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Circular Business Model Innovation: Product-as-a-Service

How Product-as-a-Service (PaaS) can unlock new revenue streams and increase customer satisfaction

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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.

What is Product-as-a-service?

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. 

What makes PaaS business models attractive?

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. 

Determining the PaaS model that is right for your business

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.

  • Winning attributes: Products with short-term or temporary demand; products that the user does not want to have to store long-term; Products that can be easily transferred back to the company (either relatively lightweight or mobile).
  • Examples: Apparel and accessories for events, home improvement equipment, short-term car rentals
  • Revenue model: The customer pays a fee for each rental and returns the product after use in a defined period.
  • Role of the business: The business owns and controls the product and is responsible for the maintenance, service, and insurance of the product.

Product leasing

For customers who prefer long-term use of a product, but don’t want to own it outright.

  • Winning attributes: Products with a medium-term demand from customers (generally longer than rentals); Products with periodic upgrades over time that may be more accessible through leasing model, compared to ownership; Assets requiring periodic maintenance, which the customer can avoid being responsible for through ending lease.
  • Examples: IT equipment, solar panels, car leases
  • Revenue model: The customer typically pays a fixed monthly fee for the lease and may have the option to buy the product at the end of the lease.
  • Role of the business: The business owns the product but transfers the control and some of the responsibility to the customer, who leases it for an undefined period that can be dependent on the customers’ preferences or needs. This business model may increase complexity when managing inventory, as the lease period may be unknown or longer than a rental model.

Product subscriptions

In a subscription model, the business charges recurring, flat rate payments for access to its suite of product and services.

  • Winning attributes: A suite of products that customers want access to, often outside of their home. The products are either homogeneous and interchangeable, or access does not need to be paused in order to clean, maintain and repair them.
  • Examples: Bike share programs, gym memberships, streaming services, clothing rental monthly subscriptions
  • Revenue model: The customer pays a monthly rate to access the suite of products. Product subscriptions generally don’t have a predefined end date and the customer can cancel anytime.
  • Role of the business: The business is responsible for the maintenance, service, and insurance of the products. At times, they will also offer the venue for the product, such as a gym, or the infrastructure for a product, such as the bike storage racks for bike sharing programs.

Pay-per-use

Pay-per-use models allow for the sharing of products among multiple customers over time

  • Winning attributes: Similar to product subscriptions, but where customers may have more variable demand for product, and would prefer to pay per use, and/or business anticipates extracting more value per use than through collecting monthly subscriptions.
  • Examples: Ride hailing services, pay-per-use scooters, laundromats, fitness studios (pay per class)
  • Revenue model: Customers are charged a fee for each use of the product.
  • Role of the business: The business itself or third-party facilitators are responsible for the platform, coordination, and insurance of the products.

 

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.

Additional considerations

PaaS is not a one-size-fits-all solution, and each type of PaaS model has its own challenges and considerations.

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Customer behavior and preferences

Customer behavior and preferences

It is vital to understand customer’s needs and preferences to determine if a PaaS model is right for your business. What duration and model of access to the product is the customer looking for? How long and where is each customer’s average use of the product? Is it easy for customers to properly care for and maintain the product? Additionally, as businesses have more interactions with customers in a PaaS model, business will have to think through how to establish a more long-term relationship with their customers and ensure their customer service operations fits the needs of a PaaS customer.
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Operational requirements

Operational requirements

PaaS requires the business to rethink how to manage their products after initial use, as ownership is no longer transferred immediately after the initial sale. Businesses may have to develop new capabilities for cleaning and maintaining the products after use, and testing for quality throughout the product lifecycle.
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Reverse logistics capabilities

Reverse logistics capabilities

Businesses may have to develop, enhance, or outsource a delivery reverse logistics process to ensure products are recovered after the customer’s use period is over. The impacts to both operational costs and transportation emissions will need to be netted against the financial and environmental benefits of the PaaS model.
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Pricing

Pricing

PaaS requires the business to set the price and the revenue model to ensure that the PaaS is accretive and profitable. The business needs to account for possible cannibalization of direct product sales, the operational costs to run the PaaS program, the costs of refurbishing and repairing products, and the competitive landscape. It is also important to consider the product and service separately when pricing products, as sometimes the sale of an unprofitable product can lead to higher revenue-generating services or subscription revenue.
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Prolonging the usage phase of the product life cycle

Prolonging the usage phase of the product life cycle

As recurring revenue is a central tenet to the success of a PaaS model; companies are incentivized to enhance and maintain the product’s quality and durability to keep them in service and functioning properly for as long as possible. A product that has a shorter lifespan than anticipated can adversely affect the profitability of a PaaS model.
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Evaluating the impact on your supply chain

Evaluating the impact on your supply chain

PaaS may require the business to rethink and redesign their supply chain processes and capabilities, such as sourcing, manufacturing, distribution, and warehousing. The business also needs to address the risks and uncertainties associated with a PaaS supply chain, such as demand variability and product availability and assess how this might affect contracts and negotiations with vendors and suppliers. Additionally, the business needs to ensure the resilience of their PaaS supply chain by developing contingency plans, diversifying their suppliers and partners, and monitoring the performance and reliability of their PaaS provider(s).

How to get it right

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:

  • Using customer segmentation, value-based pricing, and subscription or pay-per-use models to ensure the business model is accretive.
  • Using data and analytics to optimize inventory, delivery, and maintenance of the product.
  • Mitigating increased risks through increased insurance, security, and legal agreements.
  • Engaging with your suppliers and vendors early and often to ensure they are supported with proper resources, have clear expectations of operational and logistical requirements, and have mitigation plans in place to address the potential risks and costs of disruptions or delays in the delivery of the product.
  • Using market research, customer feedback, and product testing to validate the demand and the feasibility of a PaaS business model.
  • Communicating and generating awareness of the benefits and value proposition of a PaaS business model to customers, partners, and stakeholders.
  • Implementing the PaaS business model through pilots and limited rollouts to test the market response, resolve operational issues, and optimize the service delivery and customer experience.

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.

How KPMG can help

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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Meet our team

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Blythe Chorn
Circular Economy Lead, KPMG LLP
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Mary Fay
Director, Infrastructure, Capital Projects, and Climate Advisory, KPMG US

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