Step Six – Product-as-a-Service
New business models is another key feature of the circular economy with Product-as-a-Service proving the most viable for company’s interested in maintaining ownership of their assets (products). There are three main options available:
1. Total Cost of Ownership (TCO) calculation is presented as a price per month, quarter or year and can provide significant cost savings.
2. Total Cost of Usage (TCU) is presented as a price per hour, kilometre, mile, print or scan.
3. Total Cost of Service (TCS) is, generally, presented as a subscription, license or annual service fee.
Product-as-a-Service (PaaS) has significant benefits for both the buyer and the seller, but only if it is structured correctly. Our PaaS workshop will guide you through the stages.
We have a selection of workshops to choose from, starting with our ½ day mini series for busy people or the deep-dive 1 or 2 day workshops. Visit The Nine Steps Towards a Circular Business® to review the current selection of workshops on offer.
How to Calculate Total of Ownership
Total Cost of Ownership (TCO) calculation is presented as a price per month, quarter or year and can provide significant cost savings for customers.
(1) Determine the usage period in which you want to depreciate your product.
To calculate depreciation start with this simple method: the purchase price of a product / asset and sub-tract the value of the asset when it has reached the end of its usefulness over a given period of time. For example if you brought a computer for $1,000 and after you used it for five years sold it for $200, then the depreciation would be $1000 – $200 = $800. Then divide $800 / 5 years = $160 (see WikiHow to learn more and speak to a professional accountant).
(2) Determine the investment price
(3) The interest rate you pay the bank
(4) The total number of scheduled services (parts and labour) 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. PMT calculates the payment per month for a loan or monthly service fee based on constant payments and a constant interest rate.
In this model the customer is guaranteed the management time, maintenance, any unexpected breakdowns and operational costs such as taxes, insurance and inspections are provided by the operator and/or owner.
How to Calculate Total of Usage
Total Cost of Usage (TCU) is presented as a price per hour, kilometre, mile, print or scan. For the product you want to evaluate you will need the following additional information
(1) A usage indicator that reflects the usage for this product in the defined period.
(2) The residual value (second use-cycle price of the asset at the end of the defined period).
(3) Taxes, periodic fees (including insurances) related to the usage of the product
(4) The service and maintenance costs of the asset during the defined usage period.
(5) Any software licence needed to monitor and manage the product.
Recalculate the payment per month including the second use-cycle residual value. Sum 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.
Additional issues to consider:
(a) For what price can I resell the product?
(b) Will the cost of labor increase during the customer usage period?
(c) Have I properly calcualated ‘wear and tear’?
(d) Is my product as good as I expected?
Technology and Under-Utilized Assets
Technology is powering the shift in valuing under-utilized assets and the freight industry is one way in using a Total Cost of Usage (TCU) business model with a digital freight matching service. A truck’s average empty kilometers can be between 12% ~ 28% and in the US it is estimated trucks annual empty miles is 50 billion miles. Optimizing these assets can add significant income to a company and reduce the cost of extra trucks hauling freight that could have been transported in an empty truck (Source: GetApp)
In this interpretation of TCU the owner of the technology does not own the assets as in the example above.
How to Calculate Total of Service
Total Cost of Service (TCS) is, generally, presented as a subscription, license or annual service fee.
(1) The cost of energy your product consumes to operate.
(2) Advice, consultancy, inspection, upgrades and helpdesks.
Recalculate the payment per month including the 2nd life residual value. Sum 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 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 is difficult and 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.
There are two different kinds of subscription models:
(1) The customer receives a product / service periodically: the ownership is transferred to the customer
(2) The customer gains access to a service or virtual product: the customer gets the right to use it (PaaS = Product-as-a-Service)
There is more information on subscription business models available on the Business Model Toolbox website
There is a wealth of resources available in our Knowledge Centre, everything from reports, images, infographics, articles, movies and tools. For information specific to Step Six – Product-as-a-Service, click on the images below.