Convertible Notes and Startup Funding
February 12, 2025
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There is no doubt about the fact that the Product as a Service (PaaS) model is being adopted by companies on a large scale. This is because of the various advantages that the model has to offer. These advantages have already been discussed in the previous article. However, just looking at the advantages provides a one-sided view of the entire model. In order to have a balanced view, one needs to understand the disadvantages as well.
In this article, we will have a closer look at some of the common disadvantages which are associated with the Product as a Service (PaaS) model.
A lot of customers find Product as a Service (PaaS) to be an expensive method. If the customer is relatively certain that they will use the product in a predictable manner, they would be better off simply buying the product.
For instance, if a car company adopts this model, then it has to incur all the costs of building a car upfront. Instead of selling this car and recovering all the money plus profit, the company will receive smaller chunks of monthly subscription payments. Hence, a large amount of capital will be locked into the business. Since the company requires a lot of capital, there is a high chance that the company may have to resort to undertaking a lot of debt. This can cause the business to become highly leveraged which is bad for the financial health of the firm in the long term.
This model allows people to subscribe to the product. Hence, it is implied that there will be a lot of churn in the market. Customers will keep switching between service providers which would make it difficult to predict the demand. Lower customer retention also means that there is a negative impact on the customer’s lifetime value. This loss offsets the increased profitability to some extent.
One system may have to deal with insurance whereas the other may have to deal with the maintenance of the product. These different tasks are generally managed by different companies in the traditional model. Under the Product as a Service (PaaS) model, all the tasks are managed by the same company which often adds to operational complexity. A lot of the time, companies are not able to manage the complexity which causes mismanagement of the entire firm.
The bottom line is that the Product as a Service (PaaS) model also has some significant disadvantages.
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