Explore vs. Exploit in Agentic Coding

AI coding assistants like Cursor & Replit have rewritten the rules of software distribution almost overnight.

But how do companies like these manage margins? Power users looking to manage as many agents as possible may find themselves at odds with their coding agent providers.

Let’s create a hypothetical million user AI coding company & play around with some numbers.

Let’s assume this company has four pricing plans: $20 per month, $50 per month, $500 per month, & $1,500 per month. We assume a 1% conversion rate for the first two plans, a 0.5% conversion rate for the $500 per month pricing plan, & 0.1% for the $1,500 plan.¹

The revenue concentration is dramatic. While the $20 & $50 tiers capture 77% of paying users, they generate just 15% of total revenue. The enterprise tiers drive 85% of revenue from only 23% of users. The $1,500 Ultimate tier alone generates nearly 32% of all revenue from just 3.8% of users.

So the majority of the revenue will be at the enterprise, but where will the margin come from?

The reality is there are plenty of pathways to increase margin:

• Caching helps tremendously with better memory management on stable codebases meaning higher cache hit rates & dramatically lower query costs. The more stable the codebase, the greater the cache hit rate
• Microsoft is reporting 90% more tokens per GPU, showing infrastructure efficiency gains are real & accelerating
• Local coding models for smaller tasks can run on-device, reducing cloud inference costs entirely
• Bring Your Own Cloud arrangements, where enterprises use their prepurchased cloud credits, shift inference costs off the vendor’s balance sheet entirely & increase margins for those deployments to well north of 90%, depending on the customer success costs
• Rate limit users to manage outlier usage & maintain predictable unit economics

Today, the most valuable asset is distribution. Venture capital is willing to subsidize that distribution, & over time that distribution will generate profits.

At the point where the companies shift from penetration to maximization, they will need to decide whether the cost of customer acquisition at the lower part of the market is a continued strategic marketing cost or simply too expensive on a margin basis to bear.

The companies that master this transition will define the next decade of software development. Those that don’t will become cautionary tales of the great AI coding economics reckoning.