Benefits of Product as a Service (PaaS) Model
The Product as a Service (PaaS) business model is poised to change the business world in a big way. There are many traditional industries that are being disrupted by this model. Start-ups, as well as established corporations, are all taking steps to adopt this model. Many industries such as automobiles and electronics are likely to be fundamentally transformed by this business model. This is the reason that venture capitalists are looking to fund more companies that are built upon the Product as a Service (PaaS) business model.
Hence, it is important to understand the advantages of this model in more detail. In this article, we have listed the most important advantages of the Product as a Service (PaaS) business model.
Benefits for the Company
The Product as a Service (PaaS) business model is highly popular because of the advantage it offers to both parties. The details of the advantages have been mentioned below:
- More Eco-Friendly: The Product as a Service (PaaS) business model is more eco-friendly as compared to the traditional product-based model. This is because this model changes the revenue cycle of companies. Companies do not make money for every new unit produced. Instead, companies generate a profit from the same product. Hence, companies have an incentive to make products longer lasting. This ensures that companies utilize scarce resources in the best possible way since their incentives are also aligned with that of the overall environment.
- Higher Profitability: The Product as a Service (PaaS) business model also has higher profitability as compared to the traditional business model. This is because this model derives revenue from both products as well as services. Traditionally, services have a much larger profit margin as compared to products. Hence, if companies bundle the product and service, they also save costs related to customer acquisition. This cost advantage ensures that the bundled model produces a higher return on investment for the company.
- Preventive to Predictive Maintenance: Individual buyers are not in a position to buy sophisticated machinery which can monitor the health of their vehicle. However, large companies are able to do so.
Advances in the “internet of things (IoT)” are making it possible to collect data from various kinds of machines and then analyze such data. Hence, companies are in a position to move from preventive maintenance to predictive maintenance. This means that companies can maintain vehicles and other equipment better than the end-users. They can use these economies of scale to make the model more affordable to the end-users without actually cutting down on their profitability.
- Higher Sales: Customers are hesitant in buying products and services which are expensive and require significant outlay. However, customers are comfortable agreeing to a small monthly payment that they can stop at a short notice without taking any loan. Since there is no liability that the customer has to take up, a larger number of people are willing to experiment with the Product as a Service (PaaS) business model. The end result is that the company witnesses higher sales than they would have witnessed if they had stuck to the traditional product-based model.
Benefits for the End-Customers
- No Capital Expenditure: The Product as a Service (PaaS) business model has a lot of merit from the customer’s point of view as well. Products that are typically purchased under the Product as a Service (PaaS) model tend to be expensive and require capital outlays. It is common for customers to borrow money from financial institutions to buy such products.
With the advent of the Product as a Service (PaaS) business model, there is no need to borrow money and take on the liability. Instead of making monthly payments to the finance company, they can make the same payments to the manufacturer, and that too without any commitments or obligations! They can stop making the payment at a short notice and they will not owe the manufacturer any money since they were paying subscription fees and not loan installments.
- Flexibility: The Product as a Service (PaaS) business model provides a lot of flexibility to buyers. Buyers can upgrade or downgrade at any time without any hassles. They can also stop the subscription for a few months if they are not planning to use the asset during that time. Hence, the company is able to provide the same asset to different customers and earn revenue from them. This flexibility is the biggest reason that customers have started adopting the Product as a Service (PaaS) based business model in droves.
- Less Risk of Obsolescence: Another advantage for the consumer is that there is a lower risk of using an obsolete product. Since customers pay via monthly subscriptions, they can move on to a more advanced product or even to a different service provider if the product they are currently using is obsolete. Many customers find this to be an appealing value proposition since the service provider is bound to upgrade the product at periodic intervals.
Given the long list of advantages, it should come as no surprise that a lot of start-up companies are being built around this concept. Some of these companies have already gone on to become unicorns.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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