Product-as-a-Service (PaaS) sounds great—recurring revenue, better customer relationships, and circular business potential. But what does it really take to operate?
In this clip from the ReCommerce Podcast, Tuomo Laine (CEO of TWICE Commerce) unpacks the key challenges businesses face when offering products as a service—from short-term rentals to longer-term subscriptions.
Topics include:
Karri: What are the main challenges that companies are facing who are offering products as a service?
Tuomo: Yeah, I think I'm not able to provide like an all-encompassing list on that, but there's always the kind of aspect of reverse logistics also included there. If there's anything that returns to you, anything physical that ends up returning to you as a seller, you have to figure out how to handle that inflow of goods and/or material. The other one is really kind of establishing some kind of a payment cycle. So if it's a short-term rental, you have to figure out maybe things like mitigating risks on the monetary side of things. So it might be that someone gets access to a good for cheaper than its main value. So that's usually part of the promise. So if I can buy access to an iPhone for 30 euros a month, it's still worth more than that. So some sellers must kind of figure out what if that person just pays for a month and never returns the device. Are there some ways of mitigating that? There's a bunch of stuff that you can do with payment processing. It can be things like tokenizing cards, making sure that you have maybe an authorized, a deposit or you can do after charges. There can be X amount of customer identification, verification, credit scoring, all of these things that are coming from the kind of fintech industry. So these are these are kind of things that come into play in short term in subscriptions. Then there's things like, hey, how do we do subscription renewals? It's an art form by itself. It's the contract length, the payment length, all of these are kind of different. And in most cases, there's even regulation related to that. I think in the UK, there's actually quite strict laws relating to subscription of durable goods. I think there was way back in the UK market, there was a thing where consumers ended up doing quite unfavorable deals in white goods category. So washing machines and all of that. So there's there's bunch of stuff that need to be taken into account in the contractual and risk mitigation and the reverse logistics side of things.
Karri: How can small businesses then kind of tackle this because it sounds like there's a lot of like more agreements and maybe waivers and all of these technology issues that you have to kind of go through compared to like regular traditional retail business models?
Tuomo: Yeah, definitely you're selling a service, you might have some service liabilities there. I think it really, to put it simply, you need some facilitative services in between. So there are software like us and bunch of others that try to help with the whole process or like specific parts of it. There's for example, our Twice Payments, handle things like deposits out of the box. There are companies that specialize in waivers, there's companies that specialize in other documents that are needed, KY, knowing your customer or customer verification like Verif and all of these other things. So I think you need to kind of go out to the market and figure out what you need and you might need to kind of take a really deep look into your actual use case and then think about do you actually need all of these services because when you go into this rabbit hole, it can be quite easy to see like red flags everywhere. All of a sudden all of your customers seem to be the ones that are out there to do a fraud or similar. So it's kind of go to the market, see what's available at the end of the day, know your customer base. If you're renting bikes in your local small town and you kind of know 80% of the customers, maybe you don't want to introduce a lot of friction for the sake that there might be one bad apple and then just like calculate it as a cost of doing business if something happens.
Karri: Is it more expensive to start this type of business than traditional resale or even selling new stuff? I imagine there is a bunch of companies that are offering like everything that you need for these traditional businesses but on the subscription and product service side, like do you need more software? Do you need more agreements and all of that to get started?
Tuomo: I don't necessarily think that it would be that much more expensive to get started but you might need a little bit different ways of financing things for example. So if you're selling stuff you kind of have to figure out how do you get the financing to buy the stuff, buy the stock and then how quickly you sell it and then from those sales and the cross margin can you finance your other parts of the operation. Now if your business is about short-term renting it might be that it takes longer time than your sales cycle would have to kind of secure cross margin because you know I bought the bike for three thousand dollars, I make a hundred bucks per rental, I have to rent it 30 times until I've made my money back and after that everything starts to be a profit. Now if I bought it for three thousand I might have sold it for I don't know three thousand six hundred or I'm not a professional in the bike cross margin market but then anyhow I would have to make six rentals to reach the same as I would with the sales but actually after that everything starts to be on my back pocket. So again unfortunately kind of falls in the bucket of it really depends on the product category because something like a power drill people necessarily don't want to own it in small apartments you can buy one for 200 bucks people might be willing to pay 30 bucks per day for it and it quite quickly it can pay itself back and then all of a sudden you have a fleet of power tools that are just generating cash for you a lot more hastily than any any sales business could.