Every Software Business Has the Same Playbook

The strange contradiction at the heart of B2B SaaS

Midjourney/prompt: "software playbook watercolor"

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. 

Learn more

This article isn't finished...

Start a $1 trial to read the rest and get access to all of Every.

Premium Every subscribers get one email a day with a smart, thoughtful essay going deep on AI, tech, and personal development. Join 80,000+ founders, operators, and investors to access:

  • This article and hundreds of other essays
  • Our community to interact with Every's writers and other readers
  • A reading experience free of ads or paywalls
  • Our AI-writing app Lex and priority access to our other AI experiments

A trial is only $1 for your first two weeks and $200 per year thereafter.

Subscribe →

Or, login.

Read this next:

Napkin Math

Devote Yourself to the Cause of Your Life

Your to-do list can wait

1 Aug 3, 2023 by Evan Armstrong

Napkin Math

Live Fuller, Not Bigger

You must escape the shallow joy of more

10 Oct 26, 2023 by Evan Armstrong

Napkin Math

Claude 3 Is The Most Human AI Yet

But that doesn’t mean it's going to beat ChatGPT

5 Mar 5, 2024 by Evan Armstrong

The Sunday Digest

How AI Works, Crypto’s Prophet Speaks, ChatGPT for Radical Self-betterment, and More

Everything we published this week

Feb 4, 2024

Napkin Math

Profit, Power, and the Vision Pro

Will Apple’s new headset change everything?

5 Feb 6, 2024 by Evan Armstrong

Thanks for rating this post—join the conversation by commenting below.


You need to login before you can comment.
Don't have an account? Sign up!

Every smart person you know is reading this newsletter

Get one actionable essay a day on AI, tech, and personal development


Already a subscriber? Login