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.
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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:
The client – who purchases the product as a service.
The manufacturer – who delivers the product and its associated services, and
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.
The key characteristics of the PaaS business model
The key characteristics of a PaaS business model vary depending on the industry and type of product, but here are several we believe to be the most important.
Ongoing customer engagement
PaaS emphasizes building a continuous relationship with customers beyond the initial sale. This involves continuous engagement with customers with services such as product maintenance, updates, and customer support.
PaaS providers must build strong customer relationships, understand their needs, and proactively address issues to ensure customer satisfaction. Since PaaS is often subscription-based, customer retention is crucial.
Broader responsibility
PaaS businesses have more responsibility when compared to traditional companies because they are involved in (and responsible for) more phases of the product lifecycle. That is, much of the business model occurs outside of a standard buyer-seller relationship.
In addition to product maintenance and updates, businesses are also responsible for product recovery, reuse, refurbishment, and remanufacturing. Others may also be required to deliver services that enhance the customer’s experience, such as installation, training, monitoring, and optimization.
Data-driven approach
PaaS involves the collection and analysis of data to derive insights and optimize product performance. This may include data on product usage patterns, performance metrics, customer feedback, and other relevant data points.
PaaS providers with the ability to collect, analyze, and leverage data can continuously improve the product and customer experience. These companies are also more innovative as they can draw inferences from shifting consumer preferences before the competition.
Sustainability focus
The product-as-a-service business model has clear sustainability benefits which are primarily linked to the efficient use of energy, raw materials, and the product itself.
Consider a company such as Homie, which offers vacuum cleaners and a range of other household appliances on a pay-per-use subscription basis.
The PaaS business model may encourage Homie to prolong the usage phase of the product lifecycle – particularly if it can make more money on recurring revenue than it can on unit sales. Put differently, the longer a vacuum cleaner can remain operational and serve the company, the more revenue it can generate.
One can easily appreciate that keeping the vacuum cleaner in service encourages the company to establish reuse, refurbishment, and recycling processes. All of these contribute to the circular economy and lessen the PaaS company’s environmental impact.
Value proposition
The PaaS model creates several unique value propositions:
Access to the latest tech – PaaS allows customers to access the latest products and innovations without the need for upfront investment. By extension, customers can access regular product updates and benefit from continuous improvements without worrying about obsolescence.
Cost-effective and predictable pricing – the PaaS business model tends to employ a flexible, subscription-based pricing model which can be more attractive than the prospect of a large, upfront purchase. This enables customers to instead budget for predictable, ongoing expenses.
Flexibility and scalability – PaaS allows business customers in particular to scale their product usage up or down based on their needs. When customers can align product usage with demand, they avoid over-provisioning or under-utilization of resources. This results in cost reductions and an increase in operational efficiency.
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.
Key Highlights
Definition of Product-as-a-Service (PaaS): Product-as-a-service is a business model where a service is offered in an area traditionally associated with purchasing a physical product. It allows consumers to pay for the desired outcome or functionality provided by a product rather than owning the product itself.
Transition to Services: PaaS gained prominence with the rise of subscription-based models in the Web 2.0 era. Companies transformed static products into dynamic services offered through subscription-based models.
Ambient Computing and IoT: The proliferation of ambient computing, artificial intelligence, and Internet of Things (IoT) devices has facilitated the realization of the full potential of the PaaS model. Smart devices and data enable products to function without direct human intervention.
Circular Economy: PaaS integrates the circular economy model by offering products as services. Consumers access products when needed, and the products are reused, repaired, recycled, or redistributed, promoting sustainability and reducing waste.
Entities in PaaS Agreement: A typical PaaS agreement involves three entities:
The client: The customer who purchases the product as a service.
The manufacturer: Provides the product and related services.
The platform provider: Manages the infrastructure for data collection, installation, maintenance, security, and analytics. This role can sometimes be fulfilled by the manufacturer.
Key Characteristics of PaaS Business Model:
Ongoing Customer Engagement: PaaS emphasizes continuous customer engagement through services like maintenance, updates, and support.
Broader Responsibility: PaaS involves more phases of the product lifecycle beyond the initial sale, including recovery, reuse, refurbishment, and optimization.
Data-Driven Approach: PaaS utilizes data collection and analysis to improve product performance and customer experience.
Sustainability Focus: PaaS encourages sustainability by prolonging product lifecycles and implementing reuse, refurbishment, and recycling processes.
Value Propositions: PaaS offers access to the latest technology, cost-effective subscription pricing, flexibility, and scalability.
Examples of PaaS:
Leasing or Renting a Car: Companies like Hertz, Avis, and Uber offer transportation services instead of selling cars.
Tool and Equipment Hire: Businesses renting tools provide services like clean windows or spotless driveways.
Airport Lighting: Schiphol Airport rents lighting from Philips, which handles maintenance and replacement.
Aircraft Engines: Rolls-Royce’s TotalCare service relieves airlines of engine maintenance burdens and shares benefits.
Sustainability Benefits: PaaS contributes to sustainability by extending product lifecycles and reducing the environmental impact through reuse and recycling.
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.
Is Netflix a product or service?
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.
What does it mean to offer a product as a 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.
An effective business model has to focus on two dimensions: the people dimension and the financial dimension. The people dimension will allow you to build a product or service that is 10X better than existing ones and a solid brand. The financial dimension will help you develop proper distribution channels by identifying the people that are willing to pay for your product or service and make it financially sustainable in the long run.
