Product-as-a-Service or Santa Claus: Which Do You Believe in More?

Konstantin Yuganov/Adobe Stock

With the holiday season upon us, we baby boomers sometimes become nostalgic about the era before online shopping, same-day delivery and reverse logistics. Those were the days when, throughout the month of December, Santa Claus was the only major brand and end-to-end supply chain in town. But that was then....

Santa Claus Inc.

At that time, non-standard, hand-written orders had to be placed well in advance and conveyed to Santa by US mail. Stockouts of in-demand (that’s right, not on-demand) products were commonplace, resulting in unfavorable customer NPS (no product in stores) ratings — and lots of tears. And worse, deliveries were made — on that one appointed day of the year — by just one weird, elderly delivery man flying a sleigh pulled by reindeer. Remember, this was before Federal Express, not to mention delivery drones.

Still worse, this scary old man actually entered your home in the middle of the night! While this intrusion (technically, a felony) may now seem to millennial parents like a primitive, analog precursor to Amazon Key, I can assure you that, at that time, our parents were not the least bit amused. What's more, their yearly ordeal did not end there--because, with Santa, all purchases were final! There were no returns. And all of those unwanted toys would eventually, decades later, be tossed in a dumpster when weary, but relieved, empty nesters downsized from their supersized McMansions.

Now, fast-forward through Home Alone, disco, Amazon, iPhone, Straight Outta Compton, gluten-free, vaping and bitcoin all the way to the here and now, and ask: What kind of world are we living in, anyway? This question could be answered in millions of ways. However, my answer would be that we, as consumers, are now transitioning into the new world of product-as-a-service (PraaS). Let’s see if you agree.

Product-as-a-Service (PraaS)

If you look carefully, you may begin to notice the signs, like a few scattered snowflakes on a cold winter’s night. Have you noticed that returns have become much easier to make than in the past (e.g., no questions asked)? Or you make a series of returns just to fine-tune your product selection? No problem. As we approach 2018, we are waking up to the reality that PraaS has quietly begun transforming the B2C landscape — or so I believe.

B2C PraaS is very similar to B2B “servitization,” whereby manufacturers do not sell an asset (e.g., a Rolls Royce jet engine, a Siemens MRI machine) to their business clients as a one-time capital expenditure, but rather enter into a service agreement with their clients to deliver outcomes (e.g., some number of hours of continuous flight, some number of MRIs without any sudden or significant downtime) for a recurring fee. Yes, the model is much the same as Xerox copiers, and the manufacturer’s objective is to lock in recurring revenue streams and garner higher margins.

In PraaS, as with “servitization,” the focal point of value between buyer and producer/brand shifts from the transactional sale of the product itself to the ongoing customer relationship (by the way — notice we said producer/brand and not just seller). For the producer/brand, value maximization is now strongly linked to sustaining a continuing, positive relationship with the customer to prevent defection and ensure a stream of future product sales. One could say the focus is on encouraging good old customer loyalty, but one could also view it as a “soft lock-in” in today’s digital supply chain and retail channel world.

While PraaS in the B2C world is similar to B2B “servitization,” it is really very different. The world of PraaS consists of an unimaginable number of different consumer products purchased by, delivered to and consumed by hundreds of millions of consumers. What’s more, all of this activity occurs across a myriad of different, digitally supported purchasing and delivery channels that, making matters more complicated, are continually evolving, while producers and sellers are continuously shifting their products across different channels.

In this complex environment, brand value can easily get diluted or destroyed — and meaningful, “co-creative” relationships with valuable customers lost. Rather than allowing themselves to be disintermediated from their customers and place their products and brands into a low-margin, commodity death spiral, many producers/brands have found that they can harness this new environment and take control of their own destinies (or at least try to). To do that, they are reinventing the consumer model — that is PraaS.

As noted earlier, customer loyalty, customer intimacy, customer relationship management, customer lifecycle value have been around for a long time, certainly predating the internet. But PraaS is much more than just a marketing concept or profitability model — it is whole paradigmatic shift in the economic relationship between consumers and producers/brands.

Here is some of what drives PraaS:

  • Complex channels threaten to disintermediate consumers from producers/brands and turn products in low-margin, one-off transaction commodity products
  • Digital ubiquity creates new opportunities for producers/brands to track, analyze and interact and communicate with their customers.
  • Short product cycles mean new products, with new features and functions (driven by short customer feedback loops) rapidly shift consumer attention from “what they have now” to “next and best”
  • Low production costs means the cost of designing and manufacturing a consumer product makes up a lower percentage of the total landed cost of the product provided to consumers. Lower product production cost can also lead lower product quality and faster failures (even a planned obsolescence).
  • E-commerce drives out both time and cost from the order and delivery cycle and shifts the financial transaction to an earlier point in the cycle, with cash flow sometimes occurring even before a product is shipped from a manufacturer.
  • Reverse logistics is becoming less of a merely tolerated “necessary evil” to be minimized and more of an essential component of a producer/brand’s value proposition and value. Combined with “remarketing” and IoT, it closes the loop in the emerging “circular economy.”

So is it possible to connec all the dots and conclude that PraaS is real? That is the question.

Product-as-a-Service or Santa Claus: Which Do You Believe in More?

When I look at the empty milk glass and the cookie crumbs on the floor, and I add it all up and factor in my own personal experiences and the experiences of people I know, I see PraaS — or I think I do. Though the PraaS paradigm has not been really articulated by producers/brands in their marketing — it is a kind of still latent, emerging phenomenon — I’d wager to say it is real, at least for certain producers/brands that are embracing it, or at least meandering into it. But I’m still not 100% sure.

So I find myself this holiday season sentimentally reminiscing about Santa Claus and days gone by, illogically juxtaposing Santa and PraaS and wondering if PraaS is real or not (remaining mindful that you always have to be careful of what you ask for).

But whatever the case may be — and regardless of whether you believe in Santa, PraaS or something else — I want to wish all Spend Matters readers and subscribers a satisfying holiday close of 2017 and many happy returns.

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First Voice

  1. Paul Hobin:

    Sure it’s real! And actually well entrenched in some places I’d say. How long have individual consumers been leasing cars? Praas! And the replacement of all kinds of disks – music, video, game – with downloads is also Praas. I own my computer, disk players (yes, I’m old fashioned), GoPro, smartphones and printer, but they are also partially Praas as their functionality periodically updates and changes the product that’s been delivered. One way that B2C and B2B Praas differ is in the power of the receiver. Ironically, consumers may fare better in the long run. One of the pitfalls we in procurement encounter unless we’re very careful, particularly those working for large, powerful organizations, is the ability to compete and negotiate ourselves into such “wonderful” low cost contracts that necessary quality is not there. When that happens in a Praas scenario it’s likely to be more damaging than when the product has been acquired as a one-time capital asset purchase. It will be interesting to see how Praas evolves differently to service businesses and consumers.

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