What is AI COGS?
AI COGS (Cost of Goods Sold) refers to the variable costs directly attributable to delivering AI-powered features to customers.
AI COGS (Cost of Goods Sold) refers to the variable costs directly attributable to delivering AI-powered features to customers. Unlike traditional SaaS (near-zero marginal cost per user), AI features have significant per-interaction costs.
Components of AI COGS: - LLM API fees (OpenAI, Anthropic, Google per-token charges) - Embedding generation and vector database queries - GPU compute for inference or fine-tuning - Data retrieval and processing pipeline costs - Monitoring, logging, and observability" class="text-cyan-400 hover:text-cyan-300 underline underline-offset-2 decoration-cyan-500/30 transition-colors">observability infrastructure - Error handling, retry logic, and fallback model costs - Human-in-the-loop review costs
Impact on SaaS economics: Traditional SaaS enjoys 80%+ gross margins. AI-heavy SaaS products can see margins compress to 40-60%, fundamentally changing valuation multiples and capital requirements.
Why It Matters
AI COGS is the #1 reason AI products fail economically. A feature that costs $0.05 per interaction at 100K interactions/month costs $5K/month in COGS alone. At scale, this can exceed revenue. The AUEB calculator models this.
How to Measure
Tag every AI inference call with cost. Aggregate by feature, customer, and time period. Compare to feature-level revenue. The AUEB tool at richardewing.io/tools/aueb automates this analysis.
Frequently Asked Questions
How do AI COGS affect valuation?
SaaS investors apply valuation multiples based on gross margin tier. Traditional SaaS at 80% margin gets 10-15x ARR multiples. AI SaaS at 50% margin may only get 5-8x. Every percentage point of margin matters at scale.
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Richard Ewing is a Product Economist and AI Capital Auditor. He helps companies translate technical complexity into financial clarity.
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