28

January, 2019

Product as a Service
Circular economy
New business models

The 5 business benefits of offering your Product as a Service

Jan 28, 2019

This blog covers the Product as a Service (PaaS) business model and its market opportunities. It explores the business benefits that subscriptions to tangible products can provide. It is a follow up from my earlier article on a shifting customer behavior towards subscription services.

Recently I was working with a designer of baby-strollers, a true engineer who loves crafting premium quality products. He got a little upset about his product marketing team, which kept urging him to “take out production costs” as the product’s pricing had to be brought “in line with the market”. Due to this margin squeeze he was forced to lower the product’s quality, to such a degree that he was not building the high-end products he loves so much. And as consequence, the technical lifetime of the product was decreased drastically. One could say the product was “designed to be outdated”.

Now imagine that product was offered as part of a subscription service, where customers pay on a monthly basis for use of a service? What would be the benefits of such a business model? And how would the stroller be built differently?

Let me give you 5 reasons why I believe that subscriptions are a strong business model. For the stroller brand, and for most manufacturing brands.

1. Subscriptions can create customer value out of premium product quality

Let’s look at the example of Swapfiets. The company that offers a simple bike-as-a-service for 15€ per month. All repairs are covered and in case you get any problems, your bike is “swapped” within a few hours. Their bikes are simple and engineered to last – so customers get minimal disturbance and the company gets minimal repairs. With some simple product modifications, such as taking out the rear seat (which often causes breakage), the bike now lasts longer than a traditional bike: It is basically “designed to last “ and their premium product quality is now rewarded with monetary gains.

Now remember the baby-stroller designer, this would make him very happy, don’t you think?

The subscription model – based on usage of the product, rather than ownership – incentivizes a producer to build and maintain high quality products. In contrary to the traditional transactional model, revenues continue for as long as the product provides value to the user. So now, extended product lifetime results in extended customer value.

What started in information services and software, is now moving into industries such as automotive, electronics, fashion and food:

The subscription economy is booming.

2. Solve real customer problems through subscription service design

Subscriptions services have the power to renew the relationship with your customer. Where many manufacturing brands are traditionally focused on the product, in a subscriber model the focus shifts towards the customer needs. A strong service experience is built around the user’s needs, with many more points of interaction and opportunities to gain insights and data. It’s no longer a one-off transactional relation, but an ongoing partnership.

A strong example of an innovative service built around a customer need is HP’s Instant Ink. How annoying was it to find your cartridge empty as you were just printing that important contract? A connected and automated replenishment subscription ensures that won’t happen again.

3. Gain control of the full product lifecycle

Maybe you heard that smartphone brand Fairphone recently collected 2,5M€ of funding in a very successful crowdfunding campaign. Among their strategic aspirations is the roll out of “Fairphone-as-a-Service”, a service subscription to their sustainable phone. As Fairphone remains the owner of the phone, they can control the full product lifecycle – re-distributing returned phones to a next customer and ultimately re-cycling the components as input materials for the production of a new phone.

In an – access based – subscription model for durable products, the lifecyle of each individual product is controlled and owned by the producer. By applying the cycles of Re-use, Re-pair, Re-furbish and Re-cycle,  production costs can decline and the company gains revenues during the full lifecycle of the product. The 2nd hand resale market eventually disappears, bringing that value back towards the producer.

The as-a-service model is transforming many industries, both in B2B and B2C. 
Powered by technology and driven by the need for a circular economy, services will be the prevalent business model of the near future.

4. Create a profitable recurring revenue model

The business case for a subscription model is very strong. It is the way to generate recurring revenues, the wholy grail for most CFO’s these days. Seasonal influences will be minimal and competitive pricing is less likely to hurt the financial performance. Moreover, the ongoing customer relations enable huge opportunities for cross- and upsell activities. While usage data can be used to avoid customer leakage (or “churn”).

ZUORA, the world’s leading subscription billing platform, measures the financial performance of Subscription businesses on a regular basis. Their latest report shows that subscription businesses grew their revenues about 5 times faster than their S&P 500 peers.

 5. Be a leader and drive the circular economy through product-subscriptions

Mudjeans is the world’s only “circular denim brand”. They apply the core principles of the Circular Economy into both their production process as well as their business model. As inventors of the lease-a-jeans concept, they acclaimed quite some fame through free publicity and brand ambassadors. By showcasing their authentic story, they gain a lot of traffic to both their online and retail stores.

This type of business leadership is obviously much needed to preserve out natural resources. And smart leaders in the Circular economy also gain a lot of free publicity. In a world where customer acquisition and marketing becomes increasingly expensive, free media and publicity can impact your sales conversion significantly.

So if you are a retailing or manufacturing brand, my suggestion is to consider whether these subscription related benefits could be applicable to your industry as well. The subscription economy is accelerating and will transform many industries in the next years to come. Now is the time to capture that leading position. 

I am very curious to get your perspective on this exciting development, so please leave any comment or feedback. At Subspot we specialize in Subscription business, partnering with brands to develop, grow and commercialize subscription services. If you want to explore opportunities, we now offer a free consultation session. Please contact us for more information.

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