They have understood the value of selling the same product multiple times
More and more companies are realising the value of servitising their products using a so-called PaaS (Product-as-a-Service) model — both for the environment and for profitability. PaaS is central to the circular transition and was one of many exciting items on the agenda during the Nordic Circular Summit 2022 in November.
"The development of Brewer-as-a-Service means that the coffee machine does not lose value over time as a traditional investment does. The business model will be both environmentally and financially good for everyone," says Peter Larsson, co-founder of the Arvika-based 3TEMP. According to their own statement, the team behind 3TEMP has left nothing to chance in the development of the world's best, and perhaps the world's most durable, coffee machine. “We've taken the best parts, assembled by hand, and installed our self-developed software.” This became the basis for a model where the customer pays for the guaranteed opportunity to brew coffee. The rollout of the new business model is now underway in the home market as well as in England. "Our brewers are connected so we can download new software and meet most service needs from Arvika, while at the same time giving customers access to advanced statistics and the world's best coffee without interruption"
"The more you think about the linear process, where a product is sold only once and the control of the future product value is released, the more strange it is."
Product-as-a-Service model opens up new opportunities to extract maximum value
Even more surprising is the profit potential that can be achieved in a fully circular automotive industry, where an expanded range of services represents the greatest profit opportunities. “Circular economy in the automotive industry can provide companies with new sources of growth compared to current business models. Car manufacturers can increase their profitability in the value chains by 50 percent and generate 15–20 times higher revenue than the original sales value of the vehicle," writes Accenture, the World Economic Forum and the World Business Council for Sustainable Development in the report Driving Ambitions: The Business Case for Circularity in the Car Industry. These examples clearly show that we do not have to sacrifice economic growth or profitability in a circular economy. "In a Product-as-a-Service model, the company rents or lends the product instead of selling it. It opens up new opportunities to extract maximum value throughout the product's life cycle and create a close relationship with customers", says Riku Sinervo, a circular economy expert at Sitra, the Finnish equivalent of Vinnova.
He describes PaaS as one of five business models where the producer owns the product throughout the value chain and where the customer moves from ownership to using, sharing, renting or borrowing. The other four models are Material-as-a-Service, Performance-as-a-Service, Guarantees and Sharing Solutions.
Circular business models bolster security
In an environment of geopolitical instability, energy crisis, uncertain supply chains, component shortages and increasing raw material prices, the circular business appears even more obvious. The manufacturing industry, which in Sweden accounts for around 20% of GDP, has worked for a long time to streamline its use of resources and increase its sales of aftermarket services, not least because this has a clear impact on the bottom line of the income statement.
"The problem is that even if companies work with long lifecycles and smarter use of resources, there is a lot of inefficiency in the processes, not least because they are adapted to the specific needs of the customers and not to how environmentally sustainable they are. In a world where the utilisation rate of industrial machines is 40%, the service model becomes interesting. Many only think of reduced waste when the circular economy comes up in conversation, but it's also about reducing the number of products on the market because we over consume materials in relation to use," says Anna Belvén Töndevold, Nordic lead for sustainability strategy at Accenture who spoke at the Nordic Circular Summit 2022 session ‘Scale and Transform Your Business: Launch of Nordic Circular Economy Playbook’.
… and profit
Ove Lidström, responsible for business development and innovation at Foxway, a leading Nordic supplier of sustainable solutions for mainly mobile phones and computers, was another of the speakers, participating in the session ‘Swedish Approach to Circularity’. "Foxway is growing like crazy, both organically and through acquisitions. Pro forma, this year's turnover will land at SEK 7 billion [in 2022]. Thanks to our business model in which a large and growing part is PaaS, last year we contributed to reducing carbon dioxide emissions by nearly 100,000 tons.”
In the case of large customers, the company signs an agreement, either directly or through a partner, with the end customer. “We provide the customer with an assortment of mobile phones and computers and handle everything, such as making sure the cost ends up in the right place and repairing or replacing when something breaks. The customer pays per month and per user. In pricing, we take a residual value risk. When we get the product back, we do everything to get the value up and get it back into use with a new customer."
