In nature, any waste generated is used as nutrients or ‘inputs’ for another process in the ecosystem – meaning that nature doesn’t create waste at all. Unfortunately, humans live in a different reality and haven’t been in alignment with nature for a while; hence the landfills, pollution, etc. that aren’t doing the planet or human health much good. Circular business models are innovative approaches to how we create, use, and dispose of stuff to align better with what nature intended – a closed-loop system, if you will. This end goal is known as a circular economy, a system where products and materials are continuously used without generating waste. It’s regarded as a solution that supports people, the planet, and the economy.
So how do circular business models work? The sections below summarize the 5 circular business models, what they look like in practice, their benefits, and some considerations for implementation. They help demonstrate what organizations can do to work towards a more circular economy from a practical perspective. The models are:
Product-as-service
Product life extension
Sharing Platforms
Resource Recovery
Circular Supplies
1. Product-as-service
In this circular business model, companies retain the ownership of a product and customers buy the service or outcome it provides (usually for a monthly fee). Companies are responsible for maintaining the product which is an incentive to design them to last. Customers get the benefit of using the product without having to maintain it or pay the higher upfront cost (1).
Examples
Philips introduced Circular Lighting where clients agree on the brightness (outcome-based) of a facility and pay a monthly fee which includes light fixture installation, maintenance, upgrades, and end-of-life recovery;
Rent Frock Repeat provides an online dress rental service that ships across Canada via Canada Post (service-based), offering members designer rental dresses as an alternative to buying expensive dresses that would rarely be worn;
Other examples include: Audible, Netflix, Spotify, Coursera for digital access to a broad range of books, movies, music, and courses (2).
Benefits
In this model, products are designed to last and to be used more efficiently. This decreases the amount of resources needed to create new products and during product use, and it decreases waste (2). It can even eliminate the need for a physical product altogether like we’ve seen with Netflix and Spotify, where we no longer need to buy DVDs and CDs to watch movies and listen to music. We also buy less DVD players and radios as a result – so the impact extends to complementary goods.
From a business perspective, by retaining the ownership of products, manufacturers can mitigate supply chain risks around material inputs. Another benefit is that for expensive goods there’s value in appealing to consumers that wouldn’t otherwise purchase these items outright. For digital access to content like movies, music, and books, companies reduce the unit production costs while increasing revenues (2).
Considerations for implementation
Service tasks are often not performed by the manufacturer but outsourced to third parties;
Revenues are distributed over a period of time and not at the point of sale;
There is a long-term relationship between the customer and the provider;
As the owner of the product, the provider has increased responsibilities and risks;
Customers are used to owning products so acceptance can be challenging, there needs to be communication and education (1).
2. Product life extension
This is where the life of a product is extended by durable design, reuse, remanufacture, maintenance, and repair. It may involve collecting the discarded product through organized take-back systems and reverse logistics (1). Manufacturers would need to design products that are higher quality and easy to disassemble or repair if they want to engage in this business model. However, in many cases, third-party operators facilitate product life extension. For example, companies that sell second-hand clothing or refurbish old electronics (2).
Examples
Patagonia, an outdoor clothing company, is engaged in a few circular business models. They’re best known for their take back program where customers can bring their discarded products back to their store and depending on their condition, Patagonia will repair and/or resell them. They also use recycled materials to develop new products (circular supplies business model) and if a product is beyond repair, they recycle it into a new product or use materials for industrial applications (resource recovery business model) (3);
Caterpillar, a construction and mining equipment manufacturer, has a brand called “Cat® Reman” which sells exclusively remanufactured products. They’re sold at a discount and with identical warranty as new ones. The company has found it more profitable to sell remanufactured products and especially when they are leased out instead of bought outright, making it good for business and for the environment (2).
Benefits
Like the product as a service model, because products are in use for longer it reduces the number of new resources that need to be extracted to create new products (2). It also reduces waste because it encourages long-term durability and recyclability.
For companies, adopting this business model can help foster greater customer loyalty because you’re creating longer lasting and sustainable products. It also means that you would opt for premium pricing strategy, and lower sale volumes would be offset by higher prices (2).
Considerations for implementation
The collection of discarded products can be challenging because the quantity, quality, and timing of the returned products are unpredictable;
There often needs to be strong technological expertise and knowledge of the product, especially if you’re remanufacturing;
There is a lack of incentives to design for disassembly by manufacturers, and customers sometimes favor fashion/fads over timelessness/modularity (1).
3. Sharing Platforms
This involves sharing products or assets that are under-utilized through co-ownership or co-access (e.g., housing, vehicles, tools) (4) (2). There is a famous statistic by the Ellen MacArthur Foundation that exemplified this well – and it’s that the average European vehicle is parked 92% of the time (5). With the rise of smart phones, sharing platforms are more common and allow consumers to have access to products or assets at a lower price, and for owners to gain additional income from the use of their products or assets (2).
