Seven pitfalls on the path to circular economy – this is how you avoid them

– “My colleagues and I meet many companies that want to transition to a circular business model. Sometimes they run into problems along the way but when they do, we're here to help find a solution.”

The quote belongs to Josefina Sallén, who on a daily basis works with coaching companies and organizations that want to switch to a circular economy. Here she has gathered the most common pitfalls in such a change – and offers suggestions for solutions.

Financing

In traditional, linear sales, the customer usually pays the full purchase price when buying the product. In circular business models, a company does not sell the product just once, but instead often sells a service over time, which entails that the customer does not pay the full amount when receiving the product. Instead, earnings are distributed over a longer period of time, which can cause problems with liquidity.

Solution: Revenue is the same, or even greater, over time with circular models. Revenue can also come from a lower cost base as the product upgrade cost is often lower than the production cost and many customers pay for the function of a product unit. One solution can be to start small and then gradually build up the new revenue streams. With this approach, an aftermarket and known residual values can be in place when it is time to scale up and financiers are to be courted.

Customer needs

In the past, people have bought products to solve problems. When you make the switch to selling services, you need to think about the kinds of problems the customers actually wants help with, so that you do not suddenly find that you are trying to sell something that no one needs.

Solution: Determine customers’ actual, underlying needs. What a customer needs may not be a lawn mower but rather a nice garden; what a customer needs may not be a drill but rather a painting hanging on the wall instead of leaning against the wall on the floor. Find out what the customer really needs, and think about how you can help to resolve that need in the smartest possible way. This usually creates a win-win situation for both the customer and your company.

Retailers

Linear sales are often based on a chain that runs from the producer to customer through retailers. But if companies will be selling their services directly to the customers, what happens to the retailers?

Solution: The circular economy is based on products lasting for a long time – partly through good quality, partly through repair and service – instead of being throwaways. Since retailers are often close to the customers, they can get a new role as local representatives for the producers. Another alternative is for producers leasing the products to the retailers, who in turn lease them out to the local customers with marked-up prices.

Measuring profitability

Our financial ratios are presently very focused on the number of goods sold and revenue generated from these goods. But how do you measure your profitability when you don't have rapid yield from sales, but rather longer yield from leasing? How do you know whether the new way of selling is going to last?

Solution: RISE has developed a model where the company starts out from the price they charge for their goods when they sell to customers in today's linear business model. This customer price is entered as a cost in calculations. You then determine whether it is reasonable to lease out the product for a higher amount than the cost. Once you’ve set the margins you shouldn’t encounter any major surprises. It is always good to start with a small pilot project and see in black and white whether your plan is profitable or not, without taking too big a risk.

Inertia in the internal organization

There are many things that need to change internally: accounting may need to be modified, the sales commission model will need to be reviewed, and not least, many people need to start thinking and working in new ways. Internal changes for processes and staff constitute the heaviest part of the transition.

Solution: Don't underestimate the problem. Don't let responsibility for the transition be a few percent of someone's duties. Let responsibility for the transition be the only thing a person is engaged in, because this is necessary if the transition is to be made at an acceptable speed. Don't underestimate the need for training either. It’s easy to think that everyone understands the seriousness of the transition, but increased knowledge will be needed. Not least, more people need to know about the substantial benefits such a transition can bring to the business. Making the transition is a good thing – we can make money from it”

IT problems

Most product companies have support systems for selling things, but not for leasing out products or selling services.

Solution: While there are standard programs for this type of business model, you will often need your own system. Due to this, use Excel to the greatest possible extent to gather as much data and experience as you can before ordering for your IT system.

Laws and regulations

Both businesses and political parties want a transition, but laws and regulations are not always in line with these new conditions.

Solution: Although regulations can sometimes put a spanner in the works, they can be changed. Let your voice be heard. Contact the relevant politicians and authorities and explain the situation. Team up with other companies that are experiencing similar problems to put weight behind your demands. Or turn to us at RISE. We have coaches who have helped many companies through this process, and we can share our knowledge and experience that can help you with both this and other problems that you may encounter when you make the transition. It takes time to change the rules, so you have to start early.