ll go back to my normal writing imagine you start a company knowing that consumers won't pay more than $20/month. fine, you think, classic vc playbook - charge at cost, sacrifice margins for growth. you've done the math on cac, ltv, all that. but here's where it gets interesting: you've seen the a16z chart showing llm costs dropping 10x every year. so you think: i'll break even today at $20/month, and when models get 10x cheaper next year, boom - 90% margins. the losses are temporary. the profits are inevitable. it’s so simple a VC associate could understand it: year 1: break even at $20/month year 2: 90% margins as compute drops 10x year 3: yacht shopping it’s an understandable strategy: "the cost of LLM inference has dropped by a factor of 3 every 6 months, we’ll be fine” but after 18 months, margins are about as negative as they’ve ever been… win

tokens are getting more expensive "language models will get cheaper by 10x" will not save ai subscriptions from the short squeeze Ethan Ding Jul 31, 2025 573 65 51 Share note: i’m kinda tired of the “levered beta” metaphor, i have one more topic i want to cover on this topic related to cognition, and then i’ll go back to my normal writing imagine you start a company knowing that consumers won't pay more than $20/month. fine, you think, classic vc playbook - charge at cost, sacrifice margins for growth. you've done the math on cac, ltv, all that. but here's where it gets interesting: you've see

tokens are getting more expensive - by Ethan Ding

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