There are lots of takes on where value will accrue as LLM-tech proliferates. Here’s one more.
“Where will value accrue?” — in case you’re not tuned into VC-speak — translates to “When can LLM startups beat incumbents?”
My answer: Startups with LLM-enabled, counter-positioned pricing will beat incumbents. They have the giant-defeating potential that David did.
What’s “counter-positioned pricing?” It’s a pricing model that incumbents can’t copy without losing money.
The classic example1 of counter-positioning is Vanguard index funds. Fund managers could not offer passively managed funds without cannibalizing high-margin revenue from their managed funds. Even worse: offering unmanaged funds was tantamount to admitting that their core value proposition was bogus, that fund managers couldn’t really beat the market.
LLMs open up new counter-positioned pricing models for software.
For example, lots of marketing software for SaaS companies charge based on number of users or number of emails sent, but the customer doesn’t get any additional value when an email is sent or a new contact is added. The customer only cares when those marketing efforts convert a free user to a paying customer.
If you feed an LLM data about how a user is using a piece of software, the LLM can tell you when the user converts, which means customers can pay for converted users — the thing they actually care about — instead of emails sent. This is literally what we’re building.
Incumbents can build LLMs that understand what users do in an app, but they can’t copy the startup’s pricing without losing money. An incumbent that prices on emails sent will inevitably build a product that doesn’t optimize a customer’s ability to convert their users because they get paid regardless. Switching pricing models forces them into a dilemma: lose revenue from customers who aren’t converting their users or price higher than the startup.
There are very likely other cases where LLMs open up counter-positioned pricing models that startups can exploit. I don’t know any others offhand, which shouldn’t be surprising. Startups exploit billion dollar mistakes, and given that people are strongly incentivized to avoid making billion dollar mistakes, it’s hard for anyone to find a single mistake, much less two.
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The idea of “Counter-positioning” and this example comes from 7 Powers, a book on business strategy by a Stanford economist turned VC. ↩︎