Product-as-a-service: a business model that transforms commerce

by Akseli L.

24 January 2022
0 Comments

From washing machines to home gyms, rentable products make our lives simpler, more affordable, and better for the environment. That's because Product-as-a-Service (PaaS) is changing how businesses reach their customers.

Instead of selling customers standalone products, many businesses are interested in developing new combinations of products accompanied by services.

What is Product-as-a-service (PaaS)?

The product-as-a-service business model, also known as product-service-systems, has been a widely researched topic in the academic literature since the 1990s. The core of the product-as-a-service definitions is that the model focuses on outcomes instead of the product itself.

Let's take a look at washing machines, for example. Washing machines are typically marketed, focusing on the device and its features. "Silent inverter engine", "Spins gazillion times a minute", "Experience the unique EcoBubble technology".

I'm not kidding - these are real product descriptions of washing machines. Might work for a hardcore washing machine enthusiastic but for a more average consumer - I doubt it.

What does a washing machine do? It cleans clothes.

In the world of product-as-a-service, a washing machine company, like Homie, sells and advertises a promise of clean laundry.

A washing machine as a service company might sell, for example, a Clean Clothes -subscription where customers pay a monthly fee for access to use a washing machine during the subscription. The base-level service could include the right to use the washing machine x amount of times which can be complemented with extra washes and additional services like detergent refills, and so on.

From the business perspective, product-as-a-service companies move from maximizing unit sales to maximizing customer retention. Companies can only achieve customer retention through high customer satisfaction, which motivates PaaS companies to be naturally more customer-oriented than their counterparts operating via the traditional commerce models.

Product-as-a-service definitions

The repeating themes in the literature define that product-as-a-service is 1. a business model, 2. that combines physical products and services, and 3. has a goal to fulfill customer needs better.

For example, Annarelli et al. (2016) define product-as-a-service as follows:

"PSS is a business model focused on the provision of a marketable set of products and services, designed to be economically, socially, and environmentally sustainable, with the final aim of fulfilling customers' needs."

The environmental impact of the product life cycle also appears regularly in the definitions. For example, Halme et al. (2006) add the reduced material and energy usage into their description:

"Products and services which can simultaneously fulfill people's needs and considerably reduce the use of materials and energy."

Mont (2002) adds the aspect of infrastructure and networks in his definition:

"A system of products, services, supporting networks and infrastructure that is designed to be: competitive, satisfy customer needs and have a lower environmental impact than traditional business models."

Based on the above, we can notice that the PaaS model has characteristics related to commerciality, sustainability, and networks & infrastructure.

Characteristics: What makes a PaaS business

In all simplicity, the product-as-a-service business model means shifting from selling products to selling services and solutions. To help us recognize product-as-a-service businesses, some common characteristics apply to most.

Closer customer relationships between the company and the customer

A successful PaaS company has a closer relationship with the customer.

The marketing department's role is expanded, and the team is responsible for gathering data and analyzing customer insights that help the company innovate and design new service models that are simultaneously lucrative for the consumers while being commercially and environmentally sustainable.

In turn, after some companies have started to work more closely with their customers, they often have early insights into consumer tastes, preferences, and regional buying habits, providing a solid long-term competitive advantage.

Extended company responsibility

The Product-as-a-service model typically extends companies' involvement and responsibility to phases in the product life cycle, usually outside the traditional buyer-seller relationship. These responsibilities include servicing products during the use phase and schemes for takebacks, recovery, reuse, refurbishment, and remanufacturing.

More efficient usage of material and energy

The product-as-a-service model has clear ecological advantages that arise mainly from the more efficient use of the product itself, raw material, and energy. For example, it may encourage the washing machine company to prolong the usage phase of the product life cycle if it's not the unit sales that generate the profit but the recurring revenues. The longer a single washing machine can serve the company, the more revenue it generates.

Furthermore, while the ownership of the product remains with the service provider, there's an increased motivation to develop recycling, refurbishment, and reuse processes. Ideally, this would lead to entirely closed product cycles, resulting in greater resource efficiency and less environmental impact.

Faster innovation

The closer relationship with customers enables product-as-a-service companies to get data and insights on the changing consumer preferences earlier. Furthermore, the more flexible nature of services compared to manufactured goods makes reacting and developing new service models faster.

However, efficient information management is essential in order to reap the full benefits. This requires organizational changes and investments in technology and human capital.

How does the PaaS model work?

