Product as a Service: circular revenue models (1/4)

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Interest in circular products is growing rapidly, both among consumers and suppliers. One form of this development is that products no longer owned by the buyer but are offered as a service: Product as a Service (PaaS). How do the revenue models work?

The shift from owning products to using them, and more generally the interest in circular products, is becoming increasingly imminent. There is strong interest from the (central) government and even the major banks ING, ABN and RABO have now published papers on this new phenomenon. But how can you make money as a PaaS provider?

Who are PaaS providers?

There is not a single form of organization that is engaged in PaaS models. They range from start-ups to existing traditional companies. Rabobank distinguishes four types of companies. Their subdivision is made on two axes: the age of the company and the degree of focus on circularity.

1. Innovative pioneers

Innovative pioneers are intrinsically motivated to bring circular products to the market. They apply PaaS in new markets. Thus, they are mostly still young companies. Circular values are directly applied in their PaaS business model. During the first years they gain a lot of knowledge, for example to reduce operational costs or improve the assembly of the circular product.

Examples are: Gerrard Street, Mud Jeans and Link & Co

2. Dedicated transformers

Mature companies that were originally linear, but are now designing their operations to be circular. These companies are highly motivated to improve the world with their new, circular products. From management, the circular values are implemented in the PaaS business model.

Examples are: Auping with Bedzzzy. Setop boxes from KPN.

3. Sustainable market leaders

Their business model is characterized by low margins and a high volume of products. Although they apply PaaS earning models, circular values are not the focus. Sustainability comes mainly from the product ﴾fairly extracted materials, produced with green energy﴿.

Examples are: Swapfiets and Greenwheels.

4. Experienced rental companies

Experienced rental companies are mature and large companies that have many years of experience in rental and leasing services. They are now benefiting from the circular trend, but often have a limited circular focus at the product level. With their experience and strong network, they have an edge over potential competitors and new entrants.

Examples are: Royal Reesink and Volvo.

product as a service circular

PaaS can be disruptive to traditional businesses. As with the rise of the Internet and online stores and e-commerce, PaaS is not something that will pass. Therefore, if you also want to do something with PaaS, the advice is to get started and experiment with this model on a small scale. This can then be done alongside existing activities. Sometimes it is useful to set up a separate organization or entity for this as the activities deviate from the traditional organization.

4 PaaS revenue models

With a (circular) PaaS business model, no financial value is created if there is no earnings model linked to it. We distinguish four circular revenue models based on economic ownership, see also the study by KPMG, Copper8 and Kennedy van der Laan.

1. Pay-per-Use

This is payment for use per time. This can also be a combination of a one-time starting fee supplemented by a fee per time unit. For the use of their steps provider Lime charges €1 at the start and €0.23 per minute. White goods rental company Homie charges a minimum monthly fee and also invoices per wash, which also depends on the temperature of the washing water: the colder the cheaper.

2. Rental or subscription

You pay a periodic fixed amount, usually per month, for use of the service. For example, you have a pair of Mud Jeans pants for €9.95 per month. And a Swap bike for €14.50 per month.

3. Buy-back

Auping agrees with the customer that it guarantees to buy back used mattresses after 5 years: the ‘Take Back’ system. This fee is adjusted according to the condition of the product at that time, so that it is an incentive for the user to use the product sparingly.

4. Lease

Leasing occurs mainly when the provider or user receives financing from a leasing company. It plays with capital-intensive goods such as cars and is more common as a form in the B2B market. In recent years, cars based on private leasing have become very popular. (Although Mud Jeans also refers to their pants as leasing, this is actually just a subscription).

In addition to these four forms, there are also all kinds of hybrid variants, for example by combining rental with pay-per-use or by linking a one-off start or stop rate to it.

What is the best revenue model?

Answering that question partly depends on the goals of the company. If circularity is the primary goal, then pay-per-use offers users the strongest incentive to use the product sparingly and efficiently.

But if financial stability is important, it is advisable to combine this model with other incomes, for example a starting fee or a fee on collection (to prevent quick changeovers) combined with a (low) monthly fee. The experienced rental companies have an advantage here over the pioneers and transformers. Not only because of the knowledge, but also because they have working capital, something the startups usually lack. Those who rent out expensive items on a subscription basis must first buy them themselves and only then receive the proceeds back (monthly) only in parts.

It is precisely these repeated monthly payments that form a solid mattress of predictable income over time. It also appears that private equity values subscription-based companies higher because of the ‘stickiness’ of the revenue. Just as in the mobile phone sector at the beginning of this century, the right tariff combinations within your revenue model are crucial. You have to balance between (circular) goals, price comparators and sufficient liquidity. Whoever applies this smart and is prepared to take the long view will probably be a winner.

Posted in Circular, Strategy.

Auke van Stralen

Auke has been developing services for long-term subscriptions and contracts for over 25 years. He has done so in various management positions for listed companies in telecom, energy and waste. He continually strives to add value, so that both clients and companies benefit.

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