Every Software Business Has the Same Playbook

There are no secrets in software company strategy. Founders follow a well-established playbook that is freely available and universally implemented, while at the same time, the cost for competitors to make copy-cat products is getting ever smaller. In fact, a founder can assume that essentially nothing they make is long-term defensible. Yikes! Every economist would tell you that this situation should result in the destruction of value, and margins should be razor-thin. 

Yet the gross margin for an average software company is over 80%. 

Software is, in my opinion, the best business model ever devised by mankind. The cash flows are totally righteous. The margin is judicious. It is the pinnacle of 200 years of capitalism. In complete violation of what I learned in econ 101 (that, admittedly, I got a B- in), these companies can achieve outrageous levels of success and profitability. 

How can this be? 

Software is such an incredible business because it has close to zero marginal distribution cost. Once you build the software, you can send it over the internet for (essentially) free to as many customers as you like. Additionally, software is sticky. The best companies will make more money every year from the same cohort of customers. Yes, when competition is fierce, acquisition costs go up, but a well-executed go-to-market strategy can overcome that.

This is, like, a mildly interesting topic to which I could devote a newsletter edition. But the much more interesting and devilishly challenging thing to write about (and the thing I’ve been obsessed with for years) is that everyone knows this. What I wrote above contains obvious knowledge that would be at home within a software strategy 101 textbook.

The result is a meta-market: because founders know what playbook their competition is running, they end up positioning themselves against moves their competitors will make in three years. Let’s say I run a newsletter software company, similar to Substack or Beehiiv. Since each company has a unique starting point, we’ll each have relative strengths. Substack is great at helping writers acquire readers. Beehiiv has a much stronger analytics suite. My hypothetical company could have really strong branding and design. I can know, with certainty, that over the next three years both Beehiiv and Mailchimp will move closer to my capabilities, while I move closer to theirs: Substack will improve its graphics, Beehiiv will copy some of Substack’s discovery features, etc. 

In most industries, competition is a knife fight—it’s fast and dirty. In contrast, B2B SaaS is a chess match, cerebral and drawn out. And it’s because rather than merely guessing about what their foes will do, founders can forecast with a spooky level of certainty what is going to happen.