Breaking new ground with PaaS

Instead of selling a product, a manufacturer makes it available as a service for a monthly fee. That’s the product-as-a-service concept. But what happens if the manufacturer retains ownership of the product? How far along is this market? And where to start? Iris van den Akker, Commercial Manager of Product as a Service at ABN AMRO, is working with clients to find out what challenges they’re facing in making the transition from a linear to a circular revenue model.

ABN AMRO firmly believes that the circular economy will be of crucial importance to its clients in the very near future and, accordingly, to the bank itself. That’s why we have set three targets for 2020: financing EUR 1 billion in circular assets, granting 100 circular financing packages and cutting carbon emissions by 1 million tonnes. 

Product as a service (PaaS) is one of seven circular revenue models such as recycling, sharing platforms and lifetime extension. “But we’re seeing that PaaS is rapidly gaining traction,” says Iris van den Akker. The bank, too, believes in the concept. That’s why Van den Akker was recently given the mission by ABN AMRO to be the human face of PaaS for the bank. “My job,” she says, “is to talk to entrepreneurs and consumers to stay informed of all the latest market developments and to understand the direction they’re going in.” 

ABN AMRO has a dedicated team at the Innovation Lab focusing exclusively on PaaS. Their job? To answer the key question, Which business and financing models can be developed around PaaS? Van den Akker says, “I work closely with the lab. A lot is happening at the moment. Consumer behaviour is changing, and businesses want to manage their materials and resources in new and different ways. At the same time, it’s groundbreaking work, and there are no guarantees we’ll find answers. That’s why we need to team up and work together with our clients.”

PaaS: an alternative

But first, what exactly is PaaS? It’s an alternative to the traditional sales revenue model. The manufacturer retains ownership of the product, rather than selling it. The product is then lent to the end user for a fee, which may be usage-based or a fixed monthly subscription. 

Van den Akker explains: “We’re talking about a physical product here, like a bed, a professional sandwich machine, a bicycle or a washing machine. These products are offered as a service. But that doesn’t mean it’s all over and done with once payment is made. The manufacturer also assumes the obligation to provide additional services to the end user. A manufacturer offering a sandwich machine as a service might also provide maintenance, as well as suggestions on how to reduce energy consumption and tips on making a variety of sandwiches. If it’s a bed we’re talking about, the manufacturer might replace the mattress cover every six months.”

Drastically different

Obviously, the PaaS economic model is completely different from traditional – linear – ones. And the fact that the manufacturer retains ownership of the product has clear advantages for consumers, since there are no high initial costs, additional services are included and it’s sustainable. At the end of the product’s life, it’s either refurbished or recycled. 

For the manufacturer, however, it means a drastically different way of doing business. The goal is no longer to manufacture as many products as cheaply as possible. On the contrary, they now have to last as long as possible, since a longer life cycle brings down maintenance costs and ensures the products can be recycled, thus reducing purchase costs. Van den Akker continues, “Normally companies maintain a stock. They make sales, they get paid for their products, and there’s a cash flow with turnover and profits. The PaaS model is all about growing the balance sheet total: your products are no longer stock – they’re assets. There are no one-off sales – just recurring income. There’s also a bigger cash flow build-up, which is much lower at first.” 

Van den Akker says the advantage of PaaS for entrepreneurs is more interaction with customers, resulting in higher levels of customer loyalty. “Plus value can be unlocked by maintaining ownership of the product. Since products are recycled, manufacturers will reduce maintenance costs by making better-quality products. In addition, purchase costs (materials) are reduced. It’s clear that the transition to PaaS will give a tremendous boost to the circular economy.”

Swapping bikes, renting washing machines

There are already plenty of examples of businesses using the PaaS model, albeit at different stages. Swapfiets is one of them, a Dutch start-up which provides its customers with a bicycle for a fixed monthly fee. Swapfiets, not the consumer, makes sure the bike is always in working order. Van den Akker says, “It’s an interesting offering. I don’t always have time to queue at the bicycle repair shop. So Swapfiets will come to my home and swap out my bike for a new, working one.” 

Another example is Homie, a business that rents out washing machines and takes care of any upkeep and maintenance required. The machines are also connected to the Internet, regularly updating Homie on usage and the condition of the appliances. The user pays per load and can cancel in any given month. This model keeps costs down because Homie is always monitoring the status of the machines, thus preventing malfunctions and extending their lives. That way, new machines are bought less frequently.”

Retail and industry

So where do we stand now? Is PaaS already a mainstream concept? “Whenever I’ve mentioned Swapfiets in conversation, no one’s ever said, ‘I’ve never heard of them before.’ While the concept may not be mainstream yet, things are moving very quickly here. It’s about breaking new ground. Entrepreneurs are at different stages, it’s true. In retail and industry, for instance, certain players have already implemented PaaS, while others are just starting to find their feet and haven’t finalised the model. There are also incentives to expand its application. In the government procurement market, for example, many calls for tenders already specify that PaaS compliance is a must.” 

Perhaps surprisingly, it’s sectors which have operated for decades in accordance with a linear earnings model which can or want to make the transition. “Ask yourself whether there’s urgency and potential in the market,” says van den Akker. “Let’s say you make electric bikes. This particular product represents a costly purchase for consumers and has lots of moving parts, so maintenance and additional services are obvious options. It’s often products like these that consumers are very interested in purchasing as a service. So electric bikes as a service could certainly be a viable revenue model in the future.”

Working together

But where to start? Van den Akker is seeing new collaborations between businesses wanting to implement PaaS and with players that can facilitate these new relationships. She says, “Traditionally, a product travels in one direction: to the end user. But when a product has to be returned to the manufacturer for it to be circular, that requires a whole additional logistical operation. In that case, collaborating with other players and creating a win-win situation are certainly avenues to explore.” 

Van den Akker says PaaS will have far-reaching effects: “It has the potential to transform the landscape not just for business clients, but also for consumers. What would the world – or our personal finances – look like if we paid for everything as a service? Our interiors, transport, clothes… How would that work? How would we keep track of our subscriptions? It’s all very far-reaching. PaaS is breaking new ground.”