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Products can have multiple life-cycles.
Over the past years, producers and manufacturers have been focusing on selling their products in one-time transactions. This is what we now call the linear economy. Customers are the owners of that physical product, and producers are no longer responsible for taking care of the product. As these companies are not incentivized to create the best possible product, they gain most benefit by selling as much as they can.
Product-as-a-Service (PaaS) also referred as Product-Service Systems, is a combination of products that are accompanied by services. The product is joined by more features or service contracts to repair or replace. With PaaS, products are offered in subscription models that are offered with services attached.
Customers subscribe to the product and pay recurring fees. PaaS companies have more ongoing engagement with closer customer support. Because ownership is not transferred, there is a large circular economy potential, since the company is now responsible for producing a better product.
The transition from product to an all-inclusive service engagement lifespan ensures that the customer lifecycle is extended and is ensured by the services associated. Physical products are combined with services and software to monitor the customer process.
Instead of paying a one-time fee, customers subscribe to the products and pay a weekly, monthly or yearly fee, and the product is then delivered as an experience or extra service. Most of the products we experience every day come in a sort of form of Product-as-a-Service.
Is this like renting products? Partially yes, but Product-as-a-Service comes with extra benefits for customers. It is a whole different experience. Customers can expect that the producer will take care of the product and take it back to have a new life.
How did everything start?
PaaS is not a new business model. Instead, it has been around for quite some time now, but has not been applied in these new contexts of circular business models that are more enabled by digitalization, IoT and circularity. Product-as-a-service has also increased the interest from manufacturers/producers as a way to boost the profitability of their products, strengthen customer relationships, and launch new lines of sustainable business.
Product-as-a-Service is a completely different economic model than traditional linear models (take-make-waste or dispose). With a linear model, once customers don't need the product anymore, it ends up on the trash. With a circular model, the product returns to the producer where it can be recycled and given a new life.
This is one way of how Product-as-a-Service is connected with the Circular Economy Model and why it is extra valuable for companies that are looking to become more sustainable.
Why is PaaS good for manufacturers or producers?
PaaS helps manufacturers to be more sustainable!
Manufacturers still own the product and thus the residual value, they have influence on the design and can take design into consideration to make products easier to refurbish and thus give them a second life.
The customer subscribes for using the product—kind of like 'renting' it instead of buying it. If the customer wants to return the product, then the producer can pick it up and reuse some parts or materials of the product into building the product again. Keeping it in the highest value order for the longest period of time and increasing profitability in the long run. Products that can be disassembled and some parts can be reused which is more likely to contribute to the Circular Economy.
Which industries are taking advantage of PaaS:
Some of the industries that are taking huge advantage of the PaaS model are especially companies that manufacture products. Such industries are:
- Consumer electronics
- Consumer Goods
- Home & Furniture
- Original Equipment Manufacturers (OEM’s)
Schiphol airport is now renting the lamps from Philips. The Dutch company is now offering their lux as a service, so Schiphol Airport rents the usage of the light every year. The lamps are still property of Philips and they will be still responsible for all the post-service themselves (repairs & replacements). More importantly, the company will be as effective as they can in providing light.
Why are customers inclined for a PaaS model?
- Flexibility to pay/upgrade their payment options every month.
- More customer support and loyalty.
- Lower upfront costs to buy a product.
- The possibility of getting renewed products once their subscription is over.
What does it mean to transform your business with Product-as-a-Service?
1. The customer should always come first
When you are offering subscription products, you need to have a clear understanding of the people that want to buy your product. At the core, you're not only offering your product(s) but also offering value and benefits to the customers with the product(s) and the services connected.
The key when offering your subscription product is to understand why your customers are buying your products. What do they want to get? Let's say it's more freedom, less stress on their Sunday morning, or happiness when they receive their favorite flowers every month. These are intrinsic reasons why people will buy from you, keep this in mind when showing your benefits to your customers.
