Three Major Headwinds for China’s SaaS Industry

Headwinds facing the SaaS industry 1) Demand for IT products that improve efficiency has not yet taken off at scale Many small and midsize businesses are still managed informally and focus mainly on winning orders. They pay little attention to waste in production and operations. Most small-business owners have not yet recognized the importance of using IT systems to improve management and lower the cost of delivering products, including services. The main value of SaaS products—especially general-purpose SaaS tools—is to help businesses become more efficient. If many businesses do not see efficiency as a pain point, marketing SaaS products becomes very difficult. 2) Many SaaS companies’ products are not good enough Intellectual property was easy to overlook in the early days. When a software company created an innovative product and received a positive response from the market, competitors soon copied it. Software companies were then left to compete on marketing and price-performance. They were pushed toward custom development for businesses because custom work was harder to copy. Custom development, however, brought its own difficulties. Customer businesses grew quickly, and their management systems and processes changed frequently. Software developers struggled to keep up with unstable customer requirements, and vendors often could not even recover the cost of the people assigned to the work. After global software giants such as Oracle, SAP, and Microsoft entered the market, they captured the most profitable segments. To this day, only a handful of niches—such as financial software, business-intelligence reporting, and engineering cost-estimation software—have produced a small number of profitable software companies, for historical, policy, or other reasons. An industry with little growth naturally accumulates less technical expertise. It lacks not only technical talent but also people who can understand how businesses operate. SaaS grew out of the traditional software industry. The previous generation’s limitations in technical architecture and business understanding also left the next generation of SaaS products less able to meet business customers’ needs. This shows up in incomplete product functionality and weak value propositions that make customer acceptance difficult; in IT architectures that do not scale well, forcing teams to rebuild repeatedly during version updates and waste substantial engineering resources; and in organizations that lack the management thinking, operating processes, and employee culture needed across marketing, sales, and service. Looking only at the relationship among “product, customer, and market,” when a product’s value is not compelling, it is difficult for a company to break through in the market. Even if a customer buys it, if it does not solve the customer’s real pain points, word of mouth will suffer and demand for the product will not accelerate. This is a vicious cycle. 3) Corporate IT procurement is also a bottleneck In the United States, the business environment is mature and SaaS products have transparent prices. Engineers in traditional companies—not necessarily IT specialists—and managers in individual departments can quickly decide to buy a SaaS product that improves efficiency and then expense it to the company. In China, IT procurement is complicated and often involves procurement, IT, business departments, administration, the CEO’s office, and others. SaaS companies therefore face much higher marketing costs and take much longer to reach customers. When it is time to renew, the contract and price must be negotiated again. SaaS companies in China face one difficulty after another. The third point is only a symptom. The underlying causes are the first two: demand and product value. For SaaS companies, an inadequate product is an internal cause, while customers’ needs not being mission-critical is an external one. Even if a company strengthens its capabilities and fixes its internal problems, once sales reach a certain scale, external constraints will slow growth for most SaaS companies. The market is still maturing. At this stage, demand growth is mostly linear, even when a SaaS company has strong products and organizational capabilities. Of course, I have also seen companies reach substantial revenue and continue growing rapidly. This has a great deal to do with their industries. They have also learned ways to “replicate market success.” Later chapters of the book explain one such methodology in detail. China’s SaaS sector has faced many difficulties, but a great deal of capital has flowed into it over the past five years. Some of that money funded R&D and improved products; some attracted excellent software and internet talent; and some sent startup teams down the wrong path, but at least bought them valuable lessons… Some SaaS startups have also begun to enter a virtuous “product-customer-market” cycle: a strong product helps customers solve problems, which builds a good reputation in the market, brings in more customers and revenue, gives the company healthy cash flow to invest in R&D and organizational development, and helps it solve problems for even more customers… Overall, as competition intensifies across industries, Chinese businesses will gradually have a greater need to improve efficiency. Industry-specific and scenario-specific SaaS should grow faster than general-purpose SaaS tools. It addresses more concrete problems, makes business owners more willing to buy, and makes it easier to close deals and build data advantages. The founders of industry-specific and scenario-specific SaaS companies often come from the industries they serve, so they may understand the business better than many business owners in those sectors and take fewer wrong turns in product development. The book discusses the business models for industry-specific and scenario-specific SaaS later. The book can be read in two ways: Read it from beginning to end to gain a systematic understanding of the SaaS startup journey and avoid “seeing only the trees, not the forest” when making decisions at a specific stage. Or use it as a reference book, focusing on the goals and key issues relevant to the stage your own company has reached. #SaaSStartupRoadmap