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Great! As a company you have decided to start experimenting with Product-as-a-Service. The prospect of this business model is promising: it is a good way to implement circularity and to get to understand your customer better. Furthermore, it is a really good idea to experiment, and start small, learn, adapt and scale from there. This lean approach allowed many of our customers to gain most out of the business model.
Piloting enabled companies to reach a solid customer base that raises cash-flow, this can help to grow organically. When the proof of concept (the evidence that the model works and that there is demand for it) and traction have been shown, acquiring financing to keep the assets on your balance sheet also becomes easier. By keeping the pilot small, most companies are still able to also pre-finance this themselves, which makes the pilot-format highly common.
Well, a good pilot considers three main points. The propositions you want to pilot, the operational aspects and your pilot scope and definition of success. We will explain those in the following paragraphs.
First, what types of propositions are you going to start with and how long will these PaaS-subscriptions last for? Are you going for a pay-per-month, pay-per-use or pay-for-performance model? The latter two are a little bit more challenging as they often require hardware changes. Our first advice would always be to keep it simple. Keep it to a maximum of three propositions. This can be three different propositions or one proposition with several contract periods, or a combination of the two. This simplicity enables you to experiment with different adaptations to your business model over time as well.
So for example a basic, simple and deluxe (product)-package. You can make combinations with a flexible proposition (monthly payment that can be cancelled every month), a contract period of one year and one of two years. In essence this gives you 9 possibilities already. Keep in mind; increasing the amount of parameters will increase the possibilities exponentially.
When you have decided on what exact propositions you want to pilot with, it is time to think which service elements you are offering with each of these packages. Are you going to deliver repair and maintenance services or are you going to send maintenance kits? As a company you can start thinking of cross-selling opportunities, like adding software licenses to your product. Or other ways to increase the overall value of the proposition you offer.
Additionally, companies need to consider what to do when the contract period (almost) expires. Will you send a renewed (discounted) offer, or will you use this as a possibility to lock-in the customer with a new product and/or proposition? Furthermore, there are possibilities to just add on to the current contract on a flexible basis. So the customer has the possibility to cancel every month after the minimal period has expired. It is important to consider what flexibility you want to offer the customer, for example how easy is it to postpone the monthly part of your order (if present) and / or a one-click order model (subscription boxes)?
After you considered the specifics on your Product-as-a-Service or Subscription propositions, you will have to think about the operational aspects of the execution of the business model.
Most obvious to start off with, is to think about how fulfilment will work for your products and services. You have already thought about what products and services you want to offer, now it is time to consider how you are going to deliver these. So as an extension to this it is important to also think about who is going to deliver these products & services? Will that be you or a third party?
One of the obvious pitfalls in thinking about fulfilment or logistics is that companies often only think about how they will get their products to their clients. However, for the circularity component of this business model, it is also important to think about how the product gets returned. We call this reverse logistics, and it is about how and by whom these products or devices are returned.
How is this arranged, where will you keep stock, will you repair or refurbish appliances? Is your current setup even capable of working with returns? Will you send out the stock straight away as B-stock or occasions? Some companies consider selling these items as second-hand, but from a circular point of view this is not necessary; you provide functionality or an outcome. So why sell off these valuable assets?
Is there automatically a return-label that customers can use to send back the product? Companies will need a simple system in place that tracks which device is present at which customer. By tracking the serial number, companies can also check if the right product is sent back to them, we call this asset tracking. Furthermore, who checks if possible repairs fall under the service contract and can be contributed to ‘normal’ usage? Do you have a support line in place to arrange for this, or is the customer able to do all this through a self-service center?
How are you going to arrange for recurring payments (monthly, pay-per-use)? Are you going to send out payment requests or will you use SEPA Direct-Debit? Make sure you set up monthly invoicing, capturing payment mandates, payment dunning and maybe even debt-collection if you have high-value items.
