China’s Enterprise SaaS Market: Opportunities, Challenges, and Strategic Lessons 2

Part 2 - Market Interpretation / Why Is It Happening This Way?

3. Structural Challenges Shaping China's Enterprise SaaS Market

The distinctive characteristics of China's enterprise SaaS market have directly influenced how domestic SaaS companies develop products, generate revenue, and serve customers. While these approaches have enabled providers to meet the evolving needs of Chinese enterprises, they have also created structural challenges that differ from those encountered in more mature SaaS markets.

Understanding these challenges is essential for interpreting China's SaaS development and identifying where future opportunities may emerge.

3.1 Balancing Service Delivery with Product Scalability

Since the early development of China's SaaS industry, many providers have adopted business models that combine software subscriptions with implementation services, consulting, customisation, user training (China academy of information and communications technology CAICT, 2025). This hybrid approach reflects the practical needs of Chinese enterprises, which often require software solutions tailored to specific business processes and industry requirements rather than standardised, out-of-the-box products.

While this service-oriented model helps providers deliver immediate customer value and build stronger client relationships, it also creates challenges for long-term scalability. Compared with subscription-led SaaS models that rely on highly standardised products and recurring revenue, service-intensive business models require greater implementation effort, increase delivery costs, and make it more difficult to achieve operational efficiency at scale.

As a result, many domestic SaaS companies continue to balance two competing priorities: delivering the flexibility that customers expect while building standardised products capable of sustainable growth.

Although the market has expanded rapidly, several structural issues continue to influence enterprise purchasing decisions and product adoption.

3.2 Information Asymmetry

In a highly competitive SaaS market in China, marketing and sales activities often receive greater attention than measurable product performance and customer outcomes. As a result, enterprises may find it difficult to obtain objective and comparable information when evaluating different SaaS solutions, increasing the complexity of software selection (iResearch, 2025).

3.3 Limited Evaluation Standards

Compared with more mature software markets, China's SaaS industry is still developing widely recognised product evaluation frameworks and benchmarking standards. Without consistent assessment criteria, enterprises may struggle to compare competing solutions effectively (iResearch, 2025), while software providers receive limited structured feedback to support continuous product improvement.

3.4 Product Adoption and Customer Success

The long-term value of SaaS depends not only on customer acquisition but also on sustained product adoption. According to research published by 36Kr in 2023, the average utilisation rate of enterprise SaaS solutions in China was 56.4%, while more than 20% of enterprises used less than 30% of the functionality they had purchased. These findings suggest that many organisations have yet to realise the full value of their software investments. This also highlights opportunities for SaaS providers to strengthen customer onboarding, user training, product design, and customer success capabilities to improve long-term adoption and business outcomes.

3.5 Looking Ahead

As China's enterprise software market continues to mature, the next stage of SaaS development is likely to depend less on expanding market demand and more on improving business model maturity.

Future market leaders will be those that successfully balance scalable product development with the flexibility, localisation, and industry expertise required by Chinese enterprises. At the same time, advances in artificial intelligence may help reduce the traditional trade-off between customisation and scalability by enabling more intelligent, configurable, and automated software solutions.

📌 Strategic Insight

The structural challenges facing China's SaaS industry should not be interpreted as signs of market weakness. Instead, they reflect the complexity of serving one of the world's most diverse and rapidly evolving enterprise environments.

For international SaaS companies, the key lesson is that success in China depends on more than product innovation alone. Companies need operating models that combine scalable technology with localisation, implementation capability, and customer success.

Rather than asking whether the Chinese market is ready for SaaS, international technology companies should ask whether their SaaS business model is ready for China.

2. Understanding China's Enterprise SaaS Market: Characteristics and Market Dynamics

Although China's enterprise SaaS market has broadly followed the global evolution of cloud-based software, it has developed distinctive characteristics shaped by China's business environment, and enterprise needs.

Compared with the United States, China's SaaS market emerged approximately five years later (MobTech, 2022). More importantly, it evolved under different market conditions, resulting in notable differences in adoption patterns, enterprise requirements, software ecosystems, and procurement processes (iResearch, 2025).

2.1 The Coexistence of Horizontal and Vertical SaaS

One defining characteristic of China's SaaS landscape is the continued dominance of horizontal SaaS solutions(iResearch, 2025), while vertical SaaS has become the fastest-growing segment of the market.

As illustrated in Chart 3, horizontal SaaS accounted for nearly 70% of the overall market, with CRM, ERP, finance and tax management, and office automation (OA) collectively representing 76.7% of this segment. Vertical SaaS represented approximately 30% of the market, with retail e-commerce, healthcare, property management, and logistics accounting for 75.2% of vertical SaaS applications (iResearch, 2025).

By 2021, China offered more than 500 categories of enterprise SaaS products (MobTech, 2022), reflecting the increasing sophistication of enterprise demand and the growing need for industry-specific digital solutions.

This distribution reflects two parallel trends: enterprises continue to require common business management platforms, while increasingly seeking specialised solutions tailored to their industry's operational requirements.

2.2 Why Vertical SaaS Is Gaining Momentum

One of the most significant developments in recent years has been the rapid rise of vertical SaaS.

In 2023, for the first time, the number of investment rounds secured by vertical SaaS companies exceeded those of horizontal SaaS providers (iResearch, 2025). This milestone reflects growing investor confidence that industry-specific software may offer stronger long-term growth opportunities within China's enterprise market.

The trend also aligns with global market developments. According to Gartner, the global vertical SaaS market is expected to reach US$300 billion by 2025 (Gartner, 2024), supported by increasing enterprise demand for specialised software that addresses industry-specific workflows and operational challenges.

2.3 Standardisation Versus Customisation

Perhaps the most fundamental difference between China's SaaS market and more mature Western markets lies in enterprise purchasing behaviour.

Many successful US SaaS companies achieved scale by offering highly standardised products that could be deployed across a wide range of customers with minimal customisation. In contrast, Chinese enterprises have traditionally expected software vendors to adapt solutions to their existing business processes, industry requirements, and organisational structures.

This expectation has created a market paradox.

On one hand, customisation enables SaaS providers to deliver greater customer value and strengthen long-term client relationships. On the other hand, extensive customisation increases implementation costs, reduces product standardisation, and makes it more difficult to achieve the economies of scale that underpin successful SaaS business models.

This tension between customer-specific solutions and scalable product development has become one of the defining characteristics of China's enterprise SaaS market.

📌 Strategic Insight

China's enterprise SaaS market should not be viewed as a smaller version of the US market. It is a market shaped by different customer expectations, different implementation models, and different definitions of customer value.

For international SaaS companies, this has two important implications.

First, success depends not only on product quality but also on understanding how Chinese enterprises evaluate software solutions, including their expectations for localisation, integration, implementation, and ongoing support.

Second, the growing momentum behind vertical SaaS suggests that deep industry expertise may become a stronger competitive advantage than broad product coverage. Companies that combine scalable technology with sector-specific knowledge are likely to be better positioned to capture the next phase of China's enterprise software market..