The Next Crossroad of SaaS: Vertical or Horizontal?

Technology Author: Yanbing Gao Editor: Luke Sep 13, 2022 12:38 PM (GMT+8)

The SaaS (Software as a Service) industry has developed in China over nearly three decades. From horizontal SaaS formats to Vertical SaaS, great changes have taken place. Now the SaaS industry has entered a boom stage.


What category does Netflix belong to? How about Slack? If you simply conclude the software, you are right. Of course, they are software, but more specifically, both this personal entertainment software and that public office tool are SaaS products. In recent years, China's SaaS market has become hotter even under the clout of COVID-19 which fired digital transformation domestically, a batch of players have jumped on the bandwagon and achieved good results at home and abroad, including Advance AI in authentication, YouLianCloud(Chinese:有连云) in the financial information sector, Wanliniu (Chinese:万里牛), Ginee (Chinese:聚灵) and Dianxiaomi (Chinese:店小秘) in cross-border e-commerce and SHAREit Group (Chinese:茄子科技) in cross-platform near-field transmission.

Something You Need to Know about SaaS

SaaS is a software distribution model in which a cloud provider hosts applications and makes them available to end users over the internet. This means that IT professionals, business users or personal users do not have to install or maintain software but access it via the Internet. And the Cloud provider who manages access to the application, including security, availability, and performance, may just be a third-party cloud provider or the software vendor. SaaS, infrastructure as a service (IaaS) and platform as a service (PaaS) are the main categories of cloud computing.


Various reports on the SaaS industry offer different projections. But they all agree with the fact that the SaaS market will continue its speedy growth in the following years. According to the report by The Business Research Company with modest predication, the global SaaS market will grow from $212.20 billion in 2021 to $240.61 billion in 2022 at a CAGR (Compound Annual Growth Rate, the most commonly used by investors to indicate the potential of a business or industry) of 13.4%. In 2026, the market will get to $374.48 billion at a CAGR of 11.7%. Technology industry analysts from McKinsey & Company predict the software as a service market will witness further growth and its market size will reach near USD 200 billion (CNY 137.2 trillion) by 2024.


The Status Quo of SaaS in China

China has made a big name in short decades in terms of cloud and IT infrastructure. It has come under the spotlight, attracting both developed countries and professional experts. The country also fertilizes the booming of SaaS, one of the world's fastest-growing sectors, which is expected to double or even triple in the next years. More and more domestic businesses are also embracing SaaS solutions as these solutions will streamline their production and improve efficiency in turn.

There are three development stages of SaaS in China: forming stage from 2005 to 2010 when SaaS service was introduced into China, the initial stage from 2010 to 2015 when most of the currently listed companies marched into this new market, booming stage from 2015 to now when technological breakthroughs have been made, SaaS products have been increasingly embraced and a number of SaaS providers have sprung up continuously.

However, even though numerous SaaS players have flooded the market, there is no giant with a market capitalization of over USD 100 billion similar to those in the US market. The domestic SaaS market is still fragmented. Each segment of horizontal SaaS and each vertical SaaS has its own head enterprise. Tapping the market demand, exploring the growth space, and trying to break the ceiling of the industrial track, players have their own respective aims.

Yan Zhang, Vice President of YouLianCloud, concluded the big gap between China and America in terms of the SaaS industry lies in infrastructure that has yet to mature and enough time waiting for growth. YouLianCloud, founded in 2015, is an intelligent financial information engine developer combining Big Data and Natural Language Processing with a core SaaS brand of Youlian Cloud. "Just like building a skyscraper, you need to spend time building a solid foundation. Infrastructure is the foundation for the SaaS market. As long as you finish this priority, then the rest will flow." Though the foundation is still being built as China itself is a latecomer in the SaaS business, he was very optimistic about the potential of the domestic SaaS market.

Yaohui Chen (Yani), Chairman EO of Wanliniu, remarked that the Chinese SaaS market had a different development trajectory. Wanliniu, established in 2011, is an e-commerce SaaS solution provider with its own products including ERP, WMS, smart retail, BI and Newniu. "China's market has features like a lower level of information sharing and connectivity among businesses and state-owned enterprises which are not suitable for decentralization deployment". These undeniable traits decide domestic players have to make more efforts to open up these new markets. But this also means a blue sea waiting for entrepreneurs, the other side of the coin.

The Classification of SaaS

SaaS can be roughly divided into 2 types according to  application aim and specific application scenarios: horizontal SaaS and vertical SaaS.

Horizontal SaaS appertains to a type of cloud software solution that can cover a wide breadth of the market through multiple industries. In other words, it does not focus on a small niche market but taps the general demand from a big market and anticipates a bulk order. Horizontal software has developed for over a decade and is more mature than vertical SaaS. Common horizontal SaaS solutions include CRM (customer relationship management), HRM (human resource management), Office Automation System, ERP (Enterprise Resource Planning), Marketing, Cloud Saving, etc.

