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How circularity is reshaping value propositions in capital equipment

Dec 30, 2022 | Public | 0 comments

Learnings from 23 companies navigating the transition to the circular economy.

As more companies explore and implement circular business models, such as lease/rental models, pay for performance and “Everything-as-a-Service” (XaaS), they are discovering a range of unexpected challenges and opportunities for how circularity is affecting all aspects of their traditional business models. This year, the U.S. Chamber of Commerce Foundation’s Capital Equipment Coalition North America brought together dozens of leaders from 23 companies to compare notes on what they are seeing and learn from each other on successfully navigating the transition to the circular economy. Here are a few key themes from the discussions.

Author’s note: These insights are derived from roundtable discussions held in April and May through the U.S. Chamber of Commerce Foundation’s Capital Equipment Coalition North America initiative — a multi-stakeholder effort to reduce the environmental footprint of durable goods through information sharing and collaboration.

Theme 1: Customers are interested in circular offerings for both financial and sustainability reasons, but the relative importance of each varies based on size and geography.

In terms of what is bringing customers to the table for circular product offerings, companies reported that their customers are interested in both the financial and sustainability benefits of circularity, but that these are prioritized differently depending on how large the company is and where they are located.

Smaller companies were seen as more interested in the financial savings that circular offerings can provide, perhaps because they are less likely to have sustainability or circularity goals that stakeholders are holding them accountable to meet. In contrast, larger companies, particularly Fortune 500 companies with climate-focused shareholders, emphasized the importance of sustainability and greenhouse gas (GHG) emissions reductions. These companies are looking to circular solutions to help them meet these goals, although it was noted that the ability to measure and report on these impacts is essential to supporting this value proposition.

Geography was also a factor in how companies prioritize and value circularity. European Union regulation is driving companies in Europe to ask for more circular offerings and, in some cases, require remanufactured or refurbished goods in Requests for Proposal. In contrast, companies in the U.S. may not be as aware of or interested in circularity, and many are in the early stages of exploring XaaS models — which allow the original manufacturers to maintain product ownership and lifecycle responsibility — or other circular offerings.

During one of the most competitive labor markets of all time, companies leading on circularity may have an edge in attracting the best talent and can use their focus on circularity and sustainability to build morale internally.

Theme 2: Companies are encountering a range of challenges as they shift from selling traditional linear models to providing customers with new circular offerings.

  1. Communicating the benefits of circularity and overcoming misperceptions about remanufactured vs. new products: Communicating the benefits of circularity in a defensible, quantifiable and easily understood way remains a common challenge. Existing views can make this communication especially challenging. For example, while perceptions are already beginning to shift, the stigma of a “used” product can still be a factor for some buyers. To address this challenge, companies are working out new ways to use differential pricing, better warranties and quality testing to reassure customers. Additionally, digital product passports, which enable customers to link to comprehensive data and information about an asset’s production, attributes, usage and value, may help customers really understand what they are getting with circular business models.
  2. Creating new models that won’t cannibalize existing businesses: The flip side of removing the stigma of used products is that refurbished or remanufactured products can be seen as creating competition and potentially undermining demand for new products. To help address this concern, companies are taking advantage of differentiated secondary markets and partnerships with third-party remanufacturers to maximize the value that they can get from their full portfolio of products, balancing new and refurbished items.
  3. Adapting the compensation structure for sales staff to accommodate differences between circular and linear business models: Companies reported this is a critical area to address and additional focus and innovation are needed. To help move past resistance from sales staff, it can be helpful for them to understand that some customers are requiring circular business models for new bids, while other companies have corporate KPIs around circular sales that can help motivate sales teams.
  4. Training staff to move from selling a product to selling an outcome: Selling outcomes requires a different conversation with the client and, in some cases, salespeople need to understand the client’s business in a different way, considering how the client’s longer-term goals could align with circular models. Companies are addressing this by bringing in people from outside the organization to lead trainings or new sales staff to complement the capabilities of existing teams. Sales teams may also benefit from training that helps them adapt their messages based on who they are talking to in an organization: Whether it is IT, sustainability teams, sourcing teams, or others; not all parts of an organization may be equally versed in principles of sustainability or even their own company’s sustainability goals.
  5. Managing shareholder expectations about how revenue and profit patterns shift with circular business models: Investors have notably punished companies that have switched to XaaS models because of the initial perception of a loss of revenue as it transitions from a single sales transaction to a recurring revenue model, and companies adopt pay-per-use, subscription or other “as-a-service” models. Autodesk is an example of a company that was initially dropped by investors, but once investors recognized the value of the subscription model it has been celebrated.

Theme 3: There are at least eight potential elements of value propositions for circular offerings.

What are customers finding most compelling in considering circular products and services? Companies reported these seven aspects of circular offerings were of greatest interest to the customers they spoke to, with each company bringing their own prioritization of these elements to the relationship.

