What Is Product-As-A-Service? Product-As-A-Service In A Nutshell

Product-as-a-service is a business model where a service is provided in an area traditionally served via the purchase of a product. Product-as-a-service enables consumers to purchase a desired result rather than the product responsible for delivering that result. In the Web 2.0 era where subscription-based business models took over, many companies turned their static products, into dynamic services, sold on a product-as-a-service business model.

Understanding product-as-a-service

Product-as-a-service has gained traction in recent years as more companies attempt to replicate the software-as-a-service (Saas) business model and its associated subscription revenue.

Early in the piece, product-as-a-service was an add-on to standard products.

For example, the purchaser of a new car could also purchase maintenance for a monthly fee because the dealership had access to advanced performance data and technical equipment.

The difference today is ambient computing, a broad term that describes an environment of smart devices, artificial intelligence, and data that enables computers to function without the need for direct human commands.

This environment has been facilitated by the proliferation of cloud computing and Internet of Things (IoT) devices, which means PaaS can now realize its full potential as a business model

Everything from washing machines to wind turbines are now available as a service, with consumers not purchasing a product in a lump sum but instead paying for access to the product as and when they require it.

This approach means product-as-a-service incorporates the circular economy model, where the product can be reused, repaired, recycled, or redistributed as necessary.

For the manufacturer, PaaS is a business trend that advocates practicality and sustainability over conspicuous consumption.

The three entities of a PaaS agreement

In a PaaS agreement, there are normally three entities:

  1. The client – who purchases the product as a service.
  2. The manufacturer – who delivers the product and its associated services, and
  3. The platform provider – who handles infrastructure that, depending on the product, may include data collection, installation, transmission, maintenance, storage, security, and analytics. In some cases, the manufacturer and platform provider may be the same company.

Product-as-a-service examples

The product-as-a-service model is apparent in any situation where a consumer pays to use a product instead of purchasing the product outright. Examples include:

Leasing or renting a car

Under the leasing business model, a company purchases a product and then leases it to a customer for a periodic fee. The seller passes the property of the item to the lessor, which is a financier, that enables a buyer (the lessee) to use the item for a given period of time. In the end, the buyer can exercise the option to buy the item at the current market rate. This agreement makes it possible for the seller to dispose of the item, for the financier to make a profit on it, and for the buyer to use it while avoiding total costs of ownership.

Companies such as Hertz, Avis, Dollar, and even Uber can be considered product-as-a-service providers. Instead of selling cars, they sell transportation services.

Tool and equipment hire

The company hiring out elevated work platforms is in fact selling the service of clean windows to apartment block owners.

Similarly, the company selling pressure washers is selling homeowners a spotless driveway or patio.

Airport lighting

Schiphol Airport in the Netherlands is powered by lighting that is rented from Philips.

The lighting system remains the property of Philips who is responsible for maintenance, repairs, and replacement.

Aircraft engines

As part of its TotalCare service, Rolls-Royce removes the burden of engine maintenance from airline companies and absorbs the associated risks.

Both Rolls Royce and the airline benefit from this service.

Rolls Royce makes money when its engines are in service and the airline makes money when its aircraft are in service.

Key takeaways

  • Product-as-a-service is a business model where a service is provided in an area traditionally served via the purchase of a product. PaaS is a more sustainable business model because products are reused, repaired, recycled, or redistributed as necessary.
  • There are three entities in a product-as-a-service agreement: the client, the manufacturer, and the platform provider. Platform providers have benefitted from the proliferation of ambient computing, artificial intelligence, and IoT devices.
  • Product-as-a-service has existed in the leasing or hiring of vehicles, tools, and other equipment for many years. Modern interpretations of the business model can be seen at Schiphol Airport and in Rolls Royce aircraft engines.

Read More: Subscription Business Models, Cloud Business ModelsIaaS vs PaaS vs SaaSAIaaS Business Model.

Some examples of product-as-a-service comprise:

Transforming a product into a service can set various advantages for the business. Some of these advantages comprise:

  • Recurring revenues.
  • Predictable cash flows.
  • Better customer retention (as moving a product from one-time to recurring forces the company to make it appealing on a continued basis.
  • Improved customer relationships.
  • More effective sales funnel, skewed toward retention and referral.

Netflix is one of the best examples of subscription-based business models. The company has been able to build a viable consumer subscription-based business at scale with a straightforward subscription plan. Netflix also launched its ad-supported tier to enable more people to join its service.

Transforming a product into a service means making a one-time offering into a continuous service, which can be charged with a subscription-based model. That requires a shift in mindset from a one-time transaction between the buyer and seller of a product to a continuous interaction between the buyer and seller of a service.

Main Free Guides:

Connected Business Models

C3 AI is a cloud-based Enterprise AI SaaS company. It built a set of proprietary applications (known as the C3 AI suite) that offer its clients the ability to integrate digital transformation applications with fast deployment and no overheads. C3 AI makes money primarily via its subscription services and professional fees.

Microsoft Azure

The AI Ecosystem has generated a multi-billion dollar industry, and it all starts from data. Going upward in the value chain there are the Chips (GPUs) that allow the physical storing of Big Data (a dominant player is NVIDIA). That Big Data will need to be stored on platforms and infrastructures that SMEs can’t afford. That is where players like Google Cloud, Amazon AWS, IBM Cloud, and Microsoft Azure come to the rescue. At a large scale, a few corporations control the Enterprise AI market; while nations like China, the USA, Japan, Germany, the UK, and France have widely bet on it!

As you can see from the visualizations above, cloud players are manufacturing models and algorithms, that becomes an integrated part of their cloud-based offering and platform. This is what attracts more AI developers and companies to become part of the ecosystem, thus, in turn, consuming more cloud infrastructure.

Google Cloud

In 2019, Alphabet’s (Google) Cloud Business was an almost $9 billion unit within Alphabet’s Google overall business model; to gain a bit of context; Microsoft intelligent cloud netted nearly $39 billion and Amazon AWS $35 billion in the same year.

Amazon AWS

Amazon AWS follows a platform business model, that gains traction by tapping into network effects. Born as an infrastructure built on top of Amazon’s infrastructure, AWS has become a company offering cloud services to thousands of clients from the enterprise level, to startups. And its marketplace enables companies to connect to other service providers to build integrated solutions for their organizations.

IBM Cloud

Started in 1911 as Computing-Tabulating-Recording Company (CTR), called then International Business Machines by 1924. IBM primarily makes money by five segments (cognitive solutions, global business services, technology services, and cloud platforms, systems, and global financing) with also innovative products such as IBM Watson and IBM Blockchain.
International Business Machines Corporation (IBM) is an American multinational technology company. It was founded in New York as the Computing-Tabulating-Recording Company in 1911 by Charles Ranlett Flint. IBM is a diverse company with a similarly diverse portfolio of products and services. It produces and sells hardware, middleware, and software. It also offers hosting and consultancy services in nanotechnology and mainframe computers. What’s more, IBM has a strong culture in research and development, filing the most U.S. patents of any business for the past 28 years.
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