What is product as a service?
Product as a service (PaaS) is the concept of selling the services and outcomes a product can provide rather than the product itself. The term is a variant of the as-a-service phrasing that has grown along with the popularity of cloud computing -- like in, for example, software as a service (SaaS) -- and employs similar subscription-based pricing. With the advent of the internet of things (IoT), product as a service has garnered increased interest from manufacturers as a way to boost the profitability of their products, improve customer engagement and launch new lines of business.
In its purest form, the manufacturer continues to own and maintain the product, and the customer leases it for use or subscribes to a menu of services. In other scenarios, the customer owns the product but is not responsible for maintenance, or such responsibilities are divided according to the license agreement or warranty.
In all cases, the manufacturer uses the product as a platform for delivering additional services to the customer.
Perhaps the most familiar example of PaaS is traditional telephone service (today called landline service), especially prior to the advent of modern wireless and smartphones.
At least one telephone -- rotary dial or push-button dial -- was installed at the end of a set of wires. The telephone company provided local and long-distance calling services for a monthly service charge. A separate one-time installation charge was levied whenever service was initiated or changed. The phones were owned by the phone company and maintained by them. If a phone did not work properly, the phone company usually fixed or replaced it. The phone company addressed service outages, usually at no cost to subscribers. Any features and enhancements were the province of the phone company and usually increased the monthly service charge.
The same basic model applies to electric service and other utilities.
How product as a service works
Today, IoT, sensor technology, data analytics, personal mobile devices and cloud computing have enabled broader adoption of PaaS. Cheap and widely available wireless and internet connectivity make it feasible for manufacturers to outfit their products with sensors that indicate how a product is being used, as well as environmental factors that affect its reliability, such as temperature and humidity, or the failure of a specific part.
The manufacturer can monitor the product remotely and apply predictive analytics to the captured data to identify and address mechanical problems or find opportunities to offer new products and services to address customer needs. It can also foster the customer relationship through smartphone apps that allow the user to monitor and control certain aspects of the product, provide feedback to the manufacturer, and order new products and services.
Enterprise software, especially enterprise resource planning (ERP), customer relationship management (CRM) and product lifecycle management (PLM), are usually necessary for managing the products, services and customer relationships, and some vendors are explicitly marketing their software as PaaS platforms. Related tools, such as field service management (FSM), asset performance management and enterprise asset management (EAM) software come into play for managing and servicing products.
Advantages of product as a service
The PaaS business model allows for wide variations in the type of value and functionality being delivered to the customer. For example, a subscription model might guarantee certain outcomes, such as hours of uptime or units produced. It might specify the maintenance and repair services the manufacturer will provide. Other services have less to do with the physical product itself and more with how the data it collects can help customers in their business or personal lives and thereby increase customer loyalty.
The customer experience might also include relief from the responsibilities of owning the product, such as the burden of maintenance or the risk of losing the financial investment. But these benefits usually come at a premium.
Proponents of PaaS say it can improve customer satisfaction while boosting a manufacturer's revenue streams with monthly recurring revenue, making cash flow steadier and more predictable.
The ongoing internet connection and service agreement can also help manufacturers with CRM by establishing a closer and more lasting relationship than if the product is purchased outright.
PaaS has also been touted as a potential revenue boon because the need for aftermarket service extends throughout a product's lifecycle, with revenue that can surpass the earnings from selling the product. Advocates also claim the profit margin of service is several times that of product sales, an assertion backed by studies involving the Wharton School and consulting firm Accenture.
Additional PaaS benefits include flexibility in changing the product/service, reduced risk of user liability by not owning equipment, customer service and maintenance support, as well as the environmental impact of being able to recover, refurbish and reuse equipment.
Disadvantages of product as a service
From a user perspective, the prospect of paying "forever" as opposed to owning something and taking care of it might be a disincentive to PaaS. Users might also decide that paying for something repeatedly is simply too costly. Companies that obtain products with a high initial price, such as automobile rental firms, must invest a lot of money upfront to acquire the vehicles and then might have to increase their debt to offset the monthly payments from the rental income.
Greater flexibility in the PaaS model also means that existing and new customers can modify their service arrangements or discontinue them altogether. This is not an ideal situation from the service provider's perspective. Increased customer churn might result in lower customer retention, which can affect revenue and profitability.
Providers using the PaaS model are responsible for almost all aspects of the process, such as insurance and maintenance. Customer service might necessitate larger teams of service representatives in contact centers, adding to overhead. Adopting the PaaS model requires considerable research, especially when migrating from a product-based approach.
Examples of product as a service
In addition to the telephone company example described earlier, aircraft engine manufacturers General Electric, Rolls-Royce and Pratt & Whitney were early implementers of PaaS, charging on an hourly basis for power from their jet engines. Rolls-Royce began offering it in the 1960s using the trade name "Power-by-the-Hour." Today, the phrase describes situations where users pay for products and services only when they are being used.
Zipcar is a car-sharing and rental firm that is part of the Avis Budget Group. Members can sign up to use a vehicle when needed, for as long as it is needed. Similarly, Flexcar offers auto leasing services with a variety of subscription plans. With options like these, buying a car might not be necessary.
For many years, Xerox has provided printers and copiers on a subscription basis. Users pay for the use of the machines, and Xerox provides maintenance and support. Many other manufacturers, such as Epson and Brother, plus thousands of third-party leasing firms, offer similar leasing arrangements for printers, copiers and other office equipment.
When it comes to heavy equipment leasing, such as earthmoving equipment, forklifts and power supplies, many PaaS options are available, such as United Rentals and Caterpillar. When the equipment has completed its work, it is returned to the rental office.
For furniture rentals, many options are available for renting and rent-to-own arrangements. Key players include CORT, CasaOne, Feather, Aaron's and Fernish.
A firm called Grover makes it easy to rent consumer electronics, such as smart phones, laptops and gaming consoles, for varying subscription periods. The PaaS model here helps users have the most current equipment without buying it.
Current trends in product as a service
The market for PaaS is strong and growing steadily. It provides an important alternative to purchasing products and services, giving customers the ability to pay for what they use, then return the item when it's no longer needed.
Here are some important trends:
- Impact of cloud services. The PaaS model is greatly enhanced and expanded through the use of cloud and multi-cloud service arrangements. What makes this approach important is that combining resources from multiple cloud services helps foster a more adaptable, flexible cloud environment.
- International product-as-a-service growth. As PaaS expands globally, its value is being recognized as an important option for businesses and consumers, helping vendors expand their reach and market opportunities.
- Pricing based on usage. The telephone example noted earlier involved a fixed monthly rate for service, no matter how much it was used. Today, an important trend is pricing based on actual usage of the product or service. This can help align costs of the service with its value and efficiency.
- Use of artificial intelligence to enhance product as a service. Companies using PaaS can use AI to analyze various performance metrics, provide financial analytics and guidance on pricing, support and other factors.
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