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Across history, merchants have predominantly focused on selling products through one-time transactions. In this traditional model, often referred to as a linear economy, customers purchase a product, use it, and then dispose of it.
When customers become the owners of physical products, merchants are no longer responsible for them anymore. In turn, merchants aren't incentivized to create the highest quality products. Instead, they gain the greatest benefit by selling as many individual products as possible.
Product-as-a-Service (PaaS), also known as Product-Service Systems, combines products with accompanying services. In this model, products are not just sold but come with additional features and service contracts for repair or replacement. These products are often sold through subscription models.
As customers subscribe to products and pay recurring fees, PaaS merchants benefit from continuous, direct relationships. In this case, ownership is not transferred to the customer. Instead, merchants become responsible for creating better products, resulting in a more circular economy.
Transitioning from a standalone product to an all-inclusive service extends the customer life cycle, which is supported by additional services. So, 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. Then, the product is delivered as an experience or extra service. Most of the products we experience every day come in some form of PaaS.
Partially, yes. However, PaaS comes with extra benefits for customers. It is an entirely different experience. Customers can expect merchants to take care of the renewal or repurposing of products.
PaaS isn't a brand-new business model. Instead, it has been around for quite some time. However, it has yet to be applied in new contexts of circular business models, which are increasingly driven by digitalization, IoT, and circularity.
Product-as-a-Service has also attracted interest from manufacturers and producers as a strategy to enhance product profitability, strengthen customer relationships, and introduce new sustainable business lines.
Product-as-a-Service is a completely different economic model compared to traditional linear models (take-make-waste or dispose). In a linear model, once customers no longer need the product, it typically ends up in the trash. In a circular model, the customer returns the product to the producer, where it can be recycled and given a new life.
This relationship between Product-as-a-Service and the Circular Economy Model demonstrates why it is particularly valuable for merchants aiming to improve their sustainability efforts.
PaaS helps manufacturers become more sustainable.
Manufacturers retain ownership of the product and its residual value, allowing them to influence the design process. This enables them to create products that are easier to refurbish, extending their life cycle and giving them a second life.
The customer subscribes to use the product, essentially "renting" it rather than buying it. If the customer decides to return the product, the producer can retrieve it and repurpose parts or materials to create new products. This approach maximizes the product's value over time, increasing long-term profitability. Products designed for disassembly, with reusable components, are more likely to contribute to the Circular Economy.
Some of the industries that are taking the most advantage of the PaaS model, particularly those involved in manufacturing, include:
Schiphol Airport now rents lamps from Philips, with the Dutch company offering "light as a service." Instead of purchasing the lamps outright, Schiphol Airport pays an annual fee for their usage. Philips retains ownership of the lamps and remains responsible for all post-service activities, including repairs and replacements. This model incentivizes Philips to deliver light as efficiently as possible, ensuring both cost-effectiveness and sustainability.
When offering subscription products, you have to really get to know your target customers. At its core, you're not just selling a product; you're delivering value and benefits through both the product and its services.
The key to a successful subscription offering is understanding why your customers choose to buy from you. What are they really after? Perhaps it's more freedom, less stress on a Sunday morning, or the joy of receiving their favorite flowers each month. These intrinsic motivations are what drive people to subscribe, so keep them in mind when highlighting the benefits to your customers.
Some people prefer not to cook on Sundays and appreciate the convenience of having a meal kit delivered with their favorite recipes and simple instructions, saving them the hassle of deciding what to cook. Merchants like Blue Apron, HelloFresh, and Home Chef are leaders in offering fresh meal kits to customers on a subscription basis.
At Firmhouse, for example, our Product-as-a-Service merchants choose to work with us because we simplify the management of their subscription offerings by providing a single integrated platform. With just one click, they have everything they need, allowing them to focus on what they do best: selling their subscription products to new customers.
What price will you charge your customers, and how much do you need to earn over time to ensure your business is sustainable? In a traditional model, the market often dictates the price. However, in a subscription model, your pricing should be based on a combination of your customer's expectations, your market conditions, and your company's goals.
