Why Cheap Tech Rarely Stays Cheap: The Pricing Power Cycle

Remember when streaming was the cheap alternative to cable, and a ride across town cost less than a taxi? Those days are fading. Subscribing to eight major streaming services without ads now costs about $139 a month, according to Fortune, which also reports that streaming prices have climbed more than three times as fast as inflation since 2022.

That isn't an accident. It's a cycle, and once you see it, you notice it across tech. For investors, it raises a practical question: which business models can raise prices and keep their customers, and which can't?

Key Takeaways

• Many tech services launch below cost to win users, then raise prices once customers are locked in.

• The cycle tends to run in three stages: subsidize, lock in, monetize.

• AI tools may be in the early, subsidized stage today, though cheaper alternatives could change how the cycle plays out.

• Durable competitive advantages, not market hype, tend to separate businesses that can raise prices from those that can't.

What Is Pricing Power?

Pricing power is a company's ability to raise prices without losing meaningful business to competitors. Warren Buffett told the Financial Crisis Inquiry Commission that "the single most important decision in evaluating a business is pricing power," as Bloomberg reported.

Why it matters to investors:

• Price increases can flow to margins when costs don't rise in step.

• It can help a business keep pace with inflation, which affects stocks, bonds and real estate alike.

• How customers react to a price hike is real-world evidence of how much they value the product.

The Three-Stage Cycle Behind Cheap Tech

Cheap tech usually isn't cheap because it's cheap to run. Many platforms follow a predictable path from growth to profit.

Stage 1: Penetration Pricing and the Loss Leader Strategy

Penetration pricing means launching at a low price to grab market share fast. In tech, it often becomes a loss leader strategy: the company accepts losses on each customer, funded by investors, betting it can earn the money back later.

Rideshare is a textbook case. Venture-backed discounts helped the major apps grow quickly, and CNBC reported that, according to Rakuten Intelligence, the cost of a ride-sharing trip rose 92% between January 2018 and July 2021.

Stage 2: Switching Costs Lock Customers In

Once users are on board, the business works on making leaving inconvenient. Switching costs aren't always about money. Morningstar counts them among five sources of durable competitive advantage, covering the time, effort or risk customers face when moving to a rival.

In tech, they often look like:

• Saved playlists, watch histories and personalized recommendations

• Integrations with other tools and workflows

• Stored data that's painful to migrate

• Team habits and training built around one product

Stage 3: Recurring Revenue Meets the Price Hike

With customers locked in, the subscription model does the rest. Recurring revenue is predictable, and a dollar or two added to millions of monthly bills adds up quickly. This is the stage most consumers notice, because it shows up on their statements.

AI Pricing: Is the Cycle Repeating?

Today's AI pricing, a key factor for anyone weighing AI-focused investments, looks a lot like Stage 1. The cost of running AI at a fixed performance level has collapsed. Stanford's 2025 AI Index found that the price of reaching a 2022-era performance benchmark fell from $20 to $0.07 per million tokens in about 18 months.

At the same time, leading developers are spending heavily, part of a broader wave of Big Tech capital expenditure. OpenAI reportedly expects to burn around $17 billion in cash in 2026, up from about $9 billion in 2025, according to The Economist.

This tension came up in a recent investor discussion on Reddit. A former big-tech engineer described using AI coding tools to shrink his company's cloud bill. Many replies argued he was benefiting from subsidized prices, and that costs could rise once businesses depend on these tools.

AI may not follow the script exactly, though. Open alternatives are closing in: Stanford found the performance gap between top closed and open-weight models narrowed from 8% to 1.7% on some benchmarks in roughly a year. Easy-to-swap options weaken switching costs, which is exactly what Stage 3 depends on.

Why an Economic Moat Decides Who Keeps Pricing Power

Not every company that raises prices keeps its customers. The difference often comes down to an economic moat, a lasting advantage that keeps competitors from undercutting.

Signs of Durable Pricing Power

Analysts often look for traits like these:

• Margins that hold steady or expand after price increases, visible in a company's financial statements

• Low customer churn following a hike

• Few close substitutes at a similar price

• Products embedded in daily routines or business workflows

• Revenue that grows even when user counts stall

When the Cycle Breaks

The cycle has limits. According to Ampere Analysis, average price rises across three of the largest global streamers fell from 24% of the prior price in 2023/24 to 14% in 2025/26, which suggests they are nearing what consumers will pay. In rideshare, average fares rose 9.6% in 2025, and most riders said they cut back on usage, per Entrepreneur.

Competition, regulation and cheaper substitutes can all cap how far prices go. That's why the cycle works best as a lens for understanding businesses, not a guarantee of how any one company will behave, which is one reason concentration risk deserves attention.

Explore How the Platform Handles This

The pricing power cycle is easy to spot in hindsight. Tracking which consumer tech businesses still have room to raise prices, and which are starting to hit the limits described above, is much harder to do by hand month after month.

That's the gap the Future of Consumer Tech strategy on Surmount is built around. It's a rules-based thematic strategy focused on the same parts of the market this article has been examining.

What the strategy does

• Focuses on consumer tech platforms. Its universe spans e-commerce, social media, streaming, fintech and electric vehicles, the sectors where the subsidize, lock in, monetize pattern tends to play out.

• Screens for competitive advantages. Holdings are drawn from mid- to large-cap companies selected for competitive advantages and innovation-driven business models, the same moat lens covered above.

• Weights by fundamentals, not headlines. Allocations are based on each company's market leadership, financial performance and growth prospects.

• Rebalances every 30 days. The portfolio resets to its target weights monthly, so positions don't drift as some names run ahead and others stall.

• Spreads exposure across sub-sectors. It holds a basket rather than a single company, which matters given the concentration risk discussed above.

• Connects to supported brokerage accounts. It runs on the Surmount platform with no code required.

Risks to weigh alongside these features

• The strategy is concentrated in one theme. Consumer tech companies can decline together, for example if price increases push customers away, as the rideshare data above shows.

• Screening for competitive advantages involves judgment and does not guarantee any company keeps its ability to raise prices.

• Monthly rebalancing does not prevent losses and may create trading costs or taxable events.

• All investing involves risk, including the possible loss of principal.

The Future of Consumer Tech strategy is managed by Quantbase, LLC, an SEC-registered investment adviser. Surmount is the technology platform used to access it.

[BUTTON] See How the Future of Consumer Tech Strategy Works

This content is for informational and educational purposes only and is not investment advice or a recommendation to buy or sell any security or strategy.

Frequently Asked Questions

What is an example of pricing power in tech?

A streaming or software service that raises its monthly price and keeps most of its subscribers is a clear example. It suggests customers value the product enough to accept the increase.

Why do tech companies use penetration pricing?

It helps a company win market share quickly and build user habits. The goal is usually to make the money back later, once customers are settled and less likely to leave.

Is a loss leader strategy sustainable?

This approach works only as long as funding lasts. It needs the business to reach a point where it can raise prices or cut costs before investors lose patience.

Will AI pricing go up?

No one knows for sure. Costs have fallen sharply while developers spend heavily, and growing competition from open-weight models could limit how far prices rise.

How does an economic moat protect recurring revenue?

A moat makes it harder for rivals to win customers away, which helps that income hold up after a price increase. Without one, subscribers are more likely to cancel or switch.