Think about how you can control the billing and collecting cycle in such a way that you control the logic. This means that you can send just one manual payment for additional services, or you can postpone the payments (e.g. as happened with COVID19 with some proposition).
Furthermore, will your customers be able to upgrade or downgrade their subscription to their liking? This can come with a big administrative burden for you as a company. But that does not have to be the case if you control the billing logic and you have a platform that arranges this easily.
Payments are off course an important part of the Product-as-a-Service model. So having a good overview over all payments is important. Are there customers that haven’t paid? Did you try multiple times? Then a customer should be flagged, and you will need to put customer support on it. Furthermore, to keep a good overview it might be interesting to create a dashboard which shows you your Monthly Recurring Revenue (MRR) on which you can base your reporting , accounting and forecasting.
You will need to build a website for your PaaS-proposition. If you are a new company you can choose whatever platform suits you best. An existing company probably already has certain check-out flows in place. We advise you to keep these two check-out flows (‘normal’ vs PaaS) separate. This again will keep things simple. Build a front-end that is linked to your current (branded) check-out flow, but on which the back-end runs separately so your internal bookkeeping stays consistent, transparent and clear.
Make sure that even for a pilot you consider to check your customer if they are eligible for Product-as-a-Service. Especially when your product is of high value, you have to make sure that the customer is able to pay for the product. Not only from a business perspective but also as a socially responsible company. Product-as-a-Service is a wonderful model that allows access to customers that would not have been able to buy the product.
However if the product is non-essential, companies will have to make sure that they do not provide products to those that are not able to pay for them on the long run. Hence you can set risk-profile scores (based on creditworthiness) on what customers you want to accept and which customers you will have to decline. In the end, this will lead to a better customer base, with a lower churn and a higher retention rate, providing a higher Customer Lifetime Value (CLTV).
Now we have looked at most (but not all) operational aspects, we need to determine what the scope and possible definition of success for the pilot is.
How many subscribers/customers do you want to reach in the pilot and what will be the warm-up period to reach this amount of subscribers? These are two questions that lead up to when you as a company consider your pilot a success, and when not?
It is important to make this measurable and formulate this SMART so you can check if the pilot was successful. You can do this by setting up clear KPI’s (Key Performance Indicators). Also important here are the non-measurable learnings that you want to have. Are there any specific hypotheses that you wanted to test?
We explained that you can set up measurable SMART goals with KPI’s. But you might also want to add other numbers that you want to achieve in this pilot. For example, do you want to break-even on the whole pilot in terms of revenue? We see that this is often not the case, as a pilot is about learning and validation. So often the assets and the pilot-costs are not fully paid back yet. But that does not matter.
As you still own these assets, you might not have lost any real value yet. If you want to experiment with building a business case, we have built a PaaS Business Case Calculator that enables companies to do so here.
Lastly, there are some practical considerations you need to consider. For example, how are you going to market this proposition and to which target group? What will be your marketing budget? When should the pilot start and when should it end?
How much lead-up time do I need to start the pilot? What is the best time to do this (especially if your product has some seasonal aspect in it). You need to consider what internal implementation efforts need to be undertaken and what timelines you take for that. Is there board approval, is everyone clear on the goals and on-board with the pilot, and are resources allocated well?
It sounds like a lot, but it is actually super easy. Platforms like ours can help you automate and operate most of these processes with just a couple of clicks. So if all is thought off, you are ready to launch your Product-as-a-Service pilot!
We can help you get started with most of these processes. We have the right partners in our ecosystem to help you set-up and launch your pilot within 2-4 weeks. Get in contact with someone in our team or schedule a demo of our platform.
Sidenote: In a previous blog we wrote about the stepping stones a company can take before entering a PaaS-model. These are; start providing services to your existing products, and to set-up a take-back mechanism for your products and see what you can do with the returned components (refurbishment, repair etc.). This provides an easier step into a business model that might change the whole way you do business.
