Why can't China's SaaS business ever take off?
The development of SaaS in China is essentially a Don Quixote-style battle against Chinese management theory.
In 2014, I ended my media buying job at a 4A advertising agency and joined a SaaS startup called AdMaster, which specialized in online advertising effectiveness monitoring. After working at this company for 2 and a half years, I am certain that doing enterprise software or SaaS platforms in China is a trap that can never be escaped. Now, seven years have passed, and my judgment seems to be even more accurate. In 2023, can you remember any representative Chinese SaaS companies? Probably not a single one.
In analyzing the difficult situation of Chinese SaaS, perhaps these business barriers with Chinese characteristics can help you avoid some difficulties when developing business in China.
1. The rapid development of the economy has actually suppressed the customer scale for SaaS.
Yes, you heard it right. China's economic boom in the past 30 years has actually resulted in a lack of customer base for SaaS. I remember when I was working at a SaaS company, the company divided its customers into fmcg, automotive, and technology industries, with representative customers including Procter & Gamble, Nestle, Mead Johnson, BMW, Nissan, Lenovo, JD.com, and Huawei. Look at this customer list, almost all of them are Fortune 500 companies, with no small and medium-sized enterprise customers.
In China, small and medium-sized enterprises (SMEs) are the "backbone" of the national economy and social development. The "56789" data is often mentioned: SMEs in China contribute about 50% of tax revenue, 60% of GDP, 70% of technological innovation, and 80% of employment, and more than 90% of market players are SMEs. However, due to the late start of modern enterprise management models in China, the vast majority of SME owners, even some that have developed into listed companies with a market value of billions, have almost no systematic, modern, and scientific management concept guidance. In the decades of rapid growth since China's reform and opening up, these entrepreneurs have been the "pioneers" of the times, relying on the dividends of the times and the spirit of hard work to achieve what they have today. However, the core of SaaS is the output of modern management concepts at the operational tool level of enterprises. In the United States, due to the systematic standardized processes in each work unit, the pursuit of modern management efficiency, and a good payment awareness environment, the development of SaaS is smooth sailing. However, the majority of Chinese SME owners do not have such awareness and cannot directly understand how SaaS tools can reduce business operating costs and improve efficiency. Some people say that the best CRM SaaS tool in China is Guizhou Maotai liquor because in China, business is often conducted at the dining table, and there is no better enterprise management tool than alcohol.
Until today, the previous generation of entrepreneurs still dominate the mainstream of the entrepreneurial community in China. Many of them have not formed a systematic modern management concept, but instead continuously imitate fragmented business skills of companies like Huawei and Alibaba. Even a single statement from Ren Zhengfei, the founder of Huawei, can influence the decisions of tens of thousands of managers. In the minds of countless Chinese business people, China is a country where wealth is generated through personal relationships and opportunities, and therefore the perceived value of management and productivity tools is minimal. In this situation, discussing SaaS is too luxurious, and SaaS practitioners are almost impossible to develop this group as their customers. They can only continuously lower their prices to compete for the narrow survival space with the world's top 500 companies mentioned above.
2. The advantage of SaaS in business model cannot be reflected in China.
This is a problem that the business model of SaaS encounters in China. Firstly, compared to traditional enterprise software with one-time purchase model, SaaS does have a better commercial model. Customers can try out the product for free and then decide whether to subscribe, and they can also pay based on the actual number of features they use. SaaS companies can constantly expand their subscription base through product upgrades, multi-scenario coverage, and customer expansion. This is actually a very user-friendly trial mode for the vast number of small and medium-sized enterprises in China.
However, due to the low profit margins of small and medium-sized enterprises in China, it takes courage to spend money on such tools. Moreover, as mentioned earlier, there is a problem with the entrepreneurial mindset, and when it comes to actually paying, people are not willing to do so. Even if some companies actually use these tools, we need to understand that SaaS tools are constantly being updated and upgraded, which corresponds to an increase in subscription fees. However, Chinese managers cannot understand why they have to pay more, and price increases or disguised price increases seem unethical in the Chinese market.
