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Risks Involved in Derivative Contracts
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History of Derivatives
Derivatives may have found their way into the media in very recent times. However, they have been used by mankind for a very long time. Since the inception of time, humans have not liked the idea of uncertainty. More so, they did not like the idea of economic uncertainty. Hence, the need to offset this […]
Savings and Loan Crisis in the United States (1980’s)
The United States banking industry and the economy in general was rocked by the Savings and Loans crisis in the 1980’s. The savings and loans associations had been an important part of the United States banking system. Hence, when one out of every four savings and loans in the US went under water, the nation […]
Whenever we talk about modern start-up corporations, we assume that the company is engaged in some kind of an online business model. However, that may not always be the case. There are many start-ups that have transformed existing businesses by completely changing the business model and revenue model of underlying industries.
One such business model which transforms existing businesses is called product as a service. This model has been widely used by many start-ups to transform old asset-heavy industries such as automobiles, electronics, etc. In this article, we will have a closer look at what the Product as a Service (PaaS) business model is all about as well as the reasons behind its popularity.
The product as a Service (PaaS) business model is a new kind of business model wherein sellers convert their linear revenue model into a cyclical revenue model. A linear revenue model means that the company only manufactures the product and sells it in lieu of a one-time payment.
For instance, a car company manufactures a certain model of car and then sells it. Hence, the revenue of the company is dependent upon the number of cars that it sells in any particular period. Therefore, the model is called linear. Since the company only makes money when it sells more cars, there is always an incentive to lower the quality using what has been called planned obsolescence.
However, the Product as a Service (PaaS) business model changes this paradigm. Under the new model, the company does not simply sell its cars to customers for a one-time payment. Instead, they bundle the car with other services such as maintenance and insurance and offer the bundled product as a subscription.
Hence, instead of paying for a one-time product to buy the car, the customer uses the car as a service. This means that they use the car just like they would use their cable television, telephone, or any other such service. This transforms the one-time payment that the company is bound to receive into smaller cyclical payments. Therefore, the revenue of the company is not only dependent upon how much they produce and sell. They can continue providing services and generate revenue from sales that were made in previous periods as well.
Many traditional companies, as well as start-up companies, have realized the benefits of the Product as a Service (PaaS) business model. Hence, they want to transform their existing business into this model. This can be done in the following manner.
From a customer’s point of view, the switch to Product as a Service (PaaS) can only be justified because of the higher convenience that it offers. This should be relatively easy if the company is selling products that are targeted at millennials. It is relatively easier to convince millennials since they already tend to focus more on the experience.
For instance, if a person starts a family and needs a more spacious car, they can simply subscribe to a more spacious car without having to go through the hassle of selling the old one first. Both these points can be used by the firm to justify the premium it charges to the customers when they sell the bundled product using the Product as a Service (PaaS) model.
For example, a customer will receive a subscription bill every month. Hence, it is important for the system to generate accurate bills in a timely manner. Similarly, the systems will have to be overhauled to allow the monitoring and maintenance of vehicles on a large scale. The inability to do so is likely to hinder the transformation of a product-based business into a Product as a Service (PaaS) based business.
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