How Product-as-a-Service (PaaS) can unlock new revenue streams and increase customer satisfaction
In this first installment of our Circular Business Model series, we will explore the concept of 'Product-as-a-Service' (PaaS) – a circular solution that offers new ways for customers to access or use a product, rather than the traditional ownership model. PaaS is an innovative business model that disrupts the long-standing practice of one-time sales transactions for physical goods. It instead increases a product’s utility and value by extending its use phase, increasing lifetime revenue and resource efficiency, and reducing waste. This model benefits both businesses and customers, as businesses can use PaaS to increase revenue per item produced, generate new revenue streams, and increase customer loyalty, while also extending a product’s lifespan and reducing its environmental impact. Customers can benefit by gaining access to products and services at a lower cost and under more flexible and convenient terms, without having to purchase or own the product outright and be responsible for its storage and maintenance.
Imagine a fashion enthusiast who loves to wear new outfits every week. Continuously buying new clothes can be expensive and wasteful, especially when only worn once or twice. What if this customer could rent the clothes instead, and return them after use? This is the idea behind the clothing and accessory rental companies that have become popular with customers, as they allow customers to access a diverse wardrobe without owning it and provide convenient and hassle-free services that include dry cleaning, delivery, and insurance.
These clothing rental companies are leveraging a PaaS business model, where businesses offer the use of or access to their products on a service basis rather than selling them as individual items for customers to own. There are generally four types of ways to offer your product as a service: renting, leasing, pay-per-use, and product subscriptions.
Central to all PaaS business models is the concept of asset utilization, which measures how efficiently a product is used to generate income. The more uses of a product by customers, the higher its asset utilization and the lower its unit cost. A PaaS model can increase asset utilization by renting, leasing or providing access to a fixed asset to numerous customers over its lifetime, rather than selling it to one customer who may underuse it.
PaaS is financially attractive for both customers and businesses. For customers, PaaS offers the benefits of paying for use vs. ownership--meaning that they only pay for the value they get from using the product, rather than the long-term commitment and full cost of owning it. This can be more affordable, flexible, and convenient for customers, especially for products that are expensive (exercise equipment), infrequently used (home improvement machinery), or rapidly obsolete or in need of repair (i.e. fashion or mobile phones and electronics).
For businesses, PaaS can ultimately increase both net revenue and margin for a product, even after accounting for increased costs that come with implementing PaaS. By monetizing each use of the asset, the business can collect more lifetime revenue for each product over its lifespan and access new customers that were unwilling to purchase the product outright. However, companies must fully assess the forecasted demand and economic model of PaaS to ensure that the model is accretive, as revenue must exceed the cost of the company of owning and operating the asset and deliver a higher profit margin over its lifetime than if it were sold to a singular customer. This profitability price point depends on several factors, such as the initial purchase price, the depreciation rate, the maintenance cost, the rental price, and the rental frequency.
These models also increase customer loyalty, as customers may return to the same business for repeated rentals, maintenance, or upgrades while also providing access to new customer segments who are interested in using but not owning certain products. Moreover, PaaS business models can help to achieve climate strategy and sustainability goals – a company using a PaaS model meets more customer demand with less products, which in turn decreases waste and increase its resource efficiency. The product’s embodied lifecycle footprint and emissions-per-use will decrease, resulting in a decreased impact on climate, biodiversity, and natural resource extraction.
There are different product attributes that lend themselves well to certain PaaS models over others. Outlined below are four different types of PaaS models that vary based on the degree of ownership, control, and responsibility that a company and its customers have over the product.
Product rentals | For customers who want temporary possession of a product for a defined period.
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Product leasing | For customers who prefer long-term use of a product, but don’t want to own it outright.
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Product subscriptions | In a subscription model, the business charges recurring, flat rate payments for access to its suite of product and services.
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Pay-per-use | Pay-per-use models allow for the sharing of products among multiple customers over time
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PaaS models in practice for automobiles and bicycles
Product rentals | Product leasing | Product subscriptions | Pay-per-use |
Short-term car rental | 2-year lease from dealership | Bike share programs with unlimited access for monthly fee | Ride-share platforms |
PaaS will not be suitable for every product, so businesses need to evaluate product characteristics, length of ownership, customer preferences, and financial scenarios to determine if PaaS is a viable go-to-market option. It is also necessary to evaluate which PaaS model is most suitable for your product line through considerations such as if the product is durable or consumable (i.e. food, make-up, cleaning products, etc.), the product’s life cycle, complexity, usage frequency, maintenance costs, and the customer experience.
If PaaS models do not align to your product portfolio, especially if your products are consumable or if your customers prefer to own the product, you may need to consider other circular solutions such as resale or refillable models.
To get PaaS right, businesses need to select the PaaS model that works best for their products and design a strategy and execution plan to capture its full potential. Ways to address the challenges of implementing a PaaS business model include:
While offering PaaS may bring added complexity to the go-to-market model, embracing the Product-as-a-Service model holds the potential to unlock new revenue streams and create a competitive advantage in the market. PaaS can help with adapting to changing customer preferences and behaviors, as more and more customers are looking for convenient, flexible, and sustainable alternatives to ownership. Adopting a PaaS business model can unlock additional customer segments, increase customer satisfaction and retention, and reduce your environmental impact. Companies across sectors should start now to evaluate the potential of PaaS models for their businesses and evaluate suitability for products, business goals, and customer needs.
At KPMG, we partner with our clients to support all steps of a company’s circular agenda, ranging from current state opportunity assessments, strategy design, to implementation support.
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