Today the Circular Economy Week in The Netherlands comes to a close. This week has been about inspiring, sharing ideas and emphasizing the circular economy and sustainability. One of the prominent ways to reach our universal sustainability goals is by implementing the Circular Economy (CE) principles. Due to the fundamentally different approach of value creation, companies often struggle with implementing CE in their day-to-day business. In the spirit of this week, we discuss the strengths of Product-as-a-Service (PaaS) in regard to the circular economy.
Current patterns of production and consumption are widely understood to be a major cause of modern global environmental challenges. Circular economy and especially circular business models have been mentioned as one of the main ways to decouple value creation from resource use and waste generation.
One of the most frequently named business models that enables the circular economy transition and changes these production and consumption patterns is Product-as-a-Service (PaaS) (or Product-Service Systems (PSS) as it's known in the academic world). The central focus of PaaS is the shift from selling physical products to providing functionalities and benefits delivered through tangible products and intangible services.
A circular economy is an; 'economic system of closed loops in which raw materials, components and products lose their value as little as possible' [source]. This closed-loop of materials and components is a crucial factor in achieving a circular future.
However, current production and consumption patterns often do not support these material loops. One of the main reasons is the linear transfer of ownership towards the customer. This transfer of ownership does not allow for a stewardship role from the companies' perspective but encourages material use through increasing sales.
Therefore, newer business models like Product-as-a-Service have been proposed that keep the ownership with the producer or manufacturer of the goods. This, in turn, makes them responsible for the functioning of the product over time.
Revenue models within PaaS
The most prominent revenue models within PaaS are Lease or Pay-per-Month (Subscriptions Service), Pay-per-Use, and Pay-for-Performance models. These models are significantly different and do not all have large sustainability potential.
However, all these revenue models do have a focus on functionality instead of the product in common. This should make it easier to design for need-fulfillment with lower environmental impacts.
Due to the inherent nature of PaaS, more frequent customer contact can be established. This makes for a better customer-product alignment (jobs-to-be-done) and so unnecessary features and resources can be cut out.
Change of incentive
The conventional business strategy to increase turnover is to maximize units sold, hence generating more profit. Regarding PaaS, this incentive changes. Firms get paid by the service they deliver, and since the ownership of the product stays with the provider, the materials that play a role in providing these services become a cost factor for the company. This makes it more feasible to implement CE principles and to maximize resource use. Companies develop smarter and more efficient products to decrease the ecological impact. Where producers of products are profiting from high service costs and short product lifespans, a PaaS-provider with ownership will profit throughout the use phase from low lifecycle cost, thus reducing and more efficiently using material resources [i].
This decoupling of material use from value creation is the main reason for the increased attention towards the PaaS-model. Also when the producer remains owner; it will take better care for the product through maintenance & repairs (increasing performance), and make sure there is optimal (re-)use. In the end, the provider knows the product better than the end-user since they are the ones designing, producing, and maintaining it.
Consequently, that is also the reason why this week Rabobank dubbed it one of the top three most circular business models [source]. To summarize; PaaS is a practical, effective and economical solution to implement a resource-efficient circular economy.
The potential power of products returning
When the ownership of the product is not transferred, the resources will remain with the provider and extend the producer's responsibility. These returned resources can be used for other products or can be given a second-life through lifetime extension. Activities companies can perform in the circular economy can include; cascading of the resource, re-using, repairing, maintaining, refurbishing, recycling and remanufacturing [source].
The latter aims to ensure operations comparable to a similar new product. Which is in line with the PaaS proposition; paying for the product functionality and not for the product itself.
Rethink Design – Design for Remanufacturing
It becomes clear that companies that remain ownership need to rethink their design and long-term product quality. They need to enable designs that are durable, modular and fit for refurbishment or remanufacturing.
This way another advantage of the circular economy can be unlocked; a PaaS-company now has access to and control over the materials and resources for the price it bought it for. Since material prices generally rise, this could well be a huge competitive advantage in the future.
Circular Stepping Stones
Companies can already start implementing lifetime extension services like maintenance & repairs and take-back mechanisms to increase their resource re-use potential. This provides an easy stepping stone for those companies struggling to develop PaaS.
Don't forget, as we wrote before, it's important to be consistent when choosing how to sell your Product-as-a-Service. Not all PaaS are more sustainable, and some could even still encourage overconsumption. Be clear in your intentions when starting a PaaS, customers are more and more critical and socially aware. If one part of your business is not sustainable, there's a good chance your customer will look for something else.
Would you like to give circularity a boost and get started with Product-as-a-Service? At Firmhouse we can help you built and launch your first product-as-a-service subscription model. Get in touch with the team.
[I] Matschewsky, J. (2019). Unintended Circularity?—Assessing a Product-Service System for its Potential Contribution to a Circular Economy. Sustainability, 11(10), 2725.