Examples
Toronto Tool Library is a non-profit that lends tools to its community members. Members can borrow tools the same way they would borrow a book at the library, and they have over 3,000 tools available for loan. They range from everyday tools to table saws, welding equipment, and power generators. Their inventory was built primarily through tool donations which not only helps the local community but puts unused tools to good use instead of sitting in a garage or going to landfill (2);
Another well-known example is Airbnb, where consumers can rent people’s homes or rent rooms in homes. There is also Turo, an online platform that allows you to rent out your personal vehicle.
Benefits
Sharing platforms reduce the demand for new products, thereby reducing the need for new resources. From a business perspective, owners of sharing platforms generate a margin from each transaction and because they don’t own the assets, the cost to launch and scale up is low (2).
Considerations for implementation
Not all online platforms are considered circular; for example, moving from traditional brick and mortar retail stores to online stores does not improve material efficiency - it's the sharing of products or assets that does;
Regulatory issues vary depending on the business activities involved and if the online transactions are consumer-to-consumer or business-to-consumer (2).
4. Resource Recovery
This business model involves recovering discarded products and converting them into material that can be used as an input for new products (e.g., recycling, composting) (2)(4). This usually involves collection, sorting into appropriate streams, and transforming it into a finished raw material that’s sold to manufacturers (2).
Example
FREITAG, a Swiss manufacturer of bags, accessories, and clothing, “produces its bags from used truck tarpaulins, car safety belts, and old bicycle inner tubes” (2). They create value from items that would have otherwise been sent to landfill by upcycling them. Each year, they produce approximately 400,000 products from 460 tons of truck tarps, 130,000 seatbelts, and 12,000 bicycle tubes (2).
Benefits
This business model diverts waste from landfill and decreases the amount of resources extracted to create new products. It captures the residual value of resources and converts them into new forms of value (1). Waste is available as an input for little to no cost (or you could even get paid to pick it up!), and converting it to new materials can generate a profit (2).
Considerations for implementation
Complex product composition and uncertainty around the quality of discarded products can lead to technical challenges when trying to recover materials. So when companies are exchanging discarded products, they need to exchange information on availability and quality to ensure proper recovery (1);
Permitting can get in the way of some recovery practices (1);
There may be resistance from customers around buying products made from recycled materials (1); therefore, communication and education are critical;
There needs to be enough volume of discarded product and a market for the raw materials generated from it to be profitable (2).
5. Circular Supplies
This business model involves replacing the traditional inputs used to create products with bio-based, renewable, or recovered materials. Decisions to use these inputs happen at the sourcing/product development stage, and the end product should also be recyclable or recoverable at the end of its useful life (2).
Example
Tarkett is a company produces floor and wall coverings and has a brand of carpet tiles, Desso, that has cradle-to-cradle certification for their use of circular supplies. They have recyclable carpet tile, a collection program for old carpets, and a process for recycling that allows them to use recycled materials to produce new products (2).
Benefits
Companies that engage in this business model can differentiate their products and market them as sustainable, appealing to environmentally conscious consumers who would be willing to pay a premium for doing the right thing. It helps manage risks like environmental regulations and supply chain risks especially if production inputs come from politically unstable areas (2), or derived from scarce resources (1).
Considerations for implementation
Procuring circular materials from suppliers can be more costly, and suppliers may view sustainable supply chain management as an additional burden that increases risks to their competitive advantage (1);
There may be challenges integrating circular inputs from a product development perspective, and adjustments needed to ensure recyclability and reusability (1). Inputs also need to be good substitutes for traditional materials they replace, and they need to be available and affordable (2).
Circular business models vary in terms of complexity and impact, and companies can implement a few of them at once as we saw in the Patagonia example. There is still work to be done to increase their acceptance among society and the business community. We also need policy changes to help drive adoption and make it more feasible and profitable for businesses to implement them - but that's a topic for another blog post!
References
(1) Vermunt, D., Negro, S. O., Verweij, P., Kuppens, D., & Hekkert, M. P. (2019). Exploring barriers to implementing different circular business models. Journal of Cleaner Production, 222, 891–902. https://doi.org/10.1016/j.jclepro.2019.03.052
(2) OECD. (2019). Business Models for the Circular Economy: Opportunities and Challenges for Policy [Web]. https://doi.org/10.1787/g2g9dd62-en
(3) Patagonia Inc. (2018). Patagonia Post-Consumer Recycling Strategy & Upcycling Policy. https://www.patagonia.com
(4) Houston, J., St. Godard, J.-A., & Arkell, R. (2024). Circular Procurement: Strategies for Circular Criteria.
(5) Ellen MacArthur Foundation. (2015). Towards a circular economy: Business rationale for an accelerated transition. https://www.ellenmacarthurfoundation.org/towards-a-circular-economy-business-rationale-for-an-accelerated-transition?sortBy=rel
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