Product-as-a-service the business model of the future for manufacturers, says expert

Out-Law Analysis | 22 Aug 2016 | 9:46 am | 3 min. read

FOCUS: The latest digital technologies can help manufacturers change their business models and offer a complete end-to-end service to consumers.

Manufacturers that adopt a 'product-as-a-service' approach to their operations can develop stronger, more direct relationships with customers. At the same time the approach can help manufacturers address environmental concerns about the whole lifecycle of a product and the scarcity of some raw materials.

The opportunities of new business models and end-to-end solutions in manufacturing is something experts from Pinsent Masons, the law firm behind, will be discussing at the Financial Times Future of Manufacturing 2016 event in October.

Traditionally manufacturers' business models have been built on a 'take, make, and dispose' approach. However, this can lead to perfectly serviceable products being wasted when replaced and fails to account for a push for greater product customisation and service-orientated opportunities in the market.

A product-as-a-service approach would allow manufacturers to provide goods directly to consumers and charge them on a perpetual per-outcome basis rather than via a single upfront payment.

The business model opens the way for consumers to return products to manufacturers after they have used them, allowing the businesses to make the used assets available to other consumers. It has the benefit of allowing consumers to only pay for what they use products for and to avoid having to buy goods, often at great expense, where they might only use them infrequently.

New sensory technologies can be built in to products to monitor when and how they are used. These technologies, together with advanced data analytics software, can allow manufacturers to explore the product-as-a-service business model.

Being able to glean more information about consumers' use of their products would help manufacturers to provide associated services. For example, knowing how long a product has been used for over a period of time would enable manufacturers to schedule maintenance services or offer upgrades. Alternatively, where data shows that consumers have used products sparingly there would be an opportunity for manufacturers to engage with consumers to find out why that is and to offer them the opportunity to trial new features or iterations of those products.

Understanding what additional services consumers would be willing to pay extra for, and what services they would expect to be provided for free, will be vital for manufacturers looking to adapt their business models.

The concept of consumers sharing assets with other people has risen to prominence in recent times with the rise of businesses such as Airbnb. Policy makers and regulators have already begun looking into the potential impact of the rise of a 'sharing economy' on existing legal frameworks and consumer regulations.

For manufacturers the idea of making products that consumers would use and then return for use by others poses a number of issues they need to consider. Firstly, there are logistical and economical issues to consider concerning some items, for example washing machines and other large, cumbersome items, and how they could be put into use, recovered for maintenance and distributed to new users.

Manufacturers' revenue structure will also change if most customers pay an on-going fee rather than the upfront cost for their products. That, in turn, will require different accounting treatments.

Issues of product liability and consumer rights also need careful consideration. There might be uncertainty over who would be responsible for faults in products that have been shared between multiple users and what remedies would consumers have in the event those goods stop working or cause damage to other property.

In an era where everyday things are increasingly becoming internet-connected devices, capable of conferring data about their use or surrounding environment that might qualify as personal data, manufacturers would also need to consider how goods they produce and develop use charging models for would conform to data privacy regulations.

The digitisation of manufacturing and a move to greater service-led solutions in the industry could also result in a reshaping of industry boundaries and new competitors into the market. For example, technology businesses adept in gathering, analysing and using data, could look to use advanced technologies to turn goods into a service product.

There may be opportunities for manufacturers to collaborate with others in this regard, but selecting whom to work with could raise legal and contractual issues.

Incumbent suppliers are likely to be protective over data streams generated by manufactured devices, but they might lack the technology to make best use of that information. In contrast, innovative new service providers might have the technology to read and analyse the data and use it to operate new business models that might disrupt manufacturers' existing markets.

As a result, business models will need to be agile and enable business to adapt to a fast changing global market.

Clare Francis is an expert in commercial contracts in the manufacturing sector at Pinsent Masons, the law firm behind The opportunities of new business models and end-to-end solutions is something experts from Pinsent Masons, the law firm behind, will be discussing at the Financial Times Future of Manufacturing 2016 event in October.