Product-as-a-Service: Where Customer and Supplier Needs Combine

Every so often, there comes an innovation that snaps your operation into balance. Not only does it further your own growth, but your customers are demanding to get their hands on it. 

The Product-as-a-Service (PaaS) model is one such innovation. 

94% of manufacturers believe that using the “as a service” model could increase sales even during a crisis. The demand for this model is growing, with researchers expecting it to be worth upwards of 3221 Billion USD by 2030. 

What’s causing this perfect storm? Olli Kuismanen from Tampere University explained during Copperberg’s recent broadcast. There’s a clear balance forming, and smart companies must be ready to use it. 

What Is Product-as-a-Service? 

While renting and leasing can be seen as part of PaaS, the majority of people are focused on something a little more revolutionary than that. 

PaaS encompasses a few different business models, including 

• Pay-per-Use (PPU) – customers only pay for the amount of a service or product they actually use, rather than a fixed price 
• Pay-per-Output – customers only pay for the tangible results or outputs they receive from a service or product
• Outcome Based – when a company focuses on delivering a specific result or outcome to their customers rather than just selling products or services 

While renting and leasing can be seen as part of PaaS, the majority of people are focused on something a little more revolutionary than that. 

A traditional business model has manufacturers creating a product, then selling it fully to a customer. Any service and maintenance is then done on a transactional basis, and any data or upgrades are the responsibility of the client. 

Each level of PaaS then plays with who exactly owns the equipment and who is responsible for it throughout its lifecycle. Because it covers so many factors, this model becomes a lot more fluid and customizable to different situations. 

This level of control and customization requires digitization and connectivity so that the PaaS company can know exactly what’s happening in the field. Ultimately, how digital and service based your company becomes depends on your clients, and your ultimate goals. 

The Two-Pronged Need for PaaS

In order to fully understand what’s attracting so many businesses to the PaaS business model, you have to look at it from both the perspective of the suppliers and that of the customers. 

Both parties have a plethora of reasons to move towards this system. Starting with the suppliers, PaaS allows them to 

• Boost Profit – Rather than a one-time purchase, this model necessitates clients to continually subscribe to the service. This means that even with a lower profit upfront, over the lifecycle of the product the profitability continues to rise 
• Differentiation – If your company is operating in a saturated market with lots of competitors, using the PaaS business model can set you apart and send you into a blue ocean
• Customers Not Able to Invest – There are instances where a potential client is extremely interested in your products, but don’t have the capital to invest. Th PaaS model makes it more accessible 
• Untapped Service Capabilities – You may have a full service team within your organization, or remote monitoring capabilities, that are not being used to their full potential within a traditional business model 
• Technology – It is possible to have products that with top-notch reliability, IoT, and standardization that aren’t being monetized as well as they could. In a traditional model, it’s difficult to fully upsell these factors that are taken for granted 

When you bring in the customers’ perspective, the reasons for implementation only grow. 

• Flexibility –  When equipment has a long lifetime, clients don’t know that they will still be using it years down the line. PaaS allows them to stop being physically and financially responsible for the product when they outgrow its need
• No CAPEX Available – The risk and cost associated with fixed assets can be a huge barrier for companies to utilize new and improved equipment
• Cost Aligned With Revenue – This model allows even the equipment clients use to be classified as an operating cost, and therefore can be scaled in the event of lower or higher revenue
• Risk Avoidance – If there is any uncertainty in the product or the supplier’s capabilities, or in the market’s stability, this risk can be transferred back onto the supplier
• Ensuring Supplier Commitment – When a supplier only gets money if their product is usable, it keeps them connected and invested in the ongoing success of a client’s operation   

The connection and relationship that is built between both parties with this model gives everyone involved the confidence to get what they need. 

Challenges of Product-as-a-Service 

There are a few potential issues with the PaaS model, but if your team is aware and plans ahead, you can easily overcome them. 

Flexibility

In order to offer the flexibility that clients are after, your company may run into issues with assets being returned, and being held in a “limbo” state. 

There are several different ways to take back control while still allowing customers to scale and shift with their needs. 

• Standardization – If you offer a fleet of identical machinery to all your clients, you will be prepared to quickly send returned assets back into the field with someone else
• Modularization – Being able to swap out and improve machinery to fit the needs of individual clients will keep them in the field longer
• Robust Design – You want to be able to re-use a machine for multiple clients 
• Contracts – Even with the flexibility that customers are asking for, there are ways you can design your contracts that limit the risks 

The important thing is balancing the desires of your clients with the security of the company. 

Risk Transfer

Because clients are only paying for their actual use of the machine, they are effectively shifting the risks of market fluctuation and financial turmoil onto you. 

To mitigate these shifts in usage, you should plan to 

• Set Clear Contracts – While some of the risk will naturally be put onto your team, you still want to minimize the potential damage
• Knowing Your Customer and Products – Evaluate the risks associated with your clients, and have a full understanding of what your equipment can handle 
• Supply and Spare Part Inventories – You will be responsible for dealing with supply chain issues, so you need to be sure you can keep uptime high for your customers no matter what 

Remember, the less they need your product, the less they will use it. Your company needs to be prepared to handle these shifts and blows. 

Are You Ready to Adopt the PaaS Model?

Before you fully jump into the PaaS model, you need to ensure your company has the prerequisites for success. 

• Measurable Lifetime Value – Your products have to have a clear impact on clients through their entire life cycle to justify a constant subscription
• Ability to Support Products – Downtime and reduced effectiveness will have a huge impact on the longevity of your partnerships. The value you deliver must be consistent
• Ability to “Resell” Used Products – Your design must be robust enough to support passing equipment from client to client
• Ability to Finance PaaS Business – Practically, your company needs to have a fleet of assets to offer, as well as a healthy inventory of spare parts and a fully mobilized service team 
• Customer Acceptance – If your clients aren’t willing to make the shift, you aren’t going to get very far
• Ability to Cope With Future Changes – Even the smoothest PaaS operation won’t be able to stay afloat if their products are surpassed by other companies

Once you have all these factors in place, your team will be ready to step into the future of B2B manufacturing. 

Conclusion 

The delicate tightrope walk of balancing the needs of your organization with the expectations of your clients can be challenging, but with the adoption of the PaaS model, it becomes an exciting opportunity for growth.

Implementing PaaS into your B2B manufacturing operations can revolutionize the way you deliver value to your customers, enhance customer satisfaction, and drive overall business growth. By shifting from traditional product-centric models to more service-oriented approaches, you can establish long-lasting partnerships with your clients while increasing recurring revenue streams. 

Embracing PaaS not only signifies your commitment to innovation but also positions your business as a leader in the industry, ready to stay balanced high above the competition.