Circular

Product as a service: 8 success factors (3/4)

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With PaaS, products are no longer owned by the buyer but are offered as a service for usage: Product as a Service. See also episode 2 in this series. Potentially it can be applied to many products. To make it a real success you need to keep a close eye on at least these eight factors.

The interest in circular products is growing rapidly. Both among consumers and providers of them. The expected market in 2030 is 9 billion euros. Products are offered as a service. So it is no longer about “owning” but about “using” the functionalities.

PaaS requires a new way of working and learning. To successfully market a product as PaaS, you need to take a number of things into account. Earlier we wrote about the different revenue models. If your activities grow, at some point an Excel spreadsheet will no longer suffice. You then need to work with these eight essential success factors:

1. Financing and cash management products

If you want to grow, financing is your key priority. White goods provider Homie learned painfully at the outset that buying washing machines at €1,000 each for 500 customers requires €500,000 in pre-financing. So you need deep pockets. Start-up PaaS providers are almost always loss-making in the first few years. In the case of a mattress from provider Bedzzzy, it takes about three years for a subscriber to spend the same amount as someone who would have bought the exact same mattress.

The accounting industry realized this and started the Coalition Circular Accounting. Even banks now know about PaaS, but the existing risk models for a loan clash with the way PaaS is financially structured. Prefinancing for the required working capital can be obtained from (combinations of) equity, loans, private equity, and crowd funding. Additionally, the strict cash-flow management of your company plays a role.

2. IT platform

As soon as your customer base starts to grow and change, you need a flexible software platform. This is not just about your CRM, in which you keep the customer data up to date (preferably partly by the user himself): the amount of user data that comes in also plays an important role. The complexity increases with devices that are mobile or used on a pay-per-use basis.

Finally, a link with your invoicing and collection is needed. Many people find the latter boring, but it is essential for your liquidity. You will therefore have to keep a sharp eye on payment behavior. Do your customers pay on time and preferably in advance (via direct debit)? Or do you have many defaulters and reversers? Various parties offer software and services for this purpose, such as Zuora and Adyen.

3. (Return) logistics and maintenance

Logistics is often an important factor with PaaS: the delivery, physical placement, return of (heavy) equipment and then refurbishing to near-new condition. Every action that the provider has to perform costs time and therefore money. While many customers assume that it is “free of charge anyway”. Incentives are sometimes necessary to encourage diligence in your users. If you leave Homie within 12 months, they charge a €75 collection fee, for example.

This also includes asset management: in other words, keeping track of which device is where in your IT platform. This is especially true for providers of micro-mobility: lost steps or bikes are found and put back in the docking station or taken away for repair.

Therefore, make sure that you are steering for operational efficiency at an early stage and apply techniques such as lean.

4. Growth in phases

No matter how good your preparations are, no proposition can survive the test with real customers. Therefore, go through the process in phases: do some preliminary research, build a first concept (minimal viable product or subscription – MVS) and test it, follow that up with a small local pilot, then a regional launch, and finally scale up nationally (and even internationally).

5. Design and continuous product improvements

Because you are the owner you can also measure which parts break down more often and therefore need to be improved, so that the operational costs are lower in the future. Build knowledge about this into your IT platform at an early stage. You can then also apply these improvements when refurbishing your products. However, if you are not the manufacturer but a provider that offers the products, the influence on product improvements is less easy.

6. Revenue model products and customer lifetime

Which revenue model or combination fits the product? A subscription, rental, lease or pay per use? At Homie they give the first month of washing for free (and also see the highest usage there). In the following month, the customer pays per wash and usage also decreases. So, not unexpectedly, there is an incentive on consumption if you have to pay for it.

The longer the term, the better the earnings. If consumers can cancel after a month, the revenue model becomes riskier. Whereas headphone provider GerrardStreet initially offered monthly subscriptions, they have now switched to annual subscriptions. In addition, it is important to retain customers as long as possible with active retention management.

7. Insurance and product conditions

Doing business also involves risks. Damage and theft are unfortunately part of the PaaS. Therefore, the provider needs clear product conditions (for example, a clearly defined excess for the user). If experience suggests this, adjust them in time. And be sure to take out good business insurance, as well as board liability insurance.

8. Set up PaaS (partly) alongside the existing organization

For existing companies, with a traditional/transactional/linear business model, it may be advisable to set up the new activities outside their existing business. For example, by setting up a separate private limited company and/or using a different trade name, also because of the considerations mentioned in the previous point.

To conclude

In addition to the above experiences and knowledge, one last tip: just start. You can think up as much as you want and work out spreadsheets, but practice will always be different. You only find out by doing it and then adjusting your practice and concept. Those who continually learn and improve will eventually achieve success.

Posted in Circular, Innovation, 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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