Application software has the most attractive economics in technology: sell once, deliver infinitely, collect monthly. The shift from perpetual licensing to subscription has transformed revenue predictability and smoothed the lumpy sales cycles that characterized enterprise software in the past. Net revenue retention — how much existing customers expand their spending year over year — is the single most important metric for evaluating software company quality. Above 120% means the business grows even without selling to a single new customer. Gross margins above 70% are typical for pure software, and companies that achieve this while also growing rapidly can generate exceptional long-term returns. Competition is the primary risk — software markets attract entrants easily, and platform vendors constantly expand into adjacent categories, threatening specialists. AI is reshaping the product landscape rapidly, creating both opportunity for existing vendors and risk of disruption. For investors, software rewards conviction in durable product categories with high switching costs.
