@tjrobertson52

Wasn't AI supposed to get cheaper over time? Why is it getting more expensive? The way things are going, it looks like AI usage is just going to cost more and more for the foreseeable future.

So why would we keep spending more tokens if they're getting more expensive? And what did we get wrong here? Well, the truth is, if you control for capabilities, AI is getting cheaper.

For example, Google's Gemma 4 model is incredibly cheap, and it's as capable as any of the frontier models were a year ago. So if you're okay sticking with the capabilities of the frontier models today, then yes, you can expect those capabilities to get cheaper over time. Problem, of course, is that 6 months from now, those capabilities aren't gonna be enough.

If your competitors are using the latest models and you're not, you're just not gonna be able to keep up. But wait, I thought AI was supposed to make everything cheaper and more efficient. If I'm spending more and more on tokens, how do the economics work out?

Thinking through this is important cause it really highlights how much of the work needs to be done by AI for you to ultimately save money. The companies at the forefront of AI use are now targeting token costs at about 50% of their overall payroll costs. One to two years from now, I don't think it'll be abnormal for token costs to exceed payroll costs.

So if our payroll costs are effectively doubling, what has to be true for that math to work out? Well, at first you might think if costs are doubling, then output has to double. But of course, why would we go through the effort of implementing AI if the end result is just twice the payroll?

For this to make sense, the tokens have to be more cost efficient than payroll. Maybe our output has to be something like three times what it is now. B

or this to make sense, the tokens have to be more cost efficient than payroll. Maybe our output has to be something like three times what it is now. But of course, if all companies are becoming more efficient, or at least those that are staying competitive are, then what you can charge for the same output is also going to go down.

So in reality, your output probably needs to go up by four to eight times in the next one to two years with the same payroll. And of course, I'm just referring to work that can be done on a computer. Plumbers don't need to increase their output by eight times.

But that just addresses the supply side. Where does all that demand come from? How are you going to get four to eight times as many customers?

Well, that part's actually pretty simple. Most of your competitors aren't going to do this. They're not going to stay competitive.

Their customers become your customers, and a smaller and smaller group of companies eat up more and more of the market share. Now what we do as a society as result is beyond me, but as a business owner, I recommend keeping up.