Step Four – How to Transition from Selling a Product to Selling Product-as-a-Service
This section is about learning whether your product can be utilised as a service instead of being sold. By changing your business model you retain greater control of your material assets (product) and thus ensure how these assets can be repaired, remanufactured, reprocessed or recycled in their 2nd life.
What is Service Design?
Transitioning your business to a service model requires reviewing every part of your business so you can “speak the language of service development.”
There are two parts to Service Design¹;
(1) Service development life-cycle: This is the life cycle of how a service is created, launched, supported, and ended.
(2) Service experience life-cycle: This is the end-to-end experience, from before they learned about the service, from the start, during their experience, to after it is over.
Ways to Market: How Do Your Products Reach the End-User?
Products and services reach their end-users via direct or indirect channels from producers to end-users. The decision to go direct (straight from producer to end-user) or indirect (with wholesalers and retailers/dealers) is taken based on various criteria such as: volume, value of offer, standardized versus tailored product, proximity of markets, additional services, choice of customers, etc.
Along the way all channel partners play a role and add value to both the upstream suppliers and downstream customers. In every step in the channel, there are changes in ownership, risk and financial considerations, etc. (see linear sales system below).
New circular business models will have an impact on the roles of the channel partners. It involves the transformation from the one way (linear) delivery stream from producer to end user, to a continuous management of the products as well as the reverse logistics required at the end of the first life of the product so the second life can begin.
How to Price Your Service Rate
Performance based contracts have many different delivery models. It depends on the level of service a customer wants to outsource and the level of risk you can manage as a company. In this section three commonly used terms are identified around performance based contracts and explain which elements are covered in the service.
How to Calculate Total Cost of Ownership
Generally this calculation is presented as a price per month, quarter or year. For the product you want to evaluate, the following information is needed for this calculation:
- Determine the usage period in which you want to depreciate your product
- The investment price
- The interest rate you pay your bank
- The total number of scheduled services (parts and labor) that will be required by the product based on the usage period for a particular application.
In excel there is a (PMT) function that allows you to calculate a payment per month utilizing this information. In this model the customer does not take into account their own management time, maintenance, unexpected breakdown and operational costs as taxes, insurance and inspections. All the risks on the functioning of the products are left to the knowledge of the operator and the owner.
How to Calculate Total Cost of Usage
Generally this calculation is presented in a price per hour, kilometer, mile, print or scan. For the product you want to evaluate find the following additional information:
- A usage indicator that reflects the usage for this product in the defined period
- The residual value (second life prices of your product at the end of the defined period)
- Taxes, periodic fees (including insurances) related to the usage of the product
- The service and maintenance costs for your product during the defined usage period
- Software licenses needed to monitor / manage the product
Recalculate the payment per month including the 2nd life residual value. Total all the costs during the period of usage and divide these costs by the number of months that the customer plans to use the product. Add the two costs per month and divide them by the expected usage of the product per month.
How to Calculate Total Cost of Service
Generally this calculation is presented as a subscription, license or service.
- Your products consumption of energy to operate
- Advice, consultancy, inspection, upgrades, helpdesks
Recalculate the payment per month including the 2nd life residual value. Total all the costs during the period of usage including the elements above and divide these costs by the number of months that the customer plans to use the product. On top of that estimate a provision for upgrades.
When you are at the end of your calculations, summarize your findings. Be aware that calculating services is an extensive exercise. In addition to that, building the right contract and selling the calculated service requires diligence. Generally speaking, customers are often not adept at calculating the total cost of ownership of your products, so you will have to help educate them on the different aspects required for this calculation such as scheduled and unscheduled maintenance, down-time, usage tracking and management.
How to Manage Reverse Logistics – The Return of Your Products
Reverse logistics, the process of returning goods from customers to a retail or manufacturing source is an often under managed business function yet increasingly important in the Circular Economy.¹ Recalls, commercial returns, wrong deliveries, warranties, repairs & refurbishment and end-of-life returns are some of the many examples of Reverse Logistics that companies face. It has historically been an undervalued part of supply chain management, but is currently gaining much more attention due to its direct impact on profit margins, companies’ environmental image and corporate social responsibility.²
How to Retain Ownership of Your Assets
The technical part of the Circular Economy is based on the concept that products are collected from the first customer and prepared for re-use in its 2nd or further life. How many of the products do you sell are currently returned? This section takes you through the process of how a manufacturer can be involved in a closed loop supply chain for your product. So what can you do to make sure the products do come back after a certain number of weeks, months or years of use? In other words, how can you retain ownership of your assets – your products?
♦ Trade-ins: When selling a new product, the customer is offered a trade-in price when the product is no longer required.
♦ Guaranteed repurchase price: At the time of selling a new product, provide the customer with a guaranteed price at which you will repurchase the product.
♦ Leasing: Instead of selling the product, lease the product to the customer. This would be a viable option for products above a certain price range that should be determined by the business itself.
♦ Rental: The customer is given the right to use the product for a limited time, ranging from a day to one year. The customer never becomes the owner of the product but will use it and then return it at their convenience.
♦ Pay per use: The customer is paying for the performance of the product. This provides him flexibility that he is not paying when not using the product.
♦ Disposal / Scrapping: For products that do not have a high residual value, you could set up a disposal or scrapping service for the customer.
What Can You Do With Products That Are Returned to You?
So if you have set up some forms of retaining ownership on the products, what do you do with them? First of all, check if your logistical processes are capable of handling the reverse logistics of the used products (return authorization, transport, inspection, storage, administration). If you have all of that under control, then you have made great steps towards your closed loop supply chain.