In traditional linear commerce, the transactions between businesses are one-off. Once the money and the products change owners, the customer relationship is put on hold. At least temporarily.

On the other hand, product-as-a-Service forms a continuous relationship between the company and the customer during the service period.

When a customer buys a product as a service, she's entering into an agreement with the producing company. The customer doesn't purchase the product itself. Instead, she'll have access to the overall service. Once the customer finishes using the product or her subscription period ends, she returns the product to the service provider so it can enter the next phase in its product life cycle.

Since the customer never owns the product, the seller is incentivized to continue acting as the owner. That means they are responsible for maintaining a high level of quality and continually improving their products and services to retain and attract new customers.

Product-as-a-service business models

If you wonder whether the product-as-a-service business model is something completely new, the answer is no. Several well-known business model examples can be considered as product-as-a-service. Even public transportation represents one form of PaaS.

However, what is new is that the model is starting to become more prevalent in industries where it has not been seen before.

Short-term rentals

Short-term rentals of equipment are nothing new and help people fulfill their temporary needs. Whether one needs special tools for a DIY project, a dress for the prom, or skis for a one-week holiday in the Alps, there are over one million existing companies in Europe and North America alone fulfilling these and other temporary needs people have in their everyday lives.

Short-term rentals meet several product-as-a-service characteristics and orient the desired result, not the product itself. Furthermore, rental companies can complement short-term rentals with associated services, such as tour guides, to generate additional value and increase the service orientation.

For companies interested in entering the growing product-as-a-service market, short-term rentals are simple and easy to implement alongside an existing sales operation. For example, Motonet successfully launched a trailer rental service for their loyalty club members. The key to a successful launch was starting simple with a low-maintenance product, collecting learnings, and gradually expanding the rental product offering.

Today their trailers have been rented tens of thousands of times, and the service has become so popular that people are joining the loyalty club only because of the exclusive rental service.

Leasing

The main difference between leasing and short-term rentals is the duration. Where the duration of a short-term rental is counted in days or weeks, leasing agreements are often made for months or even years.

The more long-term nature of leasing makes it more common between businesses that might lease, for example, vehicles, machinery, or IT hardware. However, we shouldn't forget the growing popularity of private leasing, widespread in the automotive sector.

Pay-per-use

Pay-per-use is a relatively new business model that offers consumers an opportunity to only pay for the usage of the product. A pay-per-use business model requires IoT technology to work efficiently. Examples of pay-per-use companies are e-scooter services such as Tier, VOI, and Lime.

The service providers make sure enough maintained and recharged scooters are available, and consumers can activate the product remotely via a mobile app. The rides are charged per minute directly from the customer's credit card. Thanks to the IoT, companies can accurately track and measure the customer behavior and usage of their products and use the captured data to optimize the operation over time.

Product subscriptions

There's a fastly growing interest in product subscriptions from both consumers and companies, not least because subscriptions help create stronger customer relationships and predict sales in advance.

In a subscription model, customers are charged recurringly for a product, service, or their combination. Subscriptions are always open-ended, meaning that they don't have a predefined end-date, which is the biggest differentiator compared to rentals and leasing. Instead, the subscriber can cancel at any time.

Commonly known subscription products are often digital services such as software-as-a-service (SaaS) products and music & movie streaming. But also, most gyms and your local newspaper work on a subscription basis.

Summary

Many consumer goods companies face flat customer demand in most Western markets and intense low-cost competition with little to no room for price increases. Doesn't sound too lucrative to me in the long term. The PaaS model offers companies an opportunity to differentiate from their competition and base their growth strategy on innovation.

The service aspect does not only provide added value for the consumer but also for the business in the form of additional revenues. When all this leads to more sustainable manufacturing patterns and reduced environmental impact, there's a genuine Win-Win-Win opportunity in PaaS.

References

  • Annarelli A., Battistella C., Nonino F. (2016). "Product service system: A conceptual framework from a systematic review". Journal of Cleaner Production, Volume 139, Pages 1011-1032.
  • Halme, M., Anttonen, M., Hrauda, G., Kortman, J. (2006). "Sustainability evaluation of
    European household services". Journal of Cleaner Production, Volume 14, Pages 1529-1540.
  • Mont, O. (2002). Clarifying the concept of product-service system. Journal of Cleaner Production, Volume 10, Pages 237-245.
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Akseli L.

A marketer who gets excited about all things e-commerce. Outside of office hours, you'll most likely find Akseli from the countryside, hiking and shooting landscapes.

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