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According to Kagi, they can’t make the price much lower and still be profitable.

If they get 100x the customers on a $2 tier than a $5 tier then yes, they can be profitable.

The question is, could they get 100x? Or even 10x? I don’t know, and I assume they’ve done their homework and believe that they can’t. I just wonder, what if they’re wrong?

It if supporting each customer costs them, say, $2.50

for each Kagi search they hit APIs of other search providers etc., so they need to cover that cost.

Except for these types of services scale is in your favour. A bakery has a high cost of goods sold, whereas services like this tend to have high fixed costs but relatively light costs per customer. So scale is very much to your advantage (within reason).

because they have to pay for queries to other APIs for each search, COGS is relatively high I think, which is counterintuitive for a web product like this.

my sense is their fixed costs are relatively low.

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