‘As a service’ business models: What it is and its benefits

03 March 2022 Consultancy.eu 6 min. read
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A growing number of businesses worldwide are adopting ‘As a service’ business models. But what is such a model exactly? And what are the advantages of ‘As a service’? Tim Vellema, a Consultant at The Next Organization, walks through the concept and its benefits.

The ‘As a service’ business model is an emerging business model that shifts the customer - supplier relationship from the traditional model of ownership to a model that evolves around providing a service on a non-ownership basis.

This shift is centred around the idea that society is moving from a ‘goods-centred and customer centric’ one to a ‘service-centred’ one. This new ‘service-centred’ logic argues that customers are the focal point and are in charge of value creation. As such, organisations become ‘value facilitators’ instead of ‘value producers’. They not only supply the product, but also facilitate and offer value in use.

‘As a service’ business models: What it is and its benefits

Differences between ‘As a service’, buying and operational lease

The difference between product ownership and ‘As a service’ is substantial. A traditional transaction involves a customer buying the product, after which the seller only offers warranty required by law or charges an additional fee for follow-up services.

The difference between operational lease and ‘As a service’ is more subtle, with the main difference the duration of the contract. When closing an operational lease contract, the customer agrees to use a product for a period which is agreed on in advance. If the customer decides that he or she no longer wants to use the product, the remainder of the period still has to be paid in full (or a ‘fine’ is applied). In contrast, an ‘As a service’ contract is very flexible and often on a monthly basis.

In addition to the contractual differences, ‘As a service’ can also be a more ecologically sustainable solution. Since the customer only pays for use and sends the product back to the supplier afterwards, the product remains part of a closed loop. The product will, if needed, be repaired and refurbished and shipped to a new user.

As a result, this approach reduces the number of products that have to be manufactured, since they will be re-used until the end of their useable life and (often) recycled afterwards. This reduces the ecological footprint of the supplier and leads to a more sustainable manufacturing process.

Example: B2B ‘As a service’
Signify provides ‘Light as a service’ for Schiphol Airport since 2015. Signify is owner of the lamps, while Schiphol only pays for its use. Signify consulted Engie Services to adapt the lamps in such a way to increase their longevity by 75% and make them as easily replaceable as possible. Signify remains responsible for the durability and performance of the lightning system and is in charge of recycling the lamps at the end of their useful life.

Example: B2C ‘As a service’
Car manufacturer Lynk & Co is active in Europe since 2020. It offers a ‘Car as a service’ month-on-month subscription. For €500 a month (excluding fuel) a customer pays for the use of the car including maintenance, insurance and road tax.

Furthermore, sustainability is also very much part of their value proposition. According to Lynk & Co cars are only used 4% of the time. That’s why they offer their customers the opportunity to share their car. This reduces the number of cars that have to be produced, and thereby the impact on the environment, and lets customers lower their monthly fee since they receive compensation when they lend out their car.

Advantages of an ‘As a service’ business model

The first advantage is especially relevant for premium products. Since the ‘As a service’ business model doesn’t require customers to make an upfront investment, premium products become more accessible to a larger range of customers. Meanwhile, for suppliers, the ‘As a service’ model enables predictable, renewable revenue streams.

Take the ‘Care by Volvo’ subscription for example. The ‘buy now’ price tag of the available models make that these cars belong to the premium segment. However, with the ‘Care by Volvo’ subscription, these cars also become accessible to customers who normally aren’t able to buy cars in this segment. This enables organisations to have access to a wider pool of potential customers, which leads to potentially more revenue generation.

A second advantage of setting up an ‘As a service’ business model is the continuous feedback loop. Since the customer will be serviced at every step during its use of the product, constant contact is required. This provides the supplier with valuable data to continuously learn from the customer experience and improve both the product and service.

A third advantage is the opportunity to increase customer loyalty. Since the customer will be serviced during its product use, an organisation is able to influence the customer experience at all times. If this opportunity is combined with improvements based on the continuous feedback loop, customers can be serviced in a better way, customer loyalty can be increased and the ‘customer lifetime value’ can be enhanced.

How to set up an ‘As a service’ business model

If you want to set up an ‘As a service’ business model, there are multiple factors that should be take into account. Three important considerations:

A supportive approach
It is vital to have a service-oriented organisation and a supportive culture. This mindset starts with the vision of the board, which should be translated to a fitting organisational culture. The organisation should facilitate ‘value in use’ and service the customer at all times.

The value of non-ownership
Another thing to keep in mind is that the ‘As a service’ business model doesn’t fit every product, and therefore, every organisation. Think about which ‘pain’ you take away for the customer. Why would a customer want to ‘use’ the product instead of ‘owning’ it? If you sell a product that doesn’t fit the ‘service’ concept, then you should be wary about pursuing this business model.

For this business model to succeed, the ‘problem and hassle’ of owning a product must be big enough for a customer to consider an ‘As a service’ proposition. In the end every value proposition should be based on client needs; the product should fit the business model and shouldn’t be squeezed into it. The solution must be convenient enough to compensate for the premium price that the customer often has to pay. You will only be able to create value if this is the case.

Third, determining the price of your ‘As a service’ product. Do you focus on volume, a premium price or are you so unique that you can realise both? Since it is a capital-intensive business model it needs a solid business case. This requires a detailed estimation of the total cost of ownership, price elasticity, willingness to pay and a convincing pitch.