Product-as-a-Service attracts a lot of interest. They have been launched in many industries, on many continents, in B2C & B2B. There are even arguments that Product-as-a-Service is a superior way of doing business concerning resource consumption and planetary health. But what makes them so compelling?
Six benefits in three dimensions turn PaaS attractive: Customers, Business and Planet.
Customers
First, Product-as-a-Service models might be the better solution to customers‘ problems. Every successful business solves a relevant customer problem. The better a company solves that problem, the better it will perform compared to competitors. Some products have been used in a PaaS-like proposition for decades: renting a flat, buying a train ticket, renting a car. The asset itself is not sold. Customers pay for the right to use the asset for a defined time in a defined way and then hand it back again.
Second, New technology enables new Product-as-a-Service models. Higher data bandwidth and faster internet connection unlocked music and video streaming services. Highly capable mobile phones enabled car-sharing. Connected devices are a further enabler that makes additional or context-based functionality possible (e.g. TULU hosts tools like screwdrivers or vacuum cleaners in rackets that can be locked and unlocked remotely to allow individual tenants the use of these tools). But, to make that clear, new Product-as-a-Service propositions can also exist without technology, as On Running demonstrates with the shoe subscription Cyclon.
Product-as-a-Service solutions prove to be successful in cases where they solve a customer problem better than selling products. They will cease to exist if these use cases cannot be found or the use cases are not popular enough to turn the business model profitable.
Business
For manufacturers, Product-as-a-Service models create predictable revenue, long-lasting customer relationships and a business field that is better to protect against retailers. Any provider can reap the first two benefits, the latter is mostly available to manufacturers.
Third, Product-as-a-Service models generate recurring revenue. Mostly, PaaS propositions are based on long-lasting contracts. A defined customer base generates a defined revenue. The customer base is reduced by churn and grows with new acquisitions. Churn can be projected accurately after some time and in the absence of disruptive events. Customer acquisition might – in theory – follow the same predictability; in reality, there is rarely a linearity as early adopters behave differently than the large majority, regional differences apply, competitors react, and customer preferences change. Nevertheless, if the acquisition is turbulent, there remains a stable revenue stream from existing customers. This revenue is more immune to short-term changes than downturns in normal sales business. This character makes PaaS revenue more predictable.
Fourth, Product-as-a-Service models establish long-lasting customer relationships. The recurring service character implies a constant relationship with the customer. This contact can improve the offering: through insights, learnings, service improvements, open innovation, and feedback loops. This long relationship can also be the death sentence for one-time sales models. Two factors are at play here. First, existing customers can be highly satisfied with and loyal to the PaaS proposition: They don’t go back to one-time sales models or another PaaS provider. Second, new customers chose Product-as-a-Service over one-time sales. If more and more customers switch to PaaS, the one-time sales market shrinks. That happened at a large scale to CD and DVD sales compared to streaming. Most likely, both markets will co-exist, and the market split will depend on the industry, category, and customer segment. Extremes might exist with PaaS taking over the complete market or playing no significant role.
Fifth, Product-as-a-Service models can be a more defendable business for manufacturers and brands than retailers. Manufacturers and brands have a richer connection with their products. Multiple aspects in comparison to retailers are involved:
- deeper knowledge about the composition and features of the product
- wilder access to potential IOT usage data
- higher influence on upstream suppliers to tweak the product design in a PaaS-favourable way
- lower cost per product as internal sourcing is possible
- more freedom to use the brand in new ways
- higher trust by customers to deliver product-related service
These advantages are unique to manufacturers and brands. They are also defendable against retailers and platforms. If these advantages are turned into capabilities and the resulting qualities are valued by customers, manufacturers and brands can build a more defendable PaaS proposition.
On the contrary, retailers and platforms have other advantages: higher sales traffic, high-quality customer sales experience, more brand and product options for the customers to choose from, and potentially trusted and working customer service.
Whether manufacturers and brands can turn their position into an advantage depends on the specific parameters of the Product-as-a-Service model. On Running Cyclon – with newly designed and manufactured shoes that are of material used to produce new pairs of shoes again – is an example where many advantages of a brand come together in a way no sportswear retailer could copy. On the other hand, Grover – where customers can rent thousands of consumer electronic products from various brands – is an example where the advantages of the retailer position are exploited successfully.
Planet
Sixth, Product-as-a-Service models can reduce resource consumption. The potential for a higher product utilisation rate can be an economic incentive for providers. Products are used longer and by more people. As they circle back, their components and materials can remain in the loop and reduce the need for virgin material. Theoretically, the economic incentives are well-aligned with the goal of reducing resource consumption. However, in practice, a few challenges need to be solved:
- Customers need to switch to the new proposition, which requires a substantially more attractive proposition
- Substantial investment (=resources) is necessary to develop a new proposition, new processes and maybe even new products
- The footprint of additional circular processes (return logistics, refurbishment etc) needs to be lower than the utilisation & reuse advantages
- Rebound effects by overconsumption or additional consumption need to be minimised
All of this can be possible, yet mostly not easy. Sometimes, the combination of regulation, consumer preferences, and efficient linear infrastructure can make it up to impossible right now to turn Product-as-a-Service into a win for the planet. But the promise that this could be possible motivates many to explore that potential.
Product-as-a-Service propositions come with potential benefits, but it is up to the context and the execution of the provider to materialise them. If things are in favor and implementation is done well, they can transform a market, leave customers happier behind and consume less resources. This is what makes Product-as-a-Service so attractive.