  • Cost savings: Especially for smaller companies and those in the U.S., the potential of circular business models to lower cost for the same product, service or performance outcomes is a key driver of interest. Cost savings may be realized through a mix of new and refurbished assets, higher retained value through and after the asset’s useful life, lifetime extension enabling more value to be delivered by the same asset, and business models enabling rental or pay-per-use, which can lower overall and per unit costs.
  • Reduced risk: Circular business models can reduce the customer’s risk in a range of areas, including cost, performance, maintenance, finance and end-of-life management. In many circular business models, the responsibility for managing the risks in these areas stays with the service or product provider rather than transferring to the customer at the point of sale, changing the balance of risk and responsibility.
  • Improved outcomes and performance: When companies only pay for the outcomes or performance that they want and need, this inevitably provides better value for their investment. When customers and suppliers create contracts for circular products or services that focus on the delivery of these outcomes, this aligns all parties’ incentives and can enable more efficient ways to achieve the agreed outcomes.
Electronics factory workers assembling circuit boards by hand on assembly line.
  • GHG emissions reductions: For customers with GHG emissions reduction commitments, the ability of circular business models to quantifiably reduce GHG emissions is very important and represents a tangible benefit to clients and vendor partners. This reduction can come from various aspects of circular products and services, such as recycled parts or materials, refurbished items (which have a lower embedded carbon footprint), lease or sharing models where companies distribute the GHG emissions footprint across multiple players, and lifetime extension models where the allocated GHG emissions per use are reduced by extending the life of the asset.
  • Supply chain resilience: As companies face component shortages, there is an opportunity to further integrate circularity into supply chain resiliency strategies. In cases where there are shortages, companies can use circularity to mitigate and show business value.
  • Keep pace with innovation: Shifting away from ownership models to outcome or access-based models can enable producers to provide their customers with access to the latest technology more seamlessly than in the past, when the burden of keeping up with innovation was on the customer. In circular models, producers are incentivized to keep all their assets updated and deploy the latest, most efficient technology in order to deliver the most shared value.
  • Circularity as a business driver: For companies publicly leading on the transition to circularity, the ability to tell this story and lead by example become part of the value proposition and can be the basis to build and strengthen relationships and win new deals.
  • Attract and retain employees: During one of the most competitive labor markets of all time, companies leading on circularity may have an edge in attracting the best talent and can use their focus on circularity and sustainability to build morale internally, helping to retain talent as well.

It was clear that across the technology and manufacturing sectors, there is growing interest in circularity and circular business models.

Theme 4: Companies providing circular products and services are still learning and figuring out their own ways to optimize value from circularity.

When shaping the value proposition for customers, producers and companies providing circular business models can optimize their own value from these offerings.

  • Circular business models can help increase customer retention: While the amount of time suppliers and customers spend together may shift from pre-sale (as in a linear, ownership model) to post-sale (as in a circular model), this creates an opportunity to strengthen and deepen customer relationships. The ongoing engagement provides more chances to understand and meet customer needs and refine value delivery, all supporting long-term customer retention.
  • “Refurbished assets complete our portfolio”: In discussing the risk of cannibalizing new product sales with used refurbished assets, companies pointed out that this creates a false tension: there can only be one portfolio and the company must figure out how to optimize the value of the whole portfolio in a circular economy. Some companies saw the addition of used or remanufactured assets as adding depth and complementary to their portfolio, increasing value for them and their customers rather than threatening it.
  • Lower inventory and service costs: Companies that take back assets from customers are finding this can allow them to buy and hold fewer spare parts for assets than was previously necessary, lowering their costs over the life of the asset, which can be many years. Companies are coming to see assets out in the marketplace as a form of “spare parts storage” that they can rely on to meet repair and service needs over time. One challenge in tapping into this value can be that the value is realized across divisions or cost centers across a company, so departments need to collaborate.
  • Companies need to look at both the direct and indirect benefits of circularity: The above bullet, which addresses how companies can lower inventory costs as they increase asset recovery, is one example of the need to consider the indirect benefits of circularity in addition to the direct ones. Identifying these indirect benefits is essential to strengthening the internal value proposition for circularity and will continue to emerge as companies make the transition.

Despite the various motivations, priorities and value propositions companies have around circularity, it was clear from the roundtable discussion that across the technology and manufacturing sectors, there is growing interest in circularity and circular business models. Whether companies seek cost savings, working to meet sustainability goals, deepen customer relationships or strengthen their value proposition, circularity is driving new ways of thinking to accomplish these goals. If there was one thing everyone agreed on, continued dialogue and collaboration are key to everyone’s success.

Acknowledgements: The U.S. Chamber of Commerce Foundation thanks the CEC members who participated and invited peers and collaborators to join the discussion. The U.S. Chamber Foundation also thanks CEC facilitators Ellie Moss and Kristina Gerken for leading the discussion and capturing the insights in this document.

The post "How circularity is reshaping value propositions in capital equipment" appeared first on Green Biz

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