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I'm not an MBA over here, but this math seems wrong. If they are spending $240 in increased costs, then they only have to make about $247 in additional revenue

I'm not an MBA over here, but this math seems wrong. If they are spending $240 in increased costs, then they only have to make about $247 in additional revenue from that spend to preserve a 3% margin. That seems much more reasonable if it increases the probability that customers find the product they are looking for and have a good experience.

ambicapter 3mo ago
I agree here. OP is taking a retail company's entire profit margin, which includes a lot of operating costs, and estimating that the AI subscription will have the same margin. The AI subscription is software though, it probably has the operating costs and profit margins of software.
amazingamazing 3mo ago
No, because costco has a 3% margin. A cart of stuff at costco costing 247 will yield 240 to various operating costs, and roughly $7 actually to costco. If you have a lemonade stand you might sell a cup for $1, but overall after paying yourself and for the cups, lemons, etc you might only get 3 cents each cup. For costco revenue equals sales and membership.
- ironSkillet 3mo ago
  I understand that. The AI software is meant to be a productivity enhancer for the employees using it. Other than the licenses, some training etc, there are no operating costs associated with it. Just by using the software, I don't suddenly have to pay more for salaries, retirement plans, etc, which are things that in aggregate produce the 3% margin. Maybe I have to pay more in logistics because I'm moving more product now, but I think the point stands.
  - amazingamazing 3mo ago
    The point is if you are paying for software but not increasing your revenue by your margin you are lowering it even if you are increasing profit in absolute terms. What you are mentioning with salaries is not relevant.
    - ironSkillet 3mo ago
      I think we can agree to disagree here. I don't see how a company needs to have an $8000 increase in revenue to justify a $240 software purchase. You are assuming that the current operating cost for every dollar of revenue is also applied to every incremental dollar in revenue gained from software efficiency, and that is just not true.
      - amazingamazing 3mo ago
        There is nothing to disagree on, i am talking about net operating profit margins. It is math. What you are saying is again irrelevant. It is not about justification. Is about net margins…

ambicapter 3mo ago

I agree here. OP is taking a retail company's entire profit margin, which includes a lot of operating costs, and estimating that the AI subscription will have the same margin. The AI subscription is software though, it probably has the operating costs and profit margins of software.

amazingamazing 3mo ago

No, because costco has a 3% margin. A cart of stuff at costco costing 247 will yield 240 to various operating costs, and roughly $7 actually to costco. If you have a lemonade stand you might sell a cup for $1, but overall after paying yourself and for the cups, lemons, etc you might only get 3 cents each cup. For costco revenue equals sales and membership.

ironSkillet 3mo ago
I understand that. The AI software is meant to be a productivity enhancer for the employees using it. Other than the licenses, some training etc, there are no operating costs associated with it. Just by using the software, I don't suddenly have to pay more for salaries, retirement plans, etc, which are things that in aggregate produce the 3% margin. Maybe I have to pay more in logistics because I'm moving more product now, but I think the point stands.
- amazingamazing 3mo ago
  The point is if you are paying for software but not increasing your revenue by your margin you are lowering it even if you are increasing profit in absolute terms. What you are mentioning with salaries is not relevant.
  - ironSkillet 3mo ago
    I think we can agree to disagree here. I don't see how a company needs to have an $8000 increase in revenue to justify a $240 software purchase. You are assuming that the current operating cost for every dollar of revenue is also applied to every incremental dollar in revenue gained from software efficiency, and that is just not true.
    - amazingamazing 3mo ago
      There is nothing to disagree on, i am talking about net operating profit margins. It is math. What you are saying is again irrelevant. It is not about justification. Is about net margins…