Strategy. Innovation. Brand.

Products As A Service – The Circular Economy

Why buy when you can rent?

Why buy when you can rent?

I’ve bought several products recently without really buying them. Rather than buying the product, I bought the benefits. The manufacturer still owns the product. In the future, the manufacturer may take the product back, replace it with a newer, better product, and recycle the original product.

I get two sets of benefits. First, I get the benefit of whatever the product offers. Second, I get the benefit of staying current with the latest technology. (This is sometimes known as future-proofing). The manufacturer also gets two benefits. They get a steady income stream as I rent the first product. And, when they upgrade me, the manufacturer can refurbish my original product and resell it.

I bought my new smart phone this way last December. I pay a monthly fee to use the hardware. The fee also gives me the right to upgrade to a new phone in 12 months, with no additional charge. I simply give my current phone back to the manufacturer and walk out with the new phone. The manufacturer takes my old phone back, refurbishes it, and “sells” it to someone else.

In the software world, this is known as an “as-a-service” offering. Workday, for instance, offers software-as-a-service for human resources applications. Companies don’t buy the software. Rather they buy access to the software as it runs on the cloud. Behind the scenes, Workday can upgrade to new releases or new technology transparently.

Amazon similarly offers platform-as-a-service through its Amazon Web Services arm. Amazon has built a huge array of computers; anyone can access it by the hour, or day, or week, or year. You just pay for what you use. I now have the power of a supercomputer at my fingertips (for a brief period).

Outside the software world, this concept is more generally known as the circular economy. The idea is that a manufacturer sells a product and expects that it will circle back at some time in the future. The manufacturer can capitalize on the remaining economic value within the product by refurbishing, reselling, or recycling it.

Phillips Electronics seems to be one of the leading practitioners of the circular art. In an interview with McKinsey, the Phillips CEO, Frans van Houten discusses some of their projects. For instance, Phillips has a contract with Buenos Aires to replace 125,00 streetlights with advanced LED devices. Buenos Aires is buying the light, not the devices. Phillips can upgrade the devices in the future to capitalize on energy-saving enhancements. Conceivably, Phillips could sell the current LED devices to other cities.

As van Houten point out, the circular economy also changes the way product designers think. They’re no longer designing a product that they’ll never see again. In all likelihood, the product will circle back to them. So, they design not only for function, but also for longevity and reuse. That can mean better margins for the manufacturer as well as lower costs for the customer.

Best of all, perhaps, the circular economy also means that fewer products wind up in landfills. Rather than designing for obsolescence, circular companies are designing products that will live multiple lives. That can only be good for us and the world we live in.

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