Five business models for a circular economy
One of the biggest opportunities for the industry in the circular economy is in the launch of circular business models. It is through business models that an organization generates and delivers value to customers. No wonder that the big challenge for companies today is to embed sustainability into their business.
Circular business models can be understood as models that include circular economy principles in their value proposition. This means doing business by eliminating waste generation and environmental impacts, circulating resources and products in use for longer, and regenerating natural systems.
A business model essentially has two parts: a technical part, in which value is captured and built; and a market part, in which value is delivered.
Before talking about the types of business models, let’s explore a key concept for business models — the concept of value.
How is value defined in the Circular Economy?
The value proposition is one of the key elements of a business model. The value proposition is one of the most important differentiators a company has from its competitors.
What is value in a circular economy? Business models that operate in a circular economy logic deliver much more than products and functionalities, but also benefits that go beyond the company-customer relationship. For example, they contribute to the removal of plastic from the oceans, promote the regeneration of natural capital through the use of biodegradable raw materials, reduce or eliminate the generation of waste or plastic packaging.
It is remarkable that the market, society, and government are increasingly aware of these issues. And with this new perception, the businesses that integrate circular economy strategies in their value proposition will differentiate themselves.
So what is the first step to kick-start this journey? Before starting to develop products, it is very important to make explicit what value your business model is capturing. So we should identify what value is not captured by the current business models. From there it is possible to identify the value gap and define strategies to capture value in the circular economy logic.
The circular economy's five business models
Today, circular business models can be classified into 5 types: Circular supply chain, product-as-a-service, recovery and recycling, product life extension, sharing platforms. This classification helps in understanding the different strategies and how each one generates more value from the values that were not captured. From this analysis, it is possible to define which type of model best fits your business.
Product as a service
This type of business model requires major changes in the company’s processes. It often combines features of other types of business models, such as the extension of the product’s useful life.
In this type of business model, the way in which the company relates to the client and its partners changes completely: these relationships become closer and add more value to the business. Better customer service and preventive maintenance become key processes and directly impact the profitability of the business model.
Furthermore, the customer’s relationship with the product and the company changes.
First, the customer stops being the owner: this “gives the customer less of a headache”. The customer starts to enjoy the use of the product more (experience), and issues such as maintenance, for example, are solved by the company.
Secondly, the company gets closer to the customer and starts to better understand their pains, needs, and expectations. In an increasingly competitive world, a better understanding of what to sell for has never been so important.
And how does this type of business model contribute to a circular economy? It’s all a question of synergy. Increasing product durability increases business profitability and reduces the consumption of natural resources. The end of product life becomes the company’s responsibility, allowing parts to be reused. A product can serve more than one customer more easily, thus reducing resource consumption.
Main benefits:
- More easily applied for companies working with durable goods and with high added value (but can also be applied for consumer goods)
- Brings the company closer to its market, allowing it to better understand the user’s perception of value and their pains — improving value delivery and product development (can be combined with database and data science)
- Delivers more value to the user (e.g. maintenance, differentiated service, upgrade possibilities)
- Makes the customer’s life easier as the company takes more responsibility for the product (e.g. maintenance, end-of-life)
- Greater predictability and regular revenue flow
increases the chance of customer loyalty - Improves the use of natural resources through intensified use (1 product can serve more users) and extended product life (increases company profits)
Sharing platforms
The sharing business model user experience at its core. As with the product-as-a-service model, the focus here is on one product meeting the needs of more than one person. This means intensifying product use, reducing the need to produce more — which does not mean making less profit.
Notice that there is a dissociation between production and profit — a typical vision of the industry inherited from the Industrial Revolution. And let’s face it, this is a very outdated vision.
One difference between this type of model and the product-as-a-service model is that the product is available to a group of people, who can use it at any time.
Sharing business models can be monetized or non-monetized. In this second type, the main purpose is to solve some problems of the user or society.
Main benefits:
- Most easily applied for companies working with durable goods
- Usually increases people’s accessibility to the product and can solve some problems of big cities (e.g. bike and car-sharing)
- Makes the customer’s life easier since the company takes more responsibility for the product (e.g. maintenance, end of life)
greater predictability and regular revenue flow - Increases the chance of customer loyalty
- Improves the use of natural resources through intensified use (1 product can serve more users) and extended product life (increases company profit)
Recovery and recycling
The main objective of this business model is to recover value from resources through strategies such as recycling and cascading closed or open-loop use.
In this model, reverse logistics processes and recycling partners are key to success. In addition, approaches such as industrial ecology (waste = raw material) and cross-sectoral vision can leverage its application. This is because the recovered resource cannot always be reinserted into the same value chain.
Moreover, in value chains involving end consumers, customers play a key role in returning products.
Main benefits:
- Most easily applied for companies working with consumer goods
- Reduces the ecological footprint of the product and packaging;
promotes the circulation of secondary materials while reducing pressure on non-renewable resources - Can increase employment and income generation with the reverse value chain
- Improves environmental quality by not contaminating soil and rivers
Product Life Extension
The value proposition for circular economy in this type of model is clear: recover value by extending product life.
Product life can be extended through remanufacturing, refurbishment, maintenance and upgrade, reuse. For products with higher added value, strategies such as upgrade, remanufacturing, reconditioning and maintenance are recommended. For products with lower added value, it may make more sense to reuse, as is the case of plastic packaging.
It is worth highlighting that when choosing this strategy, the product design should be oriented to it (e.g. design for remanufacturing).
Main benefits:
- Can be applied in companies that have products with high added value as in consumer goods
- It reduces the ecological footprint of the product and packaging;
promotes the circulation of secondary materials while reducing the pressure on non-renewable resources - Improves product quality and durability, delivering more value to the consumer
- Brings the company and the user closer together;
increases the chance of customer loyalty
Circular supply chains
Business models that make use of inputs that can be or have been restored, such as recycled and renewable inputs are known as circular input business models.
In essence, these models capture value from the choice of raw materials that are: recycled, renewable, biodegradable, non-toxic, and have a smaller ecological footprint.
In addition, the energy used in the value chain is from renewable sources, and the choice and combination of raw materials and components facilitate circularity strategies at the end of product life.
Main benefits:
- More easily applied for companies working with consumer goods
- Reduces the ecological footprint of the product and packaging
- Promotes regeneration of natural capital stocks
- Reduces pressure on non-renewable resources
- Improves environmental quality by not contaminating soil and rivers
- Stimulates the local economy by promoting the use of local resources
Which business model to adopt and where to start?
This is a question that depends on several factors. Factors such as the organization’s strategy, the capability of the value chain and partners, the organization’s current competencies to build the solution, the type of product, and the context in which the business operates must be considered.
Thus, it is important to conduct a strategic analysis on the factors that influence this decision, in addition to the analysis of the uncaptured value of the current business model. Only then it will be possible to understand which type of business model best embeds into your business strategy.
Another interesting strategy is the realization of workshops gathering several areas of the business. In these workshops, the participants start with a problem and identify the uncaptured value. Next, they develop solution concepts with a new value proposition, to then propose new business models. Finally, these conceptual solutions can be selected, combined, and improved to start market validation tests.
In my next article, I'll talk about the Sustainable Goals Sprint. A workshop to help your company embed the SDGs into your business strategy.