Product-as-a-service business model
Are you looking for ways to earn more money on your products?
Learn about “product-as-a-service” business model and find out if it fits your business needs.
What is “product-as-a-service”?
A product-as-a-service (PaaS) is a business model that is based on purchasing access to a product without purchasing the product itself. It is an element of a wider phenomenon, which is called servitization, i.e. the transition from a one-time sale of products to offering services related to them.
You can buy a monthly or yearly subscription to Microsoft Office package (fixed low monthly fee, cancellation possible at any time). There’s no need to purchase expensive software anymore and incur the cost of updating it later on.
The concept itself is not new. In 1962, Rolls-Royce invented a “power-by-the-hour” trademark to describe the new service model of selling aircraft engines. The idea was to offer a complete engine and accessory replacement service on a fixed-cost-per-flying-hour basis.
In recent years it has been gaining in popularity, mainly due to the development and availability of technologies, including high-speed Internet, Internet of Things (IoT), sensors, advanced data analysis, mobile devices or cloud solutions.
Thanks to the use of modern technologies, manufacturers can remotely monitor devices, collect data about their use, efficiently react to possible failures, but also communicate with customers in real time. It also enables organisations to create and develop new, additional offers that complement products or infrastructure with services for their maintenance.
What does it mean to transform from product to product-as-a-service model?
It assumes a change in approach not only to production, but also to the entire design and product life cycle. This is because it focuses on building a long-term relationship with the customer and ensures that his experience does not end with a one-time purchase but lasts much longer and is connected with the services that are associated with the product.
In a traditional business model, for example, a car manufacturer produces a large number of a specific car model and then uses different types of marketing strategies to convince people that they need this particular car model. The company goal is to sell as much as possible in the shortest possible period of time.
In the product-as-a-service model, the company still produces cars, but instead of selling them, makes them available with additional services in a subscription model. As Volvo does under the ‘Care by Volvo’ programme(1)
“From quantity to quality”, this is the shortest way to describe the idea of the “product-as-a- service” model.
Example of product-as-a-service: Care by Volvo
“For a monthly fee, with no down payments or enrolment fees, you get access to a brand new Volvo. In addition, a Care by Volvo subscription covers the cost of periodic maintenance, repairs, servicing, full insurance and breakdown assistance.
A number of additional benefits mean that Care by Volvo is more than just driving. Whether it’s concierge care, picking up the car for servicing or renting a Volvo from higher-class models, Care by Volvo makes life easier and saves you time”.
What services has the product been combined with?
- Car replacement every 24 months
- The “Hotel for tyres” service
- Maintenance services
- Insurance services
- “Private car sharing service. It allows you to share your Volvo with
people you trust; friends or family members.”(3)
- The possibility to rent a vehicle from higher-class models for a limited time
- “Concierge services. For example, when you are looking for a restaurant on the route, or want to book a last-minute hotel or plane ticket. With concierge services, you just need to press the On Call button to call the assistant.”(4)
The customer receives access to this offer for a fraction of a price for a car ownership.
Benefits for the customer and the company
Higher availability, a lower threshold of entry and lower fixed costs – these are the key benefits of such a model from a customer perspective. This is confirmed by Business Insider data (5) which shows that by 2030 the number of private cars purchased in the US will drop by 80%.
What are the other benefits for customers?
A better experience
The customer is not just buying a car. He buys the whole mobility experience. Thanks to additional services he saves money and time. Moreover, he does not have to worry about things like space for storing tyres or periodic servicing.
The use of additional services involves sharing personal data (at least some of it), e.g. the service provider analyses it and based on the results can offer new services and products so that they better suit customer style and needs.
A supplier who wants to provide long-term efficient services must take care of the quality of his products. He no longer has a goal to sell-off his stock immediately. He wants to build long-term relationship so he needs to keep products in top-notch condition for as long as possible.
Buying a car is usually a big one-time expense. There are additional costs of servicing, software updates, repairs, etc. that the customer has to remember about. In product-as-a-service model it’s all the supplier’s duty. He takes on all services, updates or repair issues.
And what does the company which operates in such a model gain?
Growth and greater predictability of revenue streams
In the new business model – one-off sales are replaced by regular subscription income (signed for example for 2-3 years). Although the amount of a single subscription is lower, lowering the entry threshold for the customer increases the number of subscriptions. Distribution of smaller amounts of revenues over a longer period of time works and may result in up to 40% increase in revenue over 6 years – as in the case of Rolls-Royce (6).
Closer relationship with the customer
In a traditional model, even if we convince a customer to purchase a car, we have no certainty that he will ever come back to us. In the product-as-a-service model, we engage him from the very beginning in a long-term relationship, which gives an opportunity to deliver real value and build stronger and closer ties.
More information about the customer
Customer big data analytics on the usage of the car or accompanying services is a treasure trove about customers’ behaviours, habits and needs. Based on such information, the company can offer additional value to customers, generating additional revenue and profits.
Is this for me?
Richard Soley, Vice President of the Industrial Internet Consortium, says that “if you don’t consider new subscription-based business models, you’re already missing out”.
Is that really the case? I don’t know. But certainly the product-as-a-service model is interesting and has great potential. However, before you start implementing it, it’s worth checking whether such transformation is 100% profitable for your business and how long it will take to achieve the desired effect. It might be in your case, for example, that costs of installation of sensors, data monitoring or changes to the product will be much higher to fit the new business model than the costs of current production and warranty service.
You should also remember that product-as-a-service business model implementation entails changes not only in the product life cycle but also requires re-envision of the entire organization: people’s approach, budgeting, setting goals, measures, etc. Therefore, start with the analysis and then make a decision whether such a transformation is for you.