Business model innovation is about increasing the success of an organization with existing products and technologies by crafting a compelling value proposition able to propel a new business model to scale up customers and create a lasting competitive advantage. And it all starts by mastering the key customers.
Digital and tech business models can be classified according to four levels of transformation into digitally-enabled, digitally-enhanced, tech or platform business models, and business platforms/ecosystems.
A digital business model might be defined as a model that leverages digital technologies to improve several aspects of an organization. From how the company acquires customers, to what product/service it provides. A digital business model is such when digital technology helps enhance its value proposition.
A tech business model is made of four main components: value model (value propositions, mission, vision), technological model (R&D management), distribution model (sales and marketing organizational structure), and financial model (revenue modeling, cost structure, profitability and cash generation/management). Those elements coming together can serve as the basis to build a solid tech business model.
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus have a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility.
In an asymmetric businessmodel, the organization doesn’t monetize the user directly, but it leverages the data users provide coupled with technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data, combined with its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.
While the term has been coined by Andrew Lampitt, open-core is an evolution of open-source. Where a core part of the software/platform is offered for free, while on top of it are built premium features or add-ons, which get monetized by the corporation who developed the software/platform. An example of the GitLab open core model, where the hosted service is free and open, while the software is closed.
Cloud business models are all built on top of cloud computing, a concept that took over around 2006 when former Google’s CEO Eric Schmit mentioned it. Most cloud-based business models can be classified as IaaS (Infrastructure as a Service), PaaS (Platform as a Service), or SaaS (Software as a Service). While those models are primarily monetized via subscriptions, they are monetized via pay-as-you-go revenue models and hybrid models (subscriptions + pay-as-you-go).
Open source is licensed and usually developed and maintained by a community of independent developers. While the freemium is developed in-house. Thus the freemium give the company that developed it, full control over its distribution. In an open-source model, the for-profit company has to distribute its premium version per its open-source licensing model.
The freemium – unless the whole organization is aligned around it – is a growth strategy rather than a business model. A free service is provided to a majority of users, while a small percentage of those users convert into paying customers through the sales funnel. Free users will help spread the brand through word of mouth.
A freeterprise is a combination of free and enterprise where free professional accounts are driven into the funnel through the free product. As the opportunity is identified the company assigns the free account to a salesperson within the organization (inside sales or fields sales) to convert that into a B2B/enterprise account.
A marketplace is a platform where buyers and sellers interact and transact. The platform acts as a marketplace that will generate revenues in fees from one or all the parties involved in the transaction. Usually, marketplaces can be classified in several ways, like those selling services vs. products or those connecting buyers and sellers at B2B, B2C, or C2C level. And those marketplaces connecting two core players, or more.
B2B, which stands for business-to-business, is a process for selling products or services to other businesses. On the other hand, a B2C sells directly to its consumers.
A B2B2C is a particular kind of business model where a company, rather than accessing the consumer market directly, it does that via another business. Yet the final consumers will recognize the brand or the service provided by the B2B2C. The company offering the service might gain direct access to consumers over time.
Direct-to-consumer (D2C) is a business model where companies sell their products directly to the consumer without the assistance of a third-party wholesaler or retailer. In this way, the company can cut through intermediaries and increase its margins. However, to be successful the direct-to-consumers company needs to build its own distribution, which in the short term can be more expensive. Yet in the long-term creates a competitive advantage.
The C2C business model describes a market environment where one customer purchases from another on a third-party platform that may also handle the transaction. Under the C2C model, both the seller and the buyer are considered consumers. Customer to customer (C2C) is, therefore, a business model where consumers buy and sell directly between themselves. Consumer-to-consumer has become a prevalent business model especially as the web helped disintermediate various industries.
A retail business model follows a direct-to-consumer approach, also called B2C, where the company sells directly to final customers a processed/finished product. This implies a business model that is mostly local-based, it carries higher margins, but also higher costs and distribution risks.
The wholesale model is a selling model where wholesalers sell their products in bulk to a retailer at a discounted price. The retailer then on-sells the products to consumers at a higher price. In the wholesale model, a wholesaler sells products in bulk to retail outlets for onward sale. Occasionally, the wholesaler sells direct to the consumer, with supermarket giant Costco the most obvious example.
The term “crowdsourcing” was first coined by Wired Magazine editor Jeff Howe in a 2006 article titled Rise of Crowdsourcing. Though the practice has existed in some form or another for centuries, it rose to prominence when eCommerce, social media, and smartphone culture began to emerge. Crowdsourcing is the act of obtaining knowledge, goods, services, or opinions from a group of people. These people submit information via social media, smartphone apps, or dedicated crowdsourcing platforms.
In a franchained business model (a short-term chain, long-term franchise) model, the company deliberately launched its operations by keeping tight ownership on the main assets, while those are established, thus choosing a chain model. Once operations are running and established, the company divests its ownership and opts instead for a franchising model.
Businesses employing the brokerage business model make money via brokerage services. This means they are involved with the facilitation, negotiation, or arbitration of a transaction between a buyer and a seller. The brokerage business model involves a business connecting buyers with sellers to collect a commission on the resultant transaction. Therefore, acting as a middleman within a transaction.
Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
