Product as a Service (PaaS)

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.

What is Product as a Service (PaaS)?

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.

How to Transform a Product-Based Business into Product as a Service (PaaS)

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.

  • Focus on Experience: The first step in transitioning from a product-based model to a Product as a Service (PaaS) based model is to change the value proposition and positioning of the company. Instead of focusing on the benefits or the superiority of the product, a company would be better off by focusing on the experience.

    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.

  • Justify the Additional Costs: Under normal circumstances, buying a subscription would cost the customer much more than it would do to simply buy the product. However, the company needs to justify the additional costs by focusing on the experiences mentioned above. For instance, in the case of a car subscription, the customer does pay a premium. However, they get two very important features added to their experience.

    1. Firstly, they are not supposed to monitor or maintain any product. If there is a reasonable amount of wear and tear in the product, the company will take care of the same as per the terms of the subscription agreement. Hence, customers will not have to spend their valuable time trying to get the vehicle fixed.

    2. Also, they will have an alternate vehicle to continue with their lives while their vehicle is being fixed. Also, a subscription offers the freedom to upgrade or downgrade a vehicle as per the user’s needs.

    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.

  • Increase Efficiency and Automation: The systems required to run a Product as a Service (PaaS) based business are completely different from the systems which are required to run a normal manufacturing business. The interactions that the customers have with a Product as a Service (PaaS) based business are much more detailed.

    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.

  • Differentiate Your Service Offering: Lastly, even if the customer has been convinced about the Product as a Service (PaaS) business model, they still need to be convinced to choose the services of a particular company. Hence, it is important to highlight some unique features which can be used to attract customers in a competitive market where multiple sellers are adopting the Product as a Service (PaaS) business model.

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