Over the past decades, producers and manufacturers have been focusing on selling their products in one-time (sales-based) transactions. At the moment of the transaction, the ownership of the product is transferred from the producer to the customer, thereby restricting the producers responsibility for the rest of the product’s life. In such a model, producers gain most benefit by selling as much as they can, without having the incentive to create the best possible product in terms of quality, lifespan, repairability and/or recyclability. This leads in some cases to counternatural effects such as planned obsolescence, production of overstocks, lower quality products, ….

Product-as-a-Service (PaaS) models have a potential of offering a smarter and more sustainable alternative for this material-intensive consumption. Instead of selling customers standalone products, PaaS business models offer new combinations of products accompanied by services. The model focuses on outcomes (like performance) instead of the product itself and the service provider remains mostly the owner of the product. Because of this, the service provider can have the incentive to use the same products or components as much as possible and as long as possible by redesigning, reusing, repairing or sharing the product. Let’s take a look at washing machines for example, where customers actually want clean laundry. You could sell washing machines or you could sell clean laundry (=PaaS). In the latter, customers can rent a washing machine from you and pay a monthly fee or a fee per use. In an alternative PaaS set-up, customers only pay for the cleaned laundry. The service provider will still be the owner of the washing machine and be responsible for maintenance, repair and take back of the machine.
 

Opportunities of PaaS

If designed in the right way, introducing PaaS in your business creates many opportunities. It can enhance competitiveness by creating additional revenue streams as you add services (like repair, maintenance, …) to your product. Given that product lifetime extension and efficient material use are an explicit part of your PaaS model, it also reduces your dependence on (scarce) raw materials. This way, you are less likely to be impacted by the high volatility of commodity prices as we see today.
 

Left: Linear model: manufacturers sell their product and the customer takes ownership.
Right: Circular model: manufacturers offer products and services but retain ownership of the product.

 


The PaaS-guide

Curious what Product-as-a-Service is about and how your organisation could take advantage of it ? Read here our interactive PaaS-guide to identify and build PaaS-opportunities for your business in 6 steps.


Step 1: Identify the potential of Product-as-a-Service for your business
Step 2: Understand the customer and the market
Step 3: Design your Product-as-a-Service business model
Step 4: Build a business case for Product-as-a-Service
Step 5: Test your Product-as-a-Service business model
Step 6: Create the conditions for success

 

What is Product-as-a-Service?

Product-as-a-Service (PaaS) can formally be defined as “a business model that combines physical products and services that generally have the potential to extend or intensify the use cycle or life cycle of the product with the goal to better fulfil customer needs”. [1]

In practice we see that a solution, which is a combination of product(s) and service(s), allows product manufacturers to deliver better customer outcomes (e.g. better performance, upgrades, …).

Some typical PaaS characteristics are:

  • A constant in PaaS models is that the (legal) responsibility and/or ownership increasingly lies with the product manufacturer. As a result, product manufacturers can have the incentive to deliver a more material-efficient product by delivering a better performance, a longer lifecycle, etc.
 
  • In practice, we see this is being supported by services like a takeback system, repair or reuse services, extended warranties, etc. As manufacturers deliver outcomes, rather than products, it changes the economic model and product manufacturers get reimbursed for outcomes, performance, … in the form of subscription or renting fees.
 
  • In PaaS models, the provider has a closer relationship with its customers which enables to collect data and analyse customer insights that help the company innovate and design new service models. This way you get insight into your consumer tastes, preferences and using habits which provides a solid long-term competitive advantage.
What are the benefits of Product-as-a-Service business models?