On the other hand, let's take a look at China's large enterprises. In their thinking, being large and comprehensive is necessary. In other words, these large enterprises either do not spend money, or if they do spend money, they must require the service provider to solve all problems as much as possible. One manifestation of Chinese thinking is that "the customer is always right," whether it is the procurement of CRM/DMP/CDP/ERP tools and so on. This kind of thinking or collaboration is disastrous for SaaS companies.
When I worked at a SaaS company, I often envied the managers in the US market who were able to realize that they could not rely on a single software purchase to solve all their problems. They understood that purchasing SaaS tools was to improve their operational efficiency. This is very important and provides enough space and time for the development and iteration of SaaS products, as well as delineating the business boundaries that SaaS can be effective in.
This kind of comprehensive requirement can evolve into comprehensive customization and privatization, which seriously deviates from the inherent spirit of SaaS tools. In China, even giant internet companies like Alibaba and Tencent, even though they have launched highly flexible and mature enterprise-level management tools, when their business reaches large state-owned enterprises or government departments, they have to become project contractors under the pressure of performance.
There are two additional reasons for this. One is that these types of enterprises have extremely high requirements for data security, compliance, and confidentiality, which require the services to be as private as possible. The other reason is that the informationization decision-making thinking and related technical personnel of enterprises are seriously lacking. We have provided extremely detailed and readable API interface documentation for all tools, but in reality, customers hope that any step that requires an engineer's operation will be completed by the SaaS company, and they ignore the documents, even requiring comprehensive customization of the protocol, scope, compatibility, and labeling of each interface.
In the past two years, Tencent has willingly become a SaaS outsourcing contractor for a large number of government and enterprise units at the bottom level (mainly based on Tencent Cloud as the underlying business framework) to achieve vanity business indicators. Almost 90% of contracts end in losses or no profits, and there have even been irrational operations such as one dollar bidding. Since almost every customer hopes for customization or privatization, Tencent Cloud's business unit has to recruit a large number of pre-sales, after-sales, and solution managers, further expanding the scale of losses. Moreover, being only a project contractor cannot improve the core competitiveness of the product.
3. Chinese SaaS cannot find genuine users.
Here are two scenarios. First, some companies do have the idea of improving operational efficiency through digital construction, but these decisions are top-down, and managers have little understanding of the actual work pain points in fields such as supply chain, financial accounting, CRM, and marketing. As a result, the decision-makers' intention and the actual users' needs are completely inconsistent. SaaS is sold, but due to the inability to use or the fact that it does not meet the actual business situation, it instead leads to a decline in operational efficiency, which in turn affects the reputation and renewal of the SaaS tool.
The second scenario is the arrogance of the client. We once developed an online tool for monitoring negative brand messages. By setting up fixed keywords in advance, we could see actual negative messages and their corresponding dissemination degree on a very easy-to-use dashboard every day, with simple functions such as automatic email sending, PDF printing, automatic warning, and push notification. However, customers were disdainful of these functions. They subscribed to the tool purely because they hoped that we could manually summarize various negative messages every day, and make corresponding analysis and predictions, and finally summarize them into a specified format report to send to them. They also required us to make a comprehensive and detailed analysis report on the customer's brand reputation every quarter, and requested our CEO to make an on-site report. All these additional requirements were not included in the contract. We once thought of refusing, but considering such a fierce competition environment, clients can directly give this order to our competitors if they are unhappy, so we can only silently bear this bitter fruit. That is to say, clients do not value the SaaS functionality itself, but value the manpower service they think they will get after paying, so I often joke that there is no SaaS in China, only PaaS, that is, people as a service!
Finally, I want to say that I still like the SaaS industry and the colleagues I worked with. However, the premise for SaaS to exist as a copy-to-China business is the presence of modern management systems in companies led by forward-thinking managers who constantly seek to improve work efficiency. Unfortunately, this has not yet happened in China. The current period marks the starting point of China's transformation towards industrialization. I believe that in the future, our business society will once again welcome those adventurous SaaS entrepreneurs, and I hope that day will come sooner rather than later.