Sustainability and increasing profitability can go hand-in-hand
Traditionally, businesses have looked at building a sustainable business and profit as two conflicting objectives. Many businesses commonly consider sustainability as a cost to the business. The circular economy creates a paradigm shift in that it shows businesses how they can use the circular economy to add value and increase profits (and why they should).
The best way to look at this is to go through the key areas of a financial statement. Let’s examine the ways that businesses can increase their profitability by embracing sustainability.
- Increased consumer demand for sustainable products can help drive revenue as customers seek out these products.
- Closing the loop with products allows a greater connection to the consumer, which creates opportunities to further market to those customers, thereby increasing revenue.
- The success of the software as a service (SaaS) based model can also be transferred to traditional products and manufacturing. If companies start to look at the end use of their product rather than just selling the product itself, they can start to generate multiple times the revenue. This can be achieved through subscriptions or renting the same product over and over.
- Many companies that got away from repairing products in the 70s and 80s have now returned to it, based on evidence that they can increase their profits dramatically by repairing products rather than replacing or reproducing them.
- Looking at the ultimate use of the product and moving from physical products to a service can generate greater revenue compared to simply selling a product once.
- Selling refurbished products can produce another revenue stream.
Cost of Goods Sold (COGS):
- Industrial design is one of the key drivers to embracing the circular economy. Designing products that use less material, create longevity, or that can be repaired more easily will reduce long-term cost of goods sold.
- Utilization of more recyclable materials makes the cost of goods sold more predictable, which is a key driver in successfully growing a business. Relying on raw materials — and therefore commodity costs — creates a risk. Today, recyclable materials are almost limitless. Long-term, as the raw materials supply continues to decrease, commodity prices will start to increase exponentially. Early adapters will have a distinct advantage over those that keep relying on raw materials.
- Retrieval of raw materials from used products can greatly reduce the cost of goods sold. Companies such as Apple have realized this and are using used products to extract resources at a significantly lower rate.
- Switching to renewable energy may have a high upfront cost; however, as ongoing operating costs are reduced, the savings can contribute positively to net income.
- Reduction in other operating costs, such as using technology (computers and software) instead of paper can both improve efficiency and reduce the dependence on resources.
This makes a difference from both a sustainability perspective and in reducing overall costs.
- Creating a full product loop can help increase a company’s cash flow, as it can increase accounts payable and reduce inventory costs.
- More and more capital is becoming available for companies embracing sustainability. Those who adapt early will have the advantage of capturing funds before others.
There are many other ways to profit off the circular economy. As more businesses adapt and adopt circular principles, even more profit and cash drivers will emerge.
Looking for more info? Axios’ CEO Chris Legler explains how adopting a circular model can increase revenue, decrease product costs, and improve operating and marketing costs. Check out this free webinar: Capture the Financial Benefits of the Circular Economy, presented in partnership with Metal Tech Alley.