While 92 percent of S&P 500 companies have committed to sustainability, there is a key challenge that’s preventing some manufacturers from designing products that are reusable, repurposable, and repairable, and exploring options that could help drive widespread sustainability practices.
The problem is that many companies believe if they build long-lasting products, they’ll be setting themselves up for reduced revenue and profitability in the future. For example, if a manufacturer develops a washing machine that will last 25 years, that would obviously depress the future sale of new machines and ultimately cut into top-line revenue. No company wants that, and that’s the primary challenge we need to overcome.
We believe this problem can be addressed through a three-pronged approach that includes legislation, tax incentives, and most importantly, adopting a new, innovative approach to current business models and strategies. Let’s consider all three.
Government mandates on sustainability
Perhaps the fastest way to inspire change is through the implementation of regulations. European governments looking to promote sustainability are already evaluating legislation that would require companies to implement sustainable business practices.
In March 2020, the European Commission adopted a new circular economy action plan that includes a sustainable product policy framework and touches on topics like sustainable product design and circularity in production processes. In fact, the EU is “developing a sustainable product policy initiative, establishing a legal frame, so all products produced or placed on the EU market stay in line with technical standards for sustainability.”
So, particularly in Europe, we’re starting to see the possibility of new regulations driving the prioritization of sustainability. Making organizations act to avoid penalties may be what’s needed to get the ball rolling.
Tax incentives to drive sustainability
Another, less authoritarian approach would be to provide tax benefits to organizations that sign onto sustainability goals, set meaningful targets, and then achieve them. This would require some oversight and involve an auditing process to identify which businesses achieved their goals, but implementing such a program could provide further incentive to get companies moving. Whether we pass legislation, offer tax benefits or a combination of the two, the government will need to be involved.
New business models to align sustainability and profitability
The third and perhaps best option is to lean into the creative, entrepreneurial approach that made these businesses successful in the first place. That starts with a mindset that doesn’t perceive sustainability and profitability as being at odds, but that sees how aligning the two will create new opportunities and new revenue streams. Business strategies and processes will have to change. Production and development will have to evolve. But in doing so we can find ways of making companies both more sustainable and more profitable at the same time.
As we move further into the digital age, we see everyday products—refrigerators, HVAC systems, and even doorbells—becoming software enabled. This trend will play a significant role in driving new revenue streams as software upgrades become the focal point for the manufacturing sector.
By focusing on new features that are software-based, manufacturers can design and produce hardware that lasts for many years, and still profit by selling new features as downloadable upgrades. Better still, software is typically a high-margin endeavor, especially when compared to designing and developing new hardware products. That benefits manufacturers.
What might a software upgrade to a traditional appliance look like? Let’s go back to the washing machine as an example. Today, many consumers pay more per kilowatt hour used at midday than they pay at night. So, a manufacturer might produce a software upgrade for its machines that allows them to start automatically at midnight. This feature would benefit the consumer by lowering their energy consumption costs, thereby offsetting the cost of the upgrade. At the same time, the manufacturer can draw additional revenue from previously sold products. And all of this without the need to produce or sell an entirely new machine.
Additionally, as we hold onto products longer, more servicing will be required. Instead of selling new equipment at the five-, seven- or ten-year mark, companies can sell a variety of parts and services that could include product viability guarantees for some number of years. That services upsell would improve the customer experience and act as a recurring revenue generator spread out over the life of the product, helping to negate any revenue lost against entirely new purchases.
Those are just a couple of examples. If you’re looking for ways to incorporate sustainability into your business model, you might also look at the monetization of extended guarantees and warranties, expanding your business focus on parts and product refurbishment, and exploring how enabling your customers to repair and replace parts and products could benefit you in terms of both recurring revenue streams and cost reduction. With a little creativity and imagination, a sustainable approach to business might be more beneficial than you think.
Continued Reading: Service Is at the Heart of the Circular Economy