Servitization of products is a very exciting philosophy within the circular economy. Creating a subscription base or a rental base can allow manufacturers to sell the same product multiple times. The software industry discovered this early on. The Software as a Service (SaaS) business model grew 23% in 2018, becoming a $72 billion industry. Since then, it has more than doubled to $157 billion. I believe that examining the SaaS model can uncover opportunities for traditional manufacturing and retail establishments to see similar success levels and exponentially improved margins.
The SaaS-based economy started with software, which was originally developed with a one-time purchase model. Ten years ago, you’d go into a store and purchase a disc that contained whatever software you needed, whether that was an accounting package like Quickbooks, multiple application software like Microsoft Office, or another specialized program. Today it’s hard to find single-fee software packages or products anywhere.
Software companies were finding it difficult to ensure compatibility between different versions in the marketplace, as many people had outdated software when upgrades came along. By creating the SaaS-based approach, where consumers pay a monthly service fee to use the product, software companies found that they could afford to update their users’ versions to the most recent iteration. They also found that they could generate a significant increase in revenue, while the average consumer would have the perception that they were paying about the same or less.
For example, you can buy Quickbooks software for about $250 as a one-time purchase. This software gives you the ability to manage your accounting, payroll, and inventory. Or, you can buy a subscription that includes these features for $30 per month, plus another $20 per month for payroll. Most small businesses think, “$50 per month, that’s affordable!” However, for a 5 month amortization they could own the product. This perception is a huge win for the software industry.
From Software to Manufactured Products: Introducing PaaS
Now, how does this tie into the circular economy when it comes to manufacturing? Imagine if you could produce your product and charge someone to rent it, either over time or as they needed it. Once the consumer was done using your product, they would return it. You could make any necessary repairs and send it out to the next subscriber or renter. If you end up upgrading the product, you could use all the raw materials embedded in the old product to make new products, therefore reducing your cost of goods sold.
The revenue implications here are big, but the gross margin implications are immense. Over time, your cost of goods sold should continue to decrease as you need fewer and fewer raw materials. Simultaneously, your revenue will increase as you are now “selling” the same product multiple times over.
Companies are adopting this product-as-a-service (PaaS) model at both the industrial and consumer levels. Industrial companies using it include: Rolls Royce (jet engine division), Caterpillar, and Xerox, while consumer brands such as Netflix, Mudd Jeans, and Armoire Style are also reaping the benefits. While many of the early adopters are on the industrial side, there is still a huge opportunity for companies on the consumer side. Not only will companies who are early entrants in their industry create incredible profit streams, but the positive impact on the environment will be immense. It’s a win-win!