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What makes a good Product-as-a-Service? - according to academics
With the current servitization trend [i], and companies that want to ride this trend, there are a lot of Product-as-a-Service (PaaS) offerings popping up everywhere. Especially in the business-to-consumer (B2C) market, the examples are most prominent.
One of the possible explanations for this is the possibility of manufacturing firms to sell directly to the consumer (D2C) through this business model. However, not every product automatically makes a good fit for a Product-as-a-Service. Therefore in this blog, we will provide an overview of product characteristics that can (potentially) make for a successful PaaS. This blog will consist of a two-part series, whereof this first blog focuses on academic characteristics and the second blog will discuss changes and additions to these gathered from experiences of Firmhouse.
Consumption versus usage
Almost everything can be put in a subscription service, hence these concepts are popping up in every major B2C market segment. From a peanut butter subscription towards a subscription for sports cars. However, not all of these subscription models make for a PaaS-proposition that get the most benefit out of the business model.
This does not mean that these subscription models have no right to exist. Most of these subscriptions are fun, provide inspiration, and provide convenience to the customer. Nevertheless, these types of subscription services often relate to Fast-Moving Consumer Goods (FMCG), which are nondurable products that sell quickly at relatively low cost. Coincidentally, these products don't have significant material input and are often consumed instead of used.
Firmhouse defines Product-as-a-Service as a physical product combined with a service component in which ownership is not transferred.
Consequently, this means that the PaaS-provider keeps the product in circulation longer, saving on materials, energy, and other resources. It also means that additional services are added to make this business model more viable.
Therefore, a Product-as-a-Service has bigger potential in products where the product is not consumed but used, like, for example, in the consumer electronics market. In these types of markets, there is a component of additional services provided that goes further than solely a subscription or a way of pre-financing a product. So to get the real benefits of a recurring income model, with all its sustainability potential, a couple of guidelines can be followed to assure you choose the best suitable product for an ‘as-a-service’ proposition.
5 Characteristics of a ‘good’ Product-as-a-Service (PaaS)
So now we got that disclaimer on consumption versus usage out of the way we can look into finding product characteristics that potentially make a successful PaaS. Previous academic literature [ii] has stated five characteristics:
1. Price (Expensive)
2.Technically advanced (High-tech)
3.‘Easy’ to transport
4. Infrequently used by consumers
5. Not highly influenced by fashion and trends
These characteristics will now be elaborated upon. In the second part of this two-part blog, we will discuss the literature through the recent knowledge gained as a product-as-a-service company.
1. Price (Expensive)
A typical Product-as-a-Service product is not very cheap. If a product is cheap, most of the time it is not worth the hassle of putting it in an 'as-a-service' proposition. This is mostly because the cost associated with the administration of recurring payments or pay-per-use is probably too significant of a percentage of the total cost, and most customers will be able to purchase cheap products quite easily.
As a rule of thumb within the consumer electronics market, most PaaS-products start from €200 [iii]. However, there are - like always- exemption, as long as you can provide additional value through PaaS, that your customer would not have received with the purchase of the product.
2. Technically advanced (High-tech)
This is a fairly simple characteristic; a product that is technically advanced (high-tech) and preferably also uses resources in use (e.g. electricity, water, detergents, etc.), is more suitable for PaaS. This is because most of these products require maintenance and repairs, in which you as the provider are the most obvious partner to perform these.
Oftentimes, maintenance and repairs are also quite expensive activities. Adding these services to your product offering is interesting to your customers, and this is an added value when providing a Product-as-a-Service-model. Furthermore, because of the usage of resources in use, providing a more resource-efficient machine to the customer makes it more worthwhile to them. Since potential costs-savings with your product are attractive to your customer while providing a more resource-efficient (premium or A+++) machine
3. Easy to transport
This is a fairly straightforward characteristic; if you want to provide a PaaS, it should be able to be easily removed and redeployed again. So you can pick it up and give it a next life. Products that are big, heavy, and hard to transport or remove (e.g., re-installment) can decrease the flexibility required in a PaaS. Hence thinking about redeployment and logistics in the product-design is crucial for success.
4. Infrequently used by the customer
This characteristic is based on the load-factor of the product. Products that are infrequently used are more likely to be successful PaaS-product. Since the pay-for-what-you-use becomes a valuable addition, as the product is not effectively used all the time. Most products are only used <5% of their lifetime. One of the famous examples is of a drill that is supposedly only used on average for 10-20 minutes in its whole lifetime by a ‘typical’ consumer.
By implementing Product-as-a-Service, your customer can pay-per-use or pay only for the (short) period they actually need that drill for (e.g., when renovating their house). As a side note, when a product is used a lot, it will also depreciate faster than the intended lifetime. In this case, PaaS can also be a part of the solution.
5. Not highly influenced by fashion and trends
This is a characteristic that is also debated currently. Since Product-as-a-Service can provide ways of tackling new fashion & trends, and especially technological developments. Originally products that were not heavily influenced by fashion and trends (like for example washing machines) stayed the same over time.
Meaning that these products did not have any psychological obsolescence associated with them, and customers would not want the newest or most trendy new model. Which would otherwise make for frequent switching and high cost. However, some of the current PaaS-models have taken this aspect and changed it to their advantage. As these newer models can rotate their stock in such a way that fashion and trends are dealt with.
Starting points to increase your PaaS-success
Of course, this list is not exhaustive, and not all of these characteristics have to be present for a PaaS to be successful. Even if your product is complying with these characteristics, success is never guaranteed. Nevertheless, these characteristics provide an interesting starting point for (future) PaaS offerings.
To advise on selecting products suitable for the development of PaaS, more aspects could be important. In this article we’ve only focused on product characteristics. Since the implementation of a PaaS-concept can face many barriers in reality, a PaaS-provider has as much influence on how successful a Product-as-a-Service can be. More information shall be provided in the second part of this series.
Would you like to launch a Product-as-a-Service? Or to increase the success of your current Product-as-a-Service? Get in contact with Firmhouse through our team, and get information on your next steps.
Note: For the sake of simplicity of this blog, we have not considered sharing business models (like for example mobility-as-a-service initiatives). We do agree that these models have a large role to play in making our society more sustainable.
At Firmhouse, we are continuously monitoring PaaS-offerings to see how the PaaS market is developing. If you have any contributions to this article please let us know.
[i] = Servitization = the process of companies switching for selling products to providing functionality.
[ii] = Tischner, U., Verkuijl, M., & Tukker, A. (2002). Product Service Systems: best-practice document: SusProNet.
[iii]= This is not the case for other markets or subscription models.