You’ll need to determine your desired monthly revenue and subtract your costs to establish the price you’ll charge your customers. For instance, if your company has a recurring revenue goal of $100,000 for the year, that breaks down to $8,333 per month. Keep in mind that transaction fees and other costs will need to be factored in, so you may need to set your prices slightly higher to meet your revenue goals.
You’ll also need to evaluate your pricing strategy: Is it more beneficial to have 10 clients paying $833 each per month, 100 clients at $83.33, or 1,000 clients at $8.33? Consider your desired monthly revenue and how recurring payments from customers will impact that goal. Additionally, factor in the flexibility aspect—would customers be willing to pay more for your products if they know they can easily cancel? Taking these dynamics into account is necessary for optimizing your subscription model.
Customers often ask themselves, "Why should I buy this product from you?" and "Why choose you over another platform?" Simply adding extra services or features doesn’t guarantee more customers. It's important to understand and articulate your unique value proposition—what makes your company stand out.
Clearly communicate the benefits of offering your product as a service rather than selling it outright. Why is subscribing to your product better than owning it? Highlight the advantages such as lower upfront costs, ongoing support, flexibility, and access to the latest updates. Show potential customers why your Product-as-a-Service model provides better value and convenience compared to traditional ownership.
If you're just starting out, it's manageable to handle everything manually. However, as your business grows, you'll need software to automate those tasks, manage customer relationships, and oversee the product life cycle. Firmhouse can help you set up your Product-as-a-Service model, enabling you to scale quicker and more efficiently.
Manufacturers like Xerox and HP have successfully implemented the Product-as-a-Service model, offering managed print services where customers pay for a service contract rather than just the product. Rolls-Royce is another great example, providing jet engines that are billed based on hours of operation.
PaaS presents an interesting proposition for customers who value experiences over simply acquiring products, while also appealing to merchants looking to become more sustainable.
For example, imagine subscribing to a premium washing machine where your payment covers not just the usage but also maintenance and services over a set period. This model eliminates the need for high upfront purchase costs, making it easier for customers to access premium products without the financial burden of ownership.
Homie is a great example of the shift toward a pay-per-use model for washing machines, moving away from traditional upfront purchases. With Homie, you can easily order a washing machine online, have it delivered to your home, and seamlessly connect it with other appliances, making it ready for immediate use.
For manufacturers and producers, right now is an ideal time to consider transitioning from traditional product sales to offering product subscriptions. Customers are increasingly embracing circular methods of acquiring products, and sustainable business models are positioned for continued growth.
Take Decathlon, for example. In late 2023, the global sports retailer launched a children's bike subscription in Belgium. As kids tend to quickly outgrow bikes and need a bigger size, this Product-as-a-Service option enables subscribers to rent equipment and return it once no longer needed.
With three subscription packages available, Decathlon will increase the capacity of its subscription service with each passing month, making it more widely available to consumers. Depending on the subscription tier, the initiative includes maintenance, insurance, and roadside assistance. And this isn't the only circular approach Decathlon is taking to business.
It has also launched a buy-back scheme to allow customers to swap out and repair old sporting equipment while earning store vouchers to promote responsible consumption and provide a circular economy for all products. Recently, this initiative expanded to more sports categories, including fitness equipment, racket sports, water sports gear, and camping equipment.
There's no doubt about it: Product-as-a-service plays a significant role in the movement towards greater circularity, contributing to the broader adoption of sustainable practices.
As a merchant, you can champion sustainability through Product-as-a-Service subscriptions while simultaneously increasing profitability and generating recurring revenue. As PaaS adoption grows among merchants and customers, this model will become more important.
Industry leaders like Decathlon, Philips, Rolls-Royce, and Xerox are already transitioning to PaaS, offering customers the option to subscribe to their products rather than purchase them outright.
Ready to launch or scale your PaaS business? Book a demo with Firmhouse to learn more about how our platform can support you.
