Circular economy business models in which products are accompanied or entirely replaced by a service are gaining momentum. These models are often referred to as product service systems (PSS) or ‘servitisation models’. The circular economy system diagram, as propagated by the Ellen MacArthur Foundation, has given an important boost to the broad market implementation of these models.
From linear to circular
PSS business models have the potential to assist companies in moving from linear, product volume based business models to circular, service based models that ensure sustainable, long-term revenue generation. At the same time, negative impacts on the environment are reduced or even eliminated. In other words, it can help companies to move to the ‘inner loops’ of the circular economy diagram, in which value is created by keeping products, parts and components in use and recycling is avoided where possible.
Prominent examples of product service systems include the ‘pay-per-lux scheme’ of Philips / Turntoo and the ‘pay-per-copy’ model of Xerox. The latter is a good example of the impact a PSS can have on a product: instead of producing copiers that have a limited lifespan to safeguard future market demand, copiers are designed in a thoroughly durable, serviceable and maintenance friendly manner.
Optimising service and reducing hassle
A modern copier is built to last practically forever. Consumables and wear-parts can be replaced very rapidly after which they are refilled – respectively refurbished – and reused. Thereby optimising profit for the owner, optimising service and reducing hassle for the user and reducing negative impacts on the environment. Although already launched in the 1960’s, this model continues to evolve. The IoT enables direct communication between copier and warehouse, ensuring a new toner cartridge lands on your doormat just in time with minimal use of time/resources.
From a customer perspective, the example of a new painting is often used: I just bought a painting, now I have to buy a drill and some mounting hardware to give it a nice place in my living room. But… I don’t want to own a drill (or even a painting), I want a nice painting hanging in a nice place. So, wouldn’t it be better if the gallery that was selling it to me provides this as a service? And contact me in a few months to see if I still like the painting or perhaps want to replace it with a new one?
Methodology to develop a PSS
Sometimes ideas take a while to land in the right place. Over a decade ago, Partners for Innovation was involved in a ground-breaking EU project in which an extensive methodology was developed for companies to develop a PSS (MePSS). The project brought together leading institutes (covering main PSS-aspects) including Politecnico di Milano, Econcept and Dalt (design), Insead (business model innovation), Pré (impact assessment), GrAT (success and failure factors) and Sheffield Hallam University (consumer aspects).
The project built upon previous work of the participants, including a study conducted by PfI co-founder Cees van Halen, Mark Goedkoop (Pré) and Harry te Riele for the Netherlands’ Ministry of the Environment in 1997 (according to Wikipedia this study defined PSS as a term and research field).
The result of MEPSS is a model for companies to evolve from ‘take-make-dispose’ business models towards sustainable, profitable product service systems, in five phases:
1. Strategic analysis (mapping stakeholders, boundary conditions, available technologies)
2. Exploring opportunities (developing and assessing scenarios with value chain partners and other stakeholders)
3. PSS idea development (selection and further development of the most promising PSS idea)
4. PSS concept design (development of the detailed functionalities of the PSS, viability, feasibility and sustainability check)
5. Development and implementation of a PSS project (assembling a project team involving relevant value chain partners and stakeholders, jointly defining and conducting the project). PSS implementation may involve a change in the organisational set-up (e.g. creation of a new joint venture or strategic alliance).
A well-elaborated stepwise approach is made available (in a report, book and online) to move through each of the five phases in this process (see diagram below), providing accessible tools to further assess important aspects of the PSS. Decision nodes mark the beginning of each phase – results of the previous phase are evaluated by the company’s management board and are translated into starting points for the next.
Our recent projects
Although the theory is not new, it is highly applicable to the requirements of companies who want to implement a PSS today. This is underlined by the fact that main methodology developers GrAT / TU Wien and Politecnico di Milano are still regularly assisting companies in developing a product service system, building further on the results of MEPSS. At Partners for Innovation, we are firmly involved in PSS and other types of circular business model development. Recent experience includes projects in which we explored a circular business model for the airport luggage systems of Vanderlande and a product service system (rental services) for an electric scooter.
In our view, the untapped potential of PSS – in terms of social, environmental and economic benefits – is enormous. The starting points behind PSS are as valid as they were two decades ago: now is an excellent time for each business to rethink their strategy to:
* Remain access to their products / components / parts and ensure that these stay in use as long as possible (given that, as a rule, >90% of the value is lost when a product is recycled).
* Optimally adhere to the (changing) demands and wishes of their customers while reducing the resource, material and energy inputs needed to do so.
* Optimise customer retention: each PSS inherently involves a solid and durable relationship between provider and client.
Plan C, the ‘circular economy hub’ in Flanders has summarised the main characteristics of product service systems in a concise infographic.
Challenges and a refocus
In short, PSS optimises profits, customer satisfaction and (positive) sustainability impacts all at once. At the same time, it should be noted that the introduction of a PSS has profound consequences for all aspects of the company and can be challenging. The sales department will need to refocus, making a shift from maximising product sales volume to marketing of service offerings. The maintenance / service (and perhaps a new refurbishing) department need to interact closely with the R&D department to ensure product design is optimised for use in a PSS.
Another challenge may be posed by the nature of the products of your company: fast moving consumer goods may for instance not appear to be as suitable for a PSS as durable goods, and may require a more radical change from the current business as usual. We would be pleased to take up the challenge and assist in assessing the possibilities a PSS can have for your company and your partners in the supply chain.