We are living in a fascinating era in which new technology is changing the way we live and do business. Traditional businesses struggle to survive in todays highly competitive environment, while businesses and start-ups who are able to adapt to the new, disruptive business models thrive. One of those new and disruptive developments is the ‘product as a service’ business model, in which you pay for the use of a product, instead of buying it. In a product as a service business model, products are used through a lease or pay-per-use arrangement.
Advantages and drivers
One of the advantages of the pay per use business model is that it can contribute to a more circular economy. The circular economy concept is one of the main pillars in sustainable developments and promoted heavily by governments. In a circular economy, products are traded in closed loops, minimizing waste and using the natural resources as efficient as possible. The product-as-a-service business model turns the incentive for product durability and upgrading upside down, shifting companies focus from volume to performance by incentivizing them to make more durable products. Also, since the product will return to the manufacturer at the end of its life, the manufacturer is encouraged to make the product as recyclable as possible, maximizing it’s rest value.
The business model also has interesting advantages for business. Since customers do not have to pay upfront, the product becomes affordable for more customers, potentially creating extra demand. Even when customers can afford the product, the pay per use business model can create a competitive advantage because it offers the customer the option to spread the costs over the products lifetime. The pay per use business model also has the potential to deepen the customer relationship. In this new business model, the relationship changes from single transaction to a continuous relationship with the customer.
The business model also has advantages for customers, both for businesses and consumers. First of all there is a cost advantage since the upfront investment will be significantly reduced. Also, the total cost of ownership are more predictable since the risks will be transferred to the supplier.
Servitization brings many benefits to the business and creates value for its customers, but from an organizational perspective it may be challenging. It requires a shift in mindset and impacts strategy, processes, people and technology.
One of the major challenges is the impact on the cash flow. The product-as-a-service business model can provide more stable revenues over time, but going from a transactional model with large upfront payments to smaller payments collected over a longer period of time can present cash flow differences that need to be managed. Also, there may be balance sheet implications since the company retains ownership of the asset in a product-as-a-service business model. Companies will probably have difficulties in financing these enormous investments themselves. This means that financial institutions, such as banks and investors also have to adopt their products to match this new business model.
The pay-per-use business model is already quite common in the online industry. Companies like Netflix and Spotify offer unlimited access to movies, series and music. Other excellent examples can be found in cloud storage providers such as Amazone, Microsoft and Dropbox who offer enterprises highly flexible, online data storage and software companies such as Salesforce who offers a subscription based software.
However, there are also numerous traditional industries which can make the shift from a product to a service economy. According to a research by Deloitte, several industries such as automotive, financial services and insurance, consumer electronics and airplane manufacturers are industries which have high potential for a service economy.
One of the first businesses to adopt a pay-per-use business model is Rolls-Royce, the global manufacturer of airplane engines. Their ‘Power-by-the-hour’ business model was invented in 1962. Airlines did not have the technical expertise to maintain the engines properly, resulting in unexpected engine failures which could cost the airlines millions. For a flat hourly rate per engine, Rolls Royce would handle installations, check-ups, maintenance and decommissioning. This approach turned out to be very successful, since the amount of engine failures has significantly dropped.
Signify (former Philips Lightning) is another companies that has already successfully adopted the product as a service business model. In Signify’s business model, customers do not buy any product, but pay per lux. The business model is already quite successful, with major customers such as Schiphol Airport and the newly build High Tech Campus in Eindhoven switching to their pay-per-lux business model.
The pay per use business model is also successful in the business to consumer market. Metromile is revolutionizing car insurance through the use of technology with its pay-per-mile insurance model. To measure mileage, a small device is plugged into the OBD port of the car. The company, founded in 2011, already has over $100 million in revenue.