Another part of the business deals with repair. This year, Ove Lidström expects Foxway to receive, for example, one million mobile phones to be fixed. "We have a partnership with a couple of mobile operators, including Telia, where we can give a 2-year warranty even for used products and give the customer the experience of a new product. We aim for an increasing proportion of the products we sell to be products that are in their second or third life cycle, which means that the price can fall well below half of the original price." The advantages of a PaaS model are many. The manufacturer takes on a longer and broader responsibility than in a traditional sale and then gets incentives to make the product as sustainable as possible in everything from design to material recycling, better control over raw materials and inputs, closer customer contact and better opportunities for additional sales of services.
It is not rare, that the challenges come in the form of financing.
Challenges due to the need for behavioural change
“In a model like this, you have to build a balance sheet and it has to be financed. Either you take in risk capital, but there is often an exit horizon of 5 to 7 years. I have also seen cases where the venture capitalists are ready, but where the entrepreneurs want to proceed more slowly and test their model. The other route via bank loans is difficult. Banks are heavily regulated, unwilling to take risks and have an even narrower time horizon," says Ann-Charlotte Mellquist, senior researcher at RISE. "Something that has become more and more clear is that as soon as the banks have too long repayment periods on loans granted, they lose their rating with the credit rating agencies." Her top tip for entrepreneurs thinking about moving to a service-based model is to more clearly point out the risks of continuing as before when seeking funding.
"They have to show that there is a risk in the linear, not least with more expensive raw materials and lack of resources. The more money we can make from what we already produce, the better.” Henning Vold, a partner at the Norwegian private equity firm Norvestor, which is also a major shareholder in Foxway, believes that investments in as-a-service models are absolutely crucial for us to be able to achieve a completely circular economy. "Through such a model, you can influence the behaviour of customers. Foxway has large customers such as Ericsson and Stockholm Region, and to really help customers reduce their CO2 emissions, we need to influence behaviour," says Henning Vold. Because the challenges are largely about behavioural change. Finnish Tamturbo, which launched a Compressed air-as-a-Service concept, testifies to the inertia of its customers.
"They have to show that there is a risk in the linear, not least with more expensive raw materials and lack of resources. The more money we can make from what we already produce, the better.”
Making a business out of selling air
“It takes time to change customer behaviour. So far, only a small part of our business is PaaS, but a realistic goal in the short term is to get 20% of our customers through such solutions," says Timo Pulkki, sales manager at Tamturbo. “At the same time, the idea is clever. Factories already have a range of services that they subscribe to, such as water, heat and electricity.” Tamturbo has, as number two in the world, developed a technology that makes the compressor very long-lived and basically free of wear and need for servicing, says Timo Pulkki. First up was Atlas Copco, which dominates the compressor market without comparison, but according to Timo Pulkki does not sell that particular product and does not yet have a PaaS solution to offer. "The lifespan of our products is between 20 and 30 years, which is twice as long as other compressors. After five to seven years, we have recouped our product investment, so the remaining years are very profitable.” It is primarily qualified products with high value that are well suited to be placed in the PaaS model, says Peter Algurén, who works with circular business models at the consulting giant EY.
“It has become clearer and clearer that some products are better suited for PaaS than others. For example business to business, products with high value and products with an industrial function such as a ball bearing or a lift. Consumer products, such as clothes, with lower value, a large product range and extensive logistics are a little more difficult," he says. “The PaaS puzzle must fit together in terms of customer benefit, consumption patterns, product design, logistics and so on to work and scale. The difference between success and disaster often lies in the details and that everything has to be in place." Peter Algurén sees great potential for whoever succeeds in moving to a PaaS model. “With the right product design and business model, it is possible to capitalise on greater value over time. Lack of materials and components in new production also becomes less of a problem and new, more price-sensitive segments can often be added to the business. New technology can be brought to market more easily and customer loyalty is often high when the customer becomes 'yours'. In addition, future producer responsibility is well met with PaaS and the sustainability issue more transformatively because fewer products are used smarter over time instead of making incremental changes in continued mass production," says Peter Algurén. "The more you think about the linear process, where a product is sold only once and the control of the future product value is released, the more strange it is."
By Jan Agri (Tricircular) and Jill Bederoff
Fact box:
You can learn more about circular business models, such as PaaS, in the following report on PaaS written by Cradlenet and Stena Circular Consulting. Or through Nordic Innovation's report Circular Economy Playbook.
There is also a series of research projects on Circular Economy in Sweden. The strategic innovation program RE:Source has supported over 200 projects. At RE:Source, it is also possible to apply for support, advice and partial financing of new innovation projects.