Product-as-a-Service (PaaS) business models have the potential of bringing a series of advantages for both companies and their customers. We list some of them below:

 

Benefits for companies [1] [2] [3]

  1. Creates a regular and predictable revenue stream as you provide your products as a service with a recurring (monthly) fee. PaaS can generate constant revenue for your business during an economic crisis or downsizing, as customers are more likely to agree to lesser amounts of monthly payments.
  2. Creates additional revenue channels as you add services (repairs, maintenance, upgrades, replacements of parts) related to your product.
  3. Enhances overall customer relationships and loyalty as a PaaS model helps you to build long-term customer relationships and offers flexibility and wider choices of products.
  4. Drives sustainability and material use efficiency which reduces the dependence on (scarce) raw materials and volatility of commodity prices. This is because the PaaS model changes the revenue cycle of companies. Companies do not make money for every new unit produced. Instead, companies generate a profit from an existing product.
  5. Enhances product development as you are closer to the customer and their use of the products which makes it easier and faster to get feedback. This will help you make continuous improvements to your products.


Benefits for customers

  1. Saves upfront costs on capital expenditure as the customer will be paying smaller subscription fees instead of bigger instalments. This also reduces their liability of ownership and residual value risk.
  2. Gives access to constant product upgrades as they use the product on a time and need basis.
  3. Provides flexibility to customers as they can upgrade and downgrade at any time without any hassle.
  4. Reduces the risk of using an obsolete product since the customer can move to a more advanced product or even to a different service provider if the product they are currently using is obsolete.
  5. Increases the accessibility to premium or more expensive products.
What is a circular economy and circular economy strategies?

In Product-as-a-Service business models, the provider becomes a service-provider and stays responsible for the product’s well-functioning (including maintenance and repair) and the costs for disposal and waste treatment at end-of-life as he remains the owner. As such, Product-as-a-Service models offer incentives for companies to choose for more durable products, that are easy to maintain, repair and upgrade. Rather than designing a product to boost sales (as in the linear system), PaaS discourages premature obsolescence as you gain more revenue with the same volume of products.

In practice, this can be obtained by introducing some circular economy strategies like redesigning your product in a modular way, repairing and reusing components and products to extend the life cycle, providing extended warranties or designing a takeback system. Below is explained what circular economy is and how it can support PaaS models. In conclusion, PaaS models have the potential (though not the assurance) to deliver more environmentally friendly products and consumption patterns.

The circular economy tackles climate change and other global challenges like loss of biodiversity, waste, and pollution, by decoupling economic activity from the consumption of finite resources[1]. It is an economic and industrial system that aims to keep products, their components and materials in circulation within the system for as long as possible, while ensuring quality of use.

The 10R ladder of circularity strategies[2] explains the different strategies for closing material loops. The lower the R-number, the lesser external inputs are needed to close it, and the more circular the strategy. The higher the R-number, the less circular it is. It’s time to start rethinking our concept of waste as a resource instead of something to send for incineration!

 
[2] Kirchherr, J., D. Reike, and M. Hekkert, Conceptualizing the circular economy: An analysis of 114 definitions. Resources, Conservation and Recycling, 2017. 127 (January): p. 221-232.




The 10R ladder explains the different circular strategies for closing material loop
How can I use the Product-as-a-Service guide?

The guide is for any organisation wanting to understand what the potential of Product-as-a-Service (PaaS) models is for their business and how you can create, deliver and capture value by implementing it. Regardless of sector, region, business activity, size or maturity, it can be used to:
 

  • Identify PaaS business opportunities, and define its related business models
  • Explore and define how existing linear businesses can be transformed into a PaaS model
  • Refine existing PaaS models and pilots.

While interesting for all types of organisations, the guide has been developed especially to respond to the needs of small and medium-sized enterprises (SME’s). This guide is one of the measures from the Federal Circular Economy Action Plan. This action plan focuses on SME's to support and accelerate their transition to sustainability and circularity.

The guide can be used in two ways:

  • From the beginning working step by step, if you want to identify and define new PaaS opportunities.
  • From a particular step, if you want to test or refine an existing business concept.

Ready to get started with Product-as-a-Service? Read here our interactive PaaS-guide to identify and build PaaS-opportunities for your business in 6 steps.

 


More information


Webinars on the presentation of the Product-as-a-Service guide: 
NL: https://youtu.be/PuVP4TugWBk
FR: https://youtu.be/vt6JJkodLD4