MSG Team's other articles

10349 The Merger Modeling

The Three statement financial models and discounted cash flow models are considered to be basic from a financial modeling point of view. On the other hand, financial modeling for mergers and acquisitions is said to require a lot of skill. Merger modeling is extremely complex. This is also the reason why investment banks across the […]

9414 Two Fundamental Rules of Corporate Finance

Corporate finance is based on two fundamental rules. All tools and techniques of corporate finance are mere ways and means of implementing these rules. These rules can be found at the beginning of any and every corporate finance text book. One of these rules relates to the concept of return while the other relates to […]

9367 Floatation Costs and Investment Banking

Whenever companies need to raise money by accessing the public markets, they have to use the services of investment banks. This is because investment bankers have a readymade network which they use to sell securities to the general public. Investment banks are the central character for a company if it needs to go public. It […]

11535 The Founder’s Dilemma – Startup Finance

Entrepreneurship is all about making decisions in the face of uncertainty. Entrepreneurship involves beginning a journey that the founder does not currently have the resources to complete. For instance, when any start-up is first formed it does not have the money, assets, or human capital required to create value. It is the central job of […]

9472 Going From Financial Goals to a Financial Plan

The process of financial planning is a bit more organized compared to the traditional saving and investing approach. During financial planning, a comprehensive plan is created in such a way that the needs and goals of the individual are met at each stage. Hence, the financial plan of every individual is unique since it is […]

Search with tags

  • No tags available.

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.

  • Expensive: The biggest disadvantage of the Product as a Service (PaaS) model is that it works out to be expensive for the consumer. It creates a situation where customers are given intangible benefits of freedom and flexibility in lieu of a larger payment. However, a lot of the time, people do not want these benefits. In such cases, the intangible benefits do not add a lot of value.

    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.

  • Leveraged Business Model: From the business owners’ point of view, the biggest disadvantage of the Product as a Service (PaaS) model is the high amount of leverage that is present in the model.

    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.

  • Lower Customer Retention: Proponents of the Product as a Service (PaaS) model mention that this model has a lot of flexibility. The model allows customers to upgrade, downgrade or even switch service providers very easily. Now, from the service provider’s point of view, this works out to be a big disadvantage.

    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.

  • Credit Risk: When a company transitions from a product-based business model to a Product as a Service (PaaS) model, it assumes a lot of credit risk. Of course, companies mitigate this risk by running credit checks on people before they allow them to subscribe to the product. However, there is still a high chance that a person may subscribe to the product and not make timely payments later. The service provider needs to have an entire system in place to mitigate this credit risk. They must know the amount of credit that can be safely given to a customer as well as the mechanism to ensure fewer bad debts. Credit risks make the business model more unpredictable for the business owners making it difficult for them to plan the cash flow.

  • Operational Difficulties: Another significant disadvantage of the Product as a Service (PaaS) model is the fact that the company has to overhaul its entire operations. The company needs to have different kinds of systems in place.

    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.

  • Vulnerable to Downturns: The Product as a Service (PaaS) business model is very vulnerable to recessions and other economic downturns. This is because when people buy a product, they are under the obligation to pay for it regardless of their economic circumstances. However, a subscription can be easily canceled in the event of an economic downturn. Hence, Product as a Service (PaaS) based companies tends to witness a lot of idle assets and extremely poor cash inflow in such events. This is what makes the entire business model cyclical and dangerous.

  • Expensive Software: Last but not the least, the Product as a Service (PaaS) is dependent upon high-end software. For instance, predictive maintenance is based on data analytics and big data techniques which allow the identification of possible maintenance issues before they arise. Such software can be very expensive and can add to the overall cost of service. This is what makes Product as a Service (PaaS) even more expensive than it already is.

The bottom line is that the Product as a Service (PaaS) model also has some significant disadvantages.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

Convertible Notes and Startup Funding

MSG Team

Cash Burn Rate: The Basics

MSG Team