Vertical SaaS solutions aim at a particular niche or industry-specific standards. In other words, it fulfills the specific demands of a professional industry ranging from finance to technology, e-commerce to healthcare. It is not as mature as the horizontal model but may have more business opportunities as they just emerged recently. Vertical SaaS software only caters to a certain market and focuses on a single industry with high technical barriers. Vertical SaaS enterprises may be built to handle a single problem or a slew of business difficulties.


Differences Between Vertical SaaS and Horizontal SaaS

In most cases, professional knowledge and technical know-how serve as natural barriers between horizontal SaaS and vertical SaaS. These two types of SaaS are parallel and have few intersections. In other words, horizontal SaaS and vertical SaaS have their own traits respectively.

Horizontal SaaS has a wide range of potential users. It focuses on general businesses like HRM and CRM that nearly every company may use or involve in. This product feature leads to continuous but flat customer renewal rates for players out of a big market base. Besides, customers will compare the software with many other options on the market and it's more likely to jump ship. While vertical SaaS provides specific products and services targeted at small niche markets. These vertical SaaS suppliers usually probe into the real tricky problems or pinpoint scenarios that can be optimized in a specific industry, thus gaining sole appreciation and total loyalty from customers. As a result, these players will face explosive growth in customer renewal rates at times.

Mr.Zhang from YouLianCloud concluded that horizontal SaaS will help companies cut unnecessary costs and repetitive processes while vertical SaaS will not only help customers in the same way but also open the market and attract more potential clients. Mr.Chen from Wanliniu thought that compared with horizontal SaaS, the same type of vertical SaaS focusing on niche markets would offer more detailed service and include more complicated links. For example, e-commerce WMS (Warehouse Management System) would provide 24-hour service with small shipments and large multi-type SKU (Stock Keeping Unit) and consider proper time lags for potential returns while traditional WMS may focus more on large shipments and provide service in a specific time.

How to Gain a Firm Foothold in the Market?

The priority of SaaS companies to survive is to meet the necessary demands of enterprises and stimulate sales (Chinese:追逐销售) through anticipating and developing new services that customers may need. This is due to the special business model of SaaS–pay-as-you-go subscription. This business model implies that only when customers feel that SaaS products and services are something must to have rather than nice to have, they would like to pay money and renew the service–the major source of income for SaaS players. Meeting necessary demands may only allow SaaS enterprises to break even. After all, in a fierce playing field, alternatives are emerging endlessly. If they would like to make a profit, they need to optimize and explore more necessary functions to retain and gain more customers. Besides, different industrial SaaS may also meet different challenges to gain a firm foothold in the market. "Of course, the core is to keep high renewal rates. In order to achieve this goal, we need to keep an eye on customers' changeable needs", Mr.Zhang added. It is said that YouLianCloud's main customers are head enterprises with higher demand for quality and customized services and stronger capital strength, which means lower trade risk. This is related to the financial industry the company serves. As for Wanliniu, Yani revealed that it not only serves big companies but also SMEs (small and medium enterprises). "E-commerce ERP is different. Its affordability will pick out companies with enough funds".

Go Abroad

For enterprises, going abroad is never an easy task, even if it is just lip service. Both Mr. Zhang and Mr. Chen proposed that the first step of domestic SaaS companies going global is to set a solid foundation domestically and then use this foundation to back overseas development. This rule applies to all kinds of enterprises. Basically speaking, players embarking on this journey need to overcome cultural and technical differences and set friendly relationships with local governments. "Globalization also means localization, you need to grope attempts to cater to local customers. Local policies and rules and technique problems like network notes are also considered", said Mr. Chen. It is often said, in the way of digitalization, customers are the side educated to accept new things. But from the point of view of globalization, enterprises are the educated side. All in all, from domestic service to cross-border service to overseas service, it is really a long journey waiting for players to explore themselves.  

The Future Trend of SaaS

Experts have talked much about the impacts of Artificial Intelligence and Machine Learning on the SaaS industry. These new technologies will be adopted and become standard features in SaaS products. In addition to this, low-code and no-code platforms have gained popularity and are embraced by enterprises to deploy applications. It is expected that a batch of business users and developers depending on this method will emerge in the near future.

Vertical SaaS will still be a top SaaS trend. Facing the wave of digital transformation, more tailored Cloud computing services are needed for particular businesses to address their unique demands. No matter insurance, retail, automobile manufacturing, logistics, or health business, many companies have noticed the great potential benefits brought by industry-tailored vertical SaaS solutions. “This is a definite trend, vertical SaaS will become more vertical and targeted”, Mr. Chen added.

Prevalent Micro SaaS may be another trend. Micro SaaS targets a niche or specific market operated by a single person or small team. It is featured by low expenses, a limited focus, and a tiny but devoted user base without receiving any outside investment. But it may focus on so limited general business that cannot deal with more stuff. That may explain why this new thing is called "Micro SaaS". Grammar correcting software Grammarly is a typical example. Micro SaaS has gained momentum abroad, but it hasn't come into vogue at home. When asked whether Micro SaaS will become a hot spot, Mr. Zhang thought it is a pending issue and needs to face tests from the unpredictable market. Mr. Chen suspected the sustainability of Micro SaaS. "It might be a good starting point for startups, but it is not a good choice for enterprises pursuing to become bigger and stronger".