---
title: "AI SaaS Companies Will Be More Profitable"
description: "Discover why AI SaaS startups may exceed traditional -10% SaaS margins through reduced R\u0026D costs and 50-75% engineering productivity gains. Data-driven analysis."
categories: ["financials","AI"]
keywords: ["AI SaaS profitability","Tomasz Tunguz","venture capital","software as a service","AI productivity gains","Klarna customer support","Microsoft AI impact","ServiceNow engineering productivity"]
ai_summary: "AI SaaS companies may achieve higher profitability through reduced R\u0026D costs and increased engineering productivity."
date: 2024-03-21
lastmod: 2026-07-30
canonical_url: https://www.tomtunguz.com/ai-software-margins/
author: "Tomasz Tunguz"
---

Will AI sofware companies operate with better or worse profitability than a classic SaaS company?

Initially, I thought worse since the expense of serving AI as a product is signficantly higher. 

But now I'm not so sure. AI SaaS may be much more profitable than the -10% average net income margins of the current crop of public businesses.

Yes, AI inflates the cost to serve the product. Google queries may be [10x more expensive than standard search results](https://arstechnica.com/gadgets/2023/02/chatgpt-style-search-represents-a-10x-cost-increase-for-google-microsoft/). That's an unfair comparison since Google has focused on classic query cost optimization for more than 20 years. 

But let's disregard that. 

AI is also a deflationary force & a mighty one at that. There are 4 line items in a startup's profit & loss statement that will be impacted by AI : 

| P&L Line Item | AI's Effect | 
| --- | ---: | 
| Cost of Goods Sold | Inflationary for infrastructure ; deflationary for support | 
| Research & Development | Deflationary : engineers are 50-75% more productive | 
| Sales & Marketing | Initially deflationary : sales people will be more productive | 
| General & Administrative | Deflationary : more productivity in legal & finance | 

COGS will both increase because AI is expensive but decrease because AI could halve customer support (CS) costs. Klarna slashed their CS spend by 66% with AI. Let's declare this tug-of-war a wash. 

Building products will cost half-as-much as in the past because of AI. Microsoft & ServiceNow have seen the impact on their teams at scale. Deflationary.

Sales & marketing will initially see a boost from AI as the early adopters reduce cost-of-customer acquisition through novel techniques. But over time, everyone will use AI & the efficiencies will be competed away. 

General & administrative should see productivity gains across legal & finance. The impact isn't yet broadly known but likely mildly-to-significantly deflationary. 

On average AI-infused software companies should benefit from AI's productivity gains at the bottom line. 

Particularly as the industry evolves to smaller, more efficient models with [similar performance](https://tomtunguz.com/what-happens-when-model-performance-asymptotes/) but at [1% of the cost.](https://tomtunguz.com/gm-saas/)