Some people prefer not to cook on Sunday, and they might prefer a food box being delivered with their favorite (recipes) and an explanation of how to cook it (more easily) instead of having the hassle of thinking about what to cook that day. Blue Apron, Hello Fresh and Home Chef are some of the companies leading in delivering fresh recipes to customers on a subscription basis.
At Firmhouse, for example, our Product-as-a-Service companies come to us because it's easier for them to partner with a company that can manage their subscription offering in just one platform. On one click, they have everything integrated and can focus on what they do best: selling their subscription products to new customers.
2. Keep in mind your pricing
What's the price you're going to charge your customers, and how much do you need to earn overtime to make your business sustainable?.
In a traditional model, the market dictates the price. In a subscription model, your price should be based on your customers, your market, and your company. You need to decide how much you will like to make per month and take out the costs to determine how much you'll be charging your customers.
Let's assume your company has a recurring revenue goal of $100,000 for a year. If you divide that by 12 months, that gives you an $8,333 per month. (Don’t forget to take transaction fees into account; you always have to go higher because of that).
The question then is:
How many customers do we need to (or can we) serve?
What are the product(s) and extra service(s) that we would offer our customers?.
Is it better to have 10 clients that pay you $833 or 100 at $83.33 per month or 1000 at $8.33 per month? Consider what you want to earn every month, and what does that mean with recurring payments from customers. Also, make sure to calculate the flexibility aspect. Is it worth paying more for your products if customers are able to cancel it really easily?.
3. Show your company benefits with Product-as-a-Service
Why should I buy this product from you? Most of the customers ask this to themselves; Why you instead of any other company?
Not only because you're adding additional services/features will necessarily mean that more people will buy your product. Acknowledge your value proposition; what is it that makes your company unique. Show clearly the benefits of offering your Product-as-a-Service instead of buying it. Why is this better than just owning the product (buying upfront).
4. Have the right software at hand
If you are just getting started, then it would be easy to do everything manually. Yet, once you start growing, you'll need a software to help you automate that manual work, manage your customer relationships and your product lifecycle. Firmhouse can help you set your Product-as-a-Service so you can scale faster.
Manufacturers such as Xerox and HP are companies that have been working with Product-as-a-Service, where customers pay for a service contract with managed print services. Rolls-Royce is also a great example of jet engines that are powered by the hour.
5. Experience over owning products
PaaS offers an interesting proposition, where customers are seeking for experiences beyond acquiring products, and where companies are looking to become more sustainable.
Suppose you subscribe to a premium washing machine where you not only pay for its use but also for the maintenance and the services all cover for a period of time. Customers don't have high purchase costs to acquire a product; rather, they can access it more easily.
Homie is a great example of how washing machines are transitioning into a pay per use model instead of buying them upfront. As easy as ordering online, the washing machine is delivered to your home, connected with other appliances at home and ready to use.
What is in it for your company with PaaS models?
- Boost your profitability and create recurring revenues.
- Sustainability focus with the possibility of reusing materials or part(s) of the product.
- Broader end-to-end customization and personalization for customers.
- Improve customer engagement with long-term relationships with your customers.
- If your company stands for better customer service, then this is a powerful way to differentiate yourself from competitors.
How is Product-as-a-Service evolving?
For Manufacturers and Producers is the right time to evaluate if they need to make a transition from selling products to start offering product subscriptions. Customers are now adopting a more circular way of acquiring products, and sustainable business will continue to grow over time.
Your company can be more sustainable with Product-as-a-Service subscriptions while still boosting your profitability and generating recurring revenue. PaaS offerings will continue to grow with more adoption from companies and customers. Companies such as; Philips, Roll Royce, Xerox, and some others, are already taking steps to transition into Product-as-a-Service models offering customers the opportunity to subscribe to their products instead of buying them.
Our customer team is ready to help you get started or to scale with your Product-as-a-Service subscription business.