Selling a core product cheaply (like a printer) to lock customers into expensive consumables (ink) generates a predictable revenue stream. However, this model's primary weakness is the strong customer resentment it builds, as users feel trapped and exploited over time.
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AI products with a Product-Led Growth motion face a fundamental flaw in their unit economics. Customers expect predictable SaaS-like pricing (e.g., $20/month), but the company's costs are usage-based. This creates an inverse relationship where higher user engagement leads directly to lower or negative margins.
This business model embeds a vendor so deeply that a client's own institutional knowledge atrophies. The client's employees no longer understand critical business processes, making it prohibitively expensive and risky to switch vendors, who now hold all the expertise.
Widespread user complaints suggest Microsoft's Copilot is underperforming, yet the company continues to bundle it and raise prices. This is a classic incumbent strategy: leveraging a locked-in customer base to extract value from a subpar product rather than competing on quality and user experience, creating an opening for more agile competitors.
Platforms first attract users with good service, then lock them in. Next, they worsen the user experience to benefit business customers. Finally, they squeeze business customers, extracting all value for shareholders, leaving behind a dysfunctional service.
Unlike transactional purchases requiring a proactive decision to buy, subscription models thrive on consumer inertia. Customers must take active, often difficult, steps to cancel, making it easier to simply continue paying. This capitalizes on a psychological flaw, creating exceptionally sticky revenue streams.
For incumbent software companies, an existing customer base is a double-edged sword. While it provides a distribution channel for new AI products, it also acts as "cement shoes." The technical debt and feature obligations to thousands of pre-AI customers can consume all engineering resources, preventing them from competing effectively with nimble, AI-native startups.
Platforms first attract users with a great service, then pivot to monetizing those users for business customers, and finally extract all value for themselves, degrading the experience for everyone else. This cycle, termed "inshittification," is enabled by locking in users and businesses who become too dependent to leave.
Many subscription companies employ a "penetration strategy," pricing below cost to attract a large user base. Once loyalty is established, they leverage their pricing power to increase profits, shifting focus from pure growth to appeasing shareholders who now demand profitability.
Dynamic Signal generated millions in ARR, but analysis revealed customers treated the product like a one-off media buy, not a recurring software subscription. The high revenue hid an unsustainable, services-based model with low lifetime value.
Unlike perpetual or even subscription models, consumption-based compensation holds sales reps directly responsible for the customer's ongoing product usage. Reps are on the hook to ensure credits are "burned down," effectively merging the roles of sales and customer success and forcing a continuous selling motion.
