Today, the global manufacturing industry is seeing a shift centered around the idea of moving from a ‘goods-centered’ approach to a ‘service-centered’ one. One example of this shift is the introduction, and use of, Product-as-a-Service.
With nearly two decades of experience in the industrial manufacturing and equipment rental landscape, we have seen the manufacturing industry move to a more circular economy and assisted them with innovative, industry-specific software embedded in Microsoft Dynamics 365.
In this article, we share the advantages you can gain with Product-as-a-Service, so you know how adopting this model can benefit your business. Let’s have a quick look at the idea of PaaS before we get into the benefits it offers.
What is Product-as-a-Service?
Product-as-a-Service (PaaS) allows manufacturers to deliver products and rental support services as part of long- or short-term subscription contracts. They can offer products or equipment to customers for a fixed period on rent or lease and gain periodic payment for the equipment used. It’s also known as Asset-as-a-Service, servitization, or switching from CAPEX to OPEX.
What are the major benefits of Product-as-a-Service?
Product-as-a-Service offers three key benefits for manufacturing companies:
Let's take a deep dive into each benefit of the PaaS model.
1. Increases overall profits by creating new revenue streams
i. Recurring and renewable income
Providing your products as a service, with a recurring monthly fee, creates a regular and predictable revenue stream. PaaS can generate constant revenue for your business during an economic crisis or downsizing, as customers are more likely to agree to lesser amounts of monthly payments. Since you retain equipment ownership, you can rent your equipment to create a renewable income rather than a one-off sale.
ii. Additional revenue channels
When you offer your product based on a subscription format, the transaction with your customers is more comprehensive and doesn’t end in a sale. Additional services related to your product, such as repairs, maintenance, upgrades, and replacements of parts, will also be taken care of by you, which increases the revenue channels for a single product.
iii. Higher return on investment
The PaaS business model has higher profitability than the traditional ‘selling’ business model as it derives revenue from products and services. Typically, services have a much larger profit margin as compared to products. The bundled product and service model produces a higher return on investment as manufacturing companies save on costs related to customer acquisition.
iv. Flexible pricing models
With PaaS, it is possible to offer different pricing models instead of a one-time payment. Based on the requirements of your customers and the market demand, you could charge using the pay-per-use model or consumption based on time. This dynamic pricing capability allows for higher profits.
v. Competitive advantage
Incorporating an additional offering along with traditional selling helps you gain an edge over your competition and stand out in the market. You are selling convenience by letting your clients rent or buy products from you, depending on their requirements, which protects your business from being disrupted by new competitors.
2. Improves internal operations by adding services to products
i. Accelerate market penetration
PaaS is a low capital expenditure model, which makes it more attractive to new customers as it lowers the initial cost for the customer. It is easier to offer custom-made offerings that better fit the customers' situation.
Additionally, with technologies like big data, artificial intelligence, and IoT, manufacturers can make critical business decisions and develop strategies to penetrate new markets.
ii. Reduce the overall business risk
An analysis by Future Bridge stated that product-based proﬁt margins are expected to shrink and will spur the need for implementing service-based PaaS business models. PaaS enables you to introduce innovation in the business and stay relevant in the industry. It also provides a sustainable revenue stream, aiding in the better management of finances.
iii. Drive sustainability
PaaS is fueled by sustainability trends, being eco-friendly, and moving toward a circular economy. Once the customers return the equipment to you, it can be recycled and delivered to another user, extending its useful life and revenue-producing capabilities.
iv. Enhance product development
When offering your product as a service, you are closer to the customer and their use of the product, making it easier and faster to get feedback. The product team could examine patterns in usage and gain insights through analytics. This will help you make continuous improvements to your products.
v. Predictive maintenance
IoT advances make it possible to collect data from various machines and then analyze such data. Information from IoT and sensors can tell when equipment maintenance or repair is needed based on specific algorithms, allowing the equipment to stay longer on the job and reduce switch-outs and downtime.
3. Enhances overall customer relationships by offering flexibility
i. Better customer experience
With PaaS, your customers receive service at every step of using the product, which requires constant contact. The valuable data you gain with this contact lets you continuously optimize the product and service to your customer's needs.
ii. Longer customer lifetime value
The PaaS model helps you build long-term customer relationships by offering the right product and quality services. Customer loyalty increases with service improvements you make based on a continuous feedback loop. The result: Your customers receive a premium and personalized service.
iii. Wider choices of products
Your end-customer can enjoy a lot of flexibility when it comes to PaaS, as they can upgrade or downgrade at any time without hassles. They can also pause or stop the subscription for a period, making a broader set of options available to them.
iv. Save upfront capital costs
Switching to renting from buying means your customers will be paying smaller subscription fees instead of bigger installments. This helps your customers save upfront costs on capital expenditure, reducing the liability of ownership, depreciation, and residual value risk.
v. Constant product upgrades
Customers will use the product on a time and need basis, giving them the option to switch to a more advanced product. PaaS reduces the risk of obsolescence, an appealing value proposition for your customers as it ensures they can always access and use the latest or upgraded product version.
How can you get started with Product-as-a-Service?
Implementing product-as-a-service successfully can be challenging, but it isn’t impossible. It’s essential you find the right balance between the business model, a collaborative ecosystem, and constant innovation.
The industrial manufacturing landscape will see a rise in the adoption of the PaaS model, and you need the right technology to catalyze your transformation process. You can read more about how to implement Product-as-a-Service in our guide.
If an end-to-end ERP solution that can handle the manufacturing and renting side of your business interests you, check out this PaaS ERP essentials checklist, which will provide you with information on:
- Value chain of industrial equipment manufacturers and distributors
- Selection criteria to find the right-fit ERP solution
- ERP essentials for industrial equipment manufacturers and distributors