Is Your Margin My Opportunity in Software?
Software companies maintain 76% gross margins but zero net income because they spend everything on sales and R&D—yet there's no correlation between that spending and growth, suggesting the "buying growth" narrative may be broken.
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TLDR
• 69 public B2B software companies have 76% gross margins but ~0% net margins—all profit gets consumed by sales/marketing (40-60%) and R&D (15-25%)
• The standard justification is "buying growth," but the data shows NO correlation between net income margin and revenue growth (r=0.18, p=0.136)
• AWS proves infrastructure is different: 25-38% operating margins for a decade by building capex moats instead of outspending on customer acquisition
• In software, "your margin is my opportunity" doesn't mean price competition—it means whoever can outspend on growth wins, making access to capital the real moat
In Detail
The piece dismantles the conventional wisdom around software margins with hard data from 69 public B2B software companies. While these companies maintain remarkably consistent 76% gross margins, their median net income margin hovers at zero. The bottom quartile loses 10% of revenue, while only the top quartile achieves 16% profitability. This pattern holds across both enterprise and PLG models—go-to-market and engineering expenses consume everything.
The standard narrative justifies this as "buying growth" through multi-year contracts and positive net dollar retention. But the author reveals a critical flaw: there's no statistical correlation between net income margin and revenue growth (r=0.18, p=0.136). Companies spending aggressively on sales and R&D aren't actually growing faster than those who don't, undermining the entire justification for zero-margin operations.
AWS provides the counterexample that proves the rule. Despite selling commoditized compute against Google Cloud and Microsoft Azure, AWS has maintained 25-38% operating margins for a decade by building capex moats through data center infrastructure. The implication is stark: in software, Bezos's maxim doesn't mean price competition—it means the race to outspend everyone else on customer acquisition. The real competitive advantage isn't operational efficiency; it's having the balance sheet to fund the spending race, even if the returns are questionable.