Renilde Becqué

A search for compelling sustainability narratives, transformative business models and pathways towards a circular & regenerative economy — www.linkedin.com/in/renildebecque

Product as a Service – increasing energy & resource productivity

In mid 2015 I presented in New York on the Product as a Service business model – from a Circular Economy perspective- as a way to increase energy & resource productivity.

On behalf of a client I compiled a 20 page think piece with focus on the application of PaaS for energy efficient products in the built and urban environment. A high-level summary is provided in this blog.

PaaS business model and its application

Through the Product as a Service (PaaS) business model, customers use products through a lease or pay-for-use arrangement versus the conventional buy-to-own approach. This model is attractive for companies that have the ability to manage usage and maintenance of the product’s services and recapture residual value at the end of life.

Product-as-a-service transform service from a standalone function within a manufacturing organization into an integrated product and service offering that delivers value in use. Manufacturers transition from selling physical products to selling the business outcomes the products will deliver.

Products should therewith no longer be regarded as commodities to be bought and sold. Instead, they should be considered “resource banks,” with the resources that they contain being constantly reused. “The idea that goods are owned by consumers is outdated,” says Dutch architect Thomas Rau. “As a consumer I am only interested in the performance of a product, not owning it. Sufficient light, comfortable seating, good audio and vision, that’s what counts”.

Companies in effect lease products to consumers or other companies, though contracts are often based on product usage rather than simply the temporary possession of the product by the lessee. This alters the revenue stream from charging a one-off fee for buying a product into a monthly recurring right-to-use fee. For the user, this can be convenient as no upfront capital expenditures are required while the recurring right-to-use fee is predictable from month to month. Users are often prepared to pay a higher total fee in this model for the stated financial benefits and for the freedom to trade up at a given point in time without having to worry about selling or disposing of the used assets.

For companies a recurring business model smooth out the peaks and troughs of demand cycles and make revenue streams more stable. It can help companies manage their resources better, because they know how many of their products have been leased out and therefore what recyclable and reusable materials will come back to them.

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PaaS business models therewith have the potential to radically improve energy and physical resource productivity, delivering value against the least amount of (energy) resources, especially in cases where market inefficiencies lead to highly linear ‘make-take-waste’ supply & consumption chains while barriers such as the need for upfront capital impede the uptake of more efficient products.

Some predict in fact that by as soon as 2018, 40% of the Top 100 discrete manufacturers and 20% of Top 100 process manufacturers will provide Product-as-a-Service platforms.

Also in the urban and built environment the potential for PaaS is considerable. A late 2013 survey of 300 city mayors for example found that switching to LED for street lighting was considered a very high priority, second only to building retrofits. The most significant barriers identified were budget constraints and upfront costs. By providing LED street lighting as a service –such as is currently being offered by companies like Philips- upfront financial barriers can be overcome. In addition it designs out surplus material and energy use through its ownership model. With the supplier retaining ownership and responsibility for the product, there is a clear incentive to enhance the durability and efficiency of the product. Its residual value after take-back can improve profit margins, but also reduces the need for energy-intensive virgin material extraction and processing in the upstream supply chain while buffering the manufacturer from price volatilities due to increased resource scarcity.

Nonetheless, a pure PaaS model will not suit every company or product category due to various aspects such as scale, upfront financing, the risks of retaining ownership and others. PaaS inspired business models may therefore include:

  • Product lease with upfront payment for delivery and installation costs, and a monthly fee for usage including the cost of interest.
  • Product rental or product (pay-per-use) sharing, where the customer does not have exclusive use of the product.
  • Product pooling, with simultaneous use of the product.
  • Product sale in combination with a maintenance concept.
  • Buy-back guarantee.
  • Product return agreement, including a discount on the next purchase.
  • Design, Build, Operate, Maintain contracts, such as applied in the building sector.
  • A business-to-business marketplace, where companies offer their products (or even just components or raw materials) to the marketplace intermediary which subsequently (assembles and) markets the products through a managed product-service model to consumers. The marketplace can create economies of scale, while the original supplier is bound by a take-back guarantee.

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Barriers and solutions

The PaaS model can be a very attractive value proposition, although companies looking to transform their business or select product lines often run into a number of common barriers and challenges. These include the following:

    • Creating buy-in and the learning curve. PaaS concepts can initially be time consuming and research intensive to establish and scale up, and come with a considerable learning curve at first.
    • Access to capital and financing. The transition from selling products to selling services can have large financial implications. Revenues for product sales will not be realized upfront.
    • Accounting impacts. Current accounting practices can act as a barrier for PaaS on both the supplier as the customer’s side.
    • Public sector challenges. Tendering rules don’t always allow public sector agencies to ‘purchase’ PaaS contracts. Other challenges can be risk aversion by public procurement bodies, as well as confusion and logistical challenges on the supplier side leading to insufficient clarity in their bids around the actual application of applying PaaS and subsequent product take-back
    • Importance of data and metrics. Solid data and metrics for defining the baseline, required performance level as well as to monitor actual performance under a PaaS contract are key to success in delivering a high quality service with a high level of resource and energy efficiency.
    • Legal challenges. Legal issues concerning for instance the legal ownership of a PaaS product can create challenges for contract implementation.
    • Take back and re-use. Companies will have to consider how the last part of their value chain affects the first part– components and materials contained in obsolete products once taken back have to be included again in a firm’s own production process or be given a new life elsewhere.

Such challenges can successfully be overcome as exemplified by the rapidly increasing proliferation of ‘as a service’ models as well as the institutionalization of established PaaS models in select sectors including commercial print & copy machines (pay-per-use model) and airplane engines (power-by-the-hour).

Conclusion

PaaS holds appeal for private sector parties looking for attractive new business propositions to enhance customer retention and profit margins, while simultaneously addressing the resource efficiency of their supply chain and resilience of their core business model.

Government bodies also have a key role to play by developing and implementing policies and programs that facilitate and create a favorable environment for resource-efficiency driven PaaS models, as well as through their influence in the market as a major procurer of products and services. Governments and other procuring parties can ‘lead by example’ through their procurement guidelines and actions, such as performance based tendering.

 

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This entry was posted on July 5, 2015 by .

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