Can services replace products? The myths and truths
This is a guest post by Ramon Arratia, European Sustainability Director at modular carpet company InterfaceFLOR.
Product-service systems were singled out as a panacea for sustainability more than a decade ago. At Interface we put lots of effort into leasing carpet, but it didn’t take off in the mainstream market. Here is some analysis of why it didn’t work in the carpet industry and some lessons for the future.
Why it didn’t work
1. A carpet is not the whole functional unit. When you lease a car, it includes the service, road tax, etc. so the client receives the full service and doesn’t need to do anything but enjoy the service. Leasing carpet is a bit like leasing a car wheel. You need the whole service, and in the case of carpet that is office space. And there are already many people out there making money out of renting / leasing office space.
2. The residual value of carpet is negative. For a bank to finance a lease you need residual value. A £30k car after 3 years is still worth £10k-£15k. But carpet has negative residual value (cost of de-installation plus landfill or recycling). So which bank would be crazy enough finance that?
3. Unfortunately, facility managers don’t have opex [operational expenditure] budgets, they have capex [capital expenditure] budgets. If their business is doing well, they may decide to re-furbish the office. Carpet is not that business critical a thing that you need to change it in order for your business to survive. You can delay the purchase for a while. Facility managers like the ability to control the expenditure project by project.
How it can work
These are some thoughts about how we can move into a service economy rather than a product economy:
1. The concept of leasing in my view is too narrow. We should open it first to renting and then to services. There are many more ways to sell services than leasing.
2. Companies can extend their product sales into services to a certain extent. For example, in countries such as the Netherlands we charge upfront per square metre of carpet and we guarantee that the product will look good for longer. We do that by partnering with a cleaning company and doing the 6-monthly full cleaning. Another example is our field design service; we have our own designers, who help our clients to choose the right type (and colour) of carpet for the right room. That deals with the risk of carpet being refurbished prematurely because of the wrong products and colours in the wrong room. Imagine a white carpet in a heavy traffic area. These designers also help with the design for our clients such as architects, so basically we are selling knowledge and service (implicitly) added to our core business, which is selling a product.
3. But let’s face it. Product manufacturers can add more services to their core product, but it’s very difficult (and risky for them) to change their entire business model to a service organisation. Disruption very rarely comes from a successful manufacturer. If you are doing well selling stuff, you have no incentive to change. Car sharing wasn’t invented by car companies, it was invented by entrepreneurs that had nothing to lose. And then threatened car companies react. Radical service substitution will always come from someone outside the core market, someone with lots to gain and nothing to lose.
4. For more than a decade the sustainability movement has been trying to tell companies to disrupt their own business models. How clever is that? What we now need to focus on is on making companies realise that they could disrupt other sectors. Building insulation companies can reduce the demand for fossil fuels. Electric cars can disrupt petrol and diesel. Services can disrupt products. Some companies are realising that.
5. For a service to substitute a product, who the service provider is and where it sits in the value chain is key. How could Black and Decker offer a drill renting service? They don’t own the relationship with the customer. But Homebase and B&Q can. The latter can disrupt Black and Decker sales and make money out of it.
6. Services substituting more than one product are more likely to win. If you just switch a product to a service, there is little value added. It’s the value of the previous product but sold as a service. What’s much more interesting is a service that substitutes multiple products. For example, there is little value in just renting a house. But if you add an interior design service, it gets more interesting. If you add cleaning and washing, a porter, a swimming pool and gym etc. it gets even more interesting.
7. We should move on from the traditional product/service systems thinking into bundled services that solve people’s needs in an easy and cost effective way. My hopes are on the retailers; slowly they are seeing the opportunity. If companies such as Tesco sell car insurance and own mobile networks already, they are well placed for disrupting the manufacturers’ market and bundling holistic services.
Ramon blogs at www.interfaceflorcutthefluff.com/