Product-as-a-service, the business model for a circular economy
In this blog I would like to introduce you to the product-as-a-service concept and start a discussion on its potential, also for your business. In my view this model presents a big opportunity and will be one of the key driver of a circular economy. I would love you to get engaged and I am very curious to hear your perspective about this topic!
In 1853 San Francisco was in the midst of the Gold rush, creating a thriving mining industry and attracting loads of immigrants. One of them was a man named Levi Strauss. He specialized in sewing trousers for the miners, men who needed strong and long-lasting clothes that supported them in rough working conditions. Looking to find the most durable trouser, Strauss invented the “Blue Jeans’ combining denim fabrics with metal rivets. The outcome you know, it went on to be a great hit and it is very likely that you are still wearing a pair of jeans today. So the product survived, but what happened to the idea of long lasting clothes?
Overhearing a conversation at my hairdresser, I learnt that their teenager buys a pair of jeans at Primark, one of the low-end fast fashion superstores, for 8 euros a pair. He will wear them once or twice, and then dispose of them because it’s not cool to wear the same thing again.. Most likely this pair was produced in Bangladesh, produced with cheap cotton in very poor working conditions, polluting a lot of water and shipped all across the world.. it seems as if Levi Strauss’ durable solution has faded somehow?
Fortunately, change is starting to happen, and circular pioneers are going back to original concept of lasting goods. Take the example of Mudjeans, a Dutch denim brand that produces recyclable jeans made from organic cotton. Aside from the sustainable product itself, they introduced the lease-a-jeans concept; customers pay a monthly fee for as long as they use the jeans and return them to the brand when they no longer want to wear them. Mudjeans, then either re-sells the jeans as vintage or recycles them into a new pair; A radically new business model, where consumption and earnings are decoupled from the wasting of resources.
I personally believe that this kind of product-as-a-service model is the key to a circular economy. It could also be a giant opportunity for your business. Let me give you my reasons why:
1. Save raw materials — by transferring ownership from consumer to producer
There are some very pressing reasons why we need to look after our planet’s raw materials. I won’t go into detail here, but climate change, scarcity of natural resources and global population growth are definitely among them. The example of Mudjeans showed how a shift in ownership creates a positive impact on resource consumption. Effectively all the jeans leased by their customers, are still assets who should be on the balance sheet of the company. Reusing them as future source of material, will significantly lower their future production costs. By shifting ownership, from consumer to the producer, the value chain is redesigned to make most efficient use of materials. After all, the producer understands the value of the materials and can make a plan for effective reuse and minimal waste..
Swiss architect Walter Stahel was the first to understand the value of converting products into services – “the product life factor” (1982)
Aside from fashion, there are major opportunities in other industries. Think about mobile phones as example. On average, your phone will contain 62 different type of metals, like aluminium, silicon, copper and gold. Some of these are very scarce materials already. If the producer, let’s say Apple, could reuse components for production of new products, it would save them a tremendous amount of materials and therefore costs. An opportunity on which pioneers, like Fairphone, are already building a business.
2. Customer demand increases — access becomes the new ownership
Ultimately, the customer decides. And there seems to be a lot of momentum when it comes to sustainable, usage based, business models. Just look at the hyper growth of services like AirBnB or Uber. The need for ownership is fading, it is about access, experience and sustainable living. Especially the “Millennials” generation seems to be picking up quickly.
“Why would you buy a car, if you can have an affordable ride within minutes”
Promising new product-as-a-service initiatives are already happening in multiple markets, such as mobility (eg. Car2Go, Snapcar), consumer appliances (eg. Bundles, Flown) or in fashion (eg. Mudjeans). Some launched by startup initiatives, others by larger corporates. With the adoption of these innovative services, consumers and businesses are growing interest and are getting used to them.
3. Technology enables innovation — build differentiated propositions through smart assets
Technological development is at the core of the product-as-a-service-model. Especially the growth of the Internet of things will allow for innovation in the value chain. Previously unavailable information can now be used to build new processes or customer interactions, making them “smart”.
“Connecting assets enables opportunities for a product-as-a-service”
As example, take the car; through built-in sensors and internet connectivity, the vehicle can submit all kinds of information; is it used right now? what’s the planned routing? Does it need maintenance? Who are in the car? This is exactly the kinds of information that a company like Car2Go uses to build their successful car sharing subscription. Once you start re-thinking your own proposition, with technology in mind, chances are that you can design a smart service-model that differentiates from your competitors.
4. Create customer intimacy — through a direct, recurring and personalized relationship with your customer
For the marketer, the promise of a product-as-a-service model is a dream come true, enabling true “customer intimacy”. Firstly, in a service relationship, customer interaction is frequent and direct. As long the producer provides a service which is relevant to the customer, he can keep them happy and charge them. If the service is no longer relevant, customers are always free to leave. This way, poor service is directly punished, strong service is rewarded. Secondly, the role of the middle-man can possibly be eliminated. This makes the business model lean and more profitable. And finally, continuous user insights and big data, will allow service providers to get very close to their customers’ needs. As a result, many commercial opportunities arise, such as the cross-selling of other services or driving personalized marketing efforts.
5. Increase lifetime profitability — drive recurring revenue and cost savings
The financials will change in a product-as-a-service model. As customers no longer buy the product outright, revenues will become recurring and periodic; This way seasonal revenue dips could belong to the past. it is no longer a one-off transactional relationship but a subscription. More upfront investments are likely required, changing dynamics of your balance sheet and therefore capital needs. In the case of Mudjeans, they will need to pre-finance the jeans and trust that the customer will pay all of the installments.
On the revenue upside there is the potential of a consistent revenue inflow, cross-selling of extra services and an extended customer lifetime. As long as you provide the right performance, the customer will keep paying. Finally, and most importantly from the circular perspective, material usage and therefore costs will decline, saving precious resources without impacting revenues.
For you to understand whether these opportunities are relevant for your business — I would start with a few questions;
- Are materials or resources wasted in the value chain you are part of?
- Could this chain be re-designed with circular principles in mind?
- Could you use technology to enable this?
- Could you build a better customer relationship by offering a service rather than product
- Could you create more services around the core product that would solve your customer’s needs?
- If this answer is yes to one or several of these questions, you might set yourself a nice challenge!
For you to capitalize on the product-as-a-service opportunity, there are some steps to be taken. Aside from re-designing the product itself, your value chain will change. Selling a service proposition, effectively a subscription, is actually quite different compared to selling a product. I hope that this post has inspired you to consider the opportunities for your business or at least to think about the circular economy as a different option.
Like said, I would love to get your feedback and am open to support your thinking and progress!