A margin question with a constraint added halfway through. The average user is not the problem; the distribution is, and a flat price hides it until the model gets more expensive.
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We sell an AI add-on at $20 per user per month, flat. Is it profitable? Now the team wants a model that costs three times as much.
Try it in the practice workspaceDraft your answer before comparing it with the rubric.A margin question with a constraint added halfway through. The average user is not the problem; the distribution is, and a flat price hides it until the model gets more expensive.
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Case briefRead the inputs, then make your call
Fictional AI add-on sold at $20 per user per month, flat. All figures are illustrative. Request counts include regenerations, and the finance team has set a gross margin target.
| Inference cost per request, current model | $0.012 |
|---|---|
| Retrieval and infrastructure | $1.00 per user per month |
| AI-related support | $0.60 per user per month |
| Payment fees | 3% of revenue |
| Gross margin target | 75% |
| Usage segments | 70% of users send 50 requests a month, 25% send 500, 4% send 2,500 and 1% send 10,000. |
| Proposed model | Three times the cost per request; evals show better answers on hard tasks. |
| Monthly churn | 5% of add-on users on the current model |
Your task. Calculate gross and contribution margin, show which users drive cost, and decide whether to adopt the more expensive model. Compute the retention change that would justify each option you consider.
Follow-up roundsAnswer first, then revise for each changed constraint
- Round 2.
The provider halves the large model's price next quarter, so it costs 1.5 times the current model.
- Round 3.
The routing holdout is in. Routed users churn at 4.6% a month instead of 5%, and almost all of the drop is among heavy and extreme users.
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