Hi everyone and welcome back to the 10th blog post of a Circular Victory. I am really grateful to have gotten to the double digits for this project! For a while before starting my podcast, I wasn’t sure if I should or shouldn’t do it. Finally, I announced the start of the podcast and blog on LinkedIn. That way I forced myself to actually start the project and it has been an amazing journey since then! I had some really interesting conversations, met some amazing people and learned a lot more about the Circular Economy. Here’s to the next 10 episodes!
In the 9th episode, we talked about the relationship between poverty and the Circular Economy. Essentially, the Circular Economy allows everyone to achieve a better quality of life. This is because Circularity allows us to decouple consumption and waste/pollution. To find out more about this topic, have a look at episode 9 here!
This week we will be talking about the changing revenue models that come with a change to the Circular Economy.
One of the biggest cash flow changes from a Linear Economy to a Circular one, is a change from one-time payments to recurring payments. Let’s have a look at why that is.
Let us first think about how consumption tends to work in the Linear Economy. With most consumer products, we just find it in the store (be that online or offline) and pay for the product. We then take it home and use it until it is broken. At that point, we might try to repair it or we just throw it away altogether. An important point to note is that once we have bought the product, the company that manufactured or supplied the product does not interact with its usage anymore. Once we have made the payment, we are the sole owner of the product and we use it however we want it. We can talk about a transactional relationship.
In the Circular Economy, we will evolve to a different relationship between users and companies. To analyse that updated relationship, let’s have a look at the different types of business models in a Circular Economy. We talked about the five different business models in the 3rd blog post:
- Circular Inputs
- Resource Recovery
- Sharing Platforms
- Product as a Service
- Product Use Extension
Of these five business models, three are explicitly customer-facing. These are the Sharing Platforms, Product as a Service and Product Use Extension. It is in these customer-facing models that we are seeing the shift to recurring revenue. In a Circular Economy, the relationship between company and customer changes. Where we had a transactional relationship in a Linear Economy, the relationship becomes continuous in the Circular Economy.
One big shift that influences the relationship is the topic of ownership. Whereas we always see a transfer of ownership in the Linear Economy (aka “transaction”), companies will aim to retain ownership in a Circular model. They want to do this, so that they can retain control over the product. By ensuring proper usage and maintenance of the product, they can maximize the value.
Let’s have a look at the Product as a Service model for example. In this model, we see that products are offered as a service rather than just a product. In this podcast, we already talked about the Lighting as a Service model by Philips. This is a prime example of this PSS model. They no longer sell their lights (= transaction), but rather provide the service of having lights. In order to get this service, companies pay a monthly fee to have the lighting they need. This becomes a recurring payment and ongoing relationship between Philips and the user (= continuous).
Advantages of recurring revenue
From a business perspective, recurring revenue has several advantages. The first and most obvious advantage is predictability. You know the number of monthly payments you will receive and for what amount. In comparison, a transactional system where you only know historical data is a lot more uncertain. You might have a great month with lots of sales one month, but a bad month the next. Recurring revenue gives you a level of certainty that will allow you to better calculate and plan for the future.
Tied in with this, you also get a lot more data points in a recurring revenue model. These are both financial data points as well as customer interactions. Because a monthly payment needs to be collected, you can check in with your customers on a much more frequent basis. This will allow you to develop a better relationship with users. From this ongoing relationship, you can also collect better information about what your customers expect to see in your product.
Lastly, a recurring revenue model can also help you to better calculate the acquisition cost and lifetime value of a client. This is a consequence of the larger amount of data you gather. Having better information about these two measurements will allow you to develop a more detailed and clear business model.
In today’s blog, I wanted to show that the Circular Economy is not just about sustainability at all costs. An evolution to a Circular Economy also allows to build stronger business models. The value of an ongoing relationship with your users should never be underestimated.
We also see that this sustainable evolution also works together with other evolutions we see in the world. For example, the increasing importance of data in decision making and forecasting. This is a trend that we have increasingly seen throughout a lot of different industries. The synergy between the Circular Economy and data collection and analysis is another one of the reasons that I really believe that the Circular Economy will become the mainstream way of doing business.