Is Your Margin My Opportunity in Software?

Jeff Bezos famously said, “Your margin is my opportunity.”¹ Does this maxim apply in software & AI? Yes.

Software companies maintain 76% gross margins yet earn almost nothing. Sales, marketing, & research & development consume it all.

Among 69 publicly traded B2B software companies, the median net income margin hovers near zero.² Gross margins cluster tightly around 76%, yet almost none of that profit flows to the bottom line.

The bottom quartile loses nearly 10% of revenue. Only the top quartile achieves meaningful profitability at 16%. Palantir, once dismissed as a services company, tops the list at 18% net income margin.

Enterprise & PLG look the same at the bottom line :

Enterprise software maintains higher gross margins than PLG/SMB, but both segments struggle equally to convert that to net income.³

Go-to-market & engineering consume the entire gross margin. Software companies spend 40-60% of revenue on sales & marketing alone. R&D takes another 15-25%.

Multi-year contracts & positive net dollar retention justify the expense. This is why so many software companies operate at zero net income margin : they’re buying growth. At least, this is the narrative.

But, but, but! Among these 69 companies, there is no correlation between net income margin & revenue growth (r = 0.18, p = 0.136).

Infrastructure is different. Despite intense competition from Google Cloud & Microsoft Azure, AWS has maintained high operating margins over the past decade. In the last few quarters, margins have increased, even as AWS sells CPUs & GPUs similar to those available elsewhere.⁴

From 2015 to 2025, AWS operating margins have ranged between 25% & 38%. Even after a decade of cloud commoditization, AWS prints money at scale. Where most software companies outspend on sales teams, AWS outspends on data centers. The moat is capex, not customer acquisition, & few other companies have the balance sheet to compete.

Bezos was right. Your margin is my opportunity. In software, that opportunity isn’t price. It’s the race to outspend everyone else.

Still, $8.7 trillion in enterprise value says the race is worth running.