Rising AI’s Costs Put SaaS Companies Between A Rock And A Hard Place

by · Inc42

SUMMARY

  • Zoho cofounder Sridhar Vembu has warned that rising AI infrastructure and usage costs are putting pressure on software companies, prompting tighter spending and a pause in routine salary hikes at Zoho.
  • AI productivity gains may not be enough to offset rising model, token and computing costs, leaving software companies to rethink hiring, salaries and investment priorities.
  • Freshworks’ proposed acquisition of Torii, alongside Perfios’ efforts to optimise AI models and track profitability, highlights how companies are trying to make AI adoption more cost-effective.
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Recently, Zoho cofounder Sridhar Vembu raised concerns over the economics of building software in an AI-driven market. In a post on X, Vembu said server prices have risen 4-5X in a year, while AI usage and token expenditure are pushing up operating costs.

Zoho, however, plans to respond by cutting its marketing budget, freezing headcount for 18 months and pausing its usual salary hikes this year. 

Vembu’s concern is that while AI has made software easier to build, running a software business is getting more expensive. At the same time, AI coding tools and agents are challenging traditional subscription and per-seat pricing models. 

Another concern, as per Vembu, is that AI-driven productivity gains in software development currently stand at 25% to 50% when measured across the entire product development process. While developers can build prototypes faster, testing, verification and other stages of taking a product to market continue to require human involvement.

When AI Costs Start To Bite

As AI eats into SaaS revenue, it is also making software more expensive to run. Every AI query requires computing power, adding to operating costs. At the same time, growing demand for AI infrastructure is driving up hardware prices, making it more expensive for companies to run their software.

According to ICONIQ’s 2026 data, AI products have an average gross margin of around 52%, compared with the 80% benchmark for traditional SaaS. For established SaaS companies adding AI features, gross margins can fall by 12-17 percentage points, depending on how efficiently they manage AI computing costs. 

The pressure is also forcing software companies to reconsider how much profitability they are willing to sacrifice to build AI products. 

On October 15, 2026, SaaS giant Figma’s CFO, Praveer Melwani, said the design software company might not return to its previous gross margins of over 90% as it invests in AI features. Its margins were in the mid-80% range, with the company prioritising long-term growth and competitiveness over an immediate return to earlier profitability levels, according to Reuters.