Disadvantages of Product as a Service (PaaS) Model

There is no doubt about the fact that the Product as a Service (PaaS) model is being adopted by companies on a large scale. This is because of the various advantages that the model has to offer. These advantages have already been discussed in the previous article. However, just looking at the advantages provides a one-sided view of the entire model. In order to have a balanced view, one needs to understand the disadvantages as well.

In this article, we will have a closer look at some of the common disadvantages which are associated with the Product as a Service (PaaS) model.

• Expensive: The biggest disadvantage of the Product as a Service (PaaS) model is that it works out to be expensive for the consumer. It creates a situation where customers are given intangible benefits of freedom and flexibility in lieu of a larger payment. However, a lot of the time, people do not want these benefits. In such cases, the intangible benefits do not add a lot of value.

  A lot of customers find Product as a Service (PaaS) to be an expensive method. If the customer is relatively certain that they will use the product in a predictable manner, they would be better off simply buying the product.

• Leveraged Business Model: From the business owners’ point of view, the biggest disadvantage of the Product as a Service (PaaS) model is the high amount of leverage that is present in the model.

  For instance, if a car company adopts this model, then it has to incur all the costs of building a car upfront. Instead of selling this car and recovering all the money plus profit, the company will receive smaller chunks of monthly subscription payments. Hence, a large amount of capital will be locked into the business. Since the company requires a lot of capital, there is a high chance that the company may have to resort to undertaking a lot of debt. This can cause the business to become highly leveraged which is bad for the financial health of the firm in the long term.

• Lower Customer Retention: Proponents of the Product as a Service (PaaS) model mention that this model has a lot of flexibility. The model allows customers to upgrade, downgrade or even switch service providers very easily. Now, from the service provider’s point of view, this works out to be a big disadvantage.

  This model allows people to subscribe to the product. Hence, it is implied that there will be a lot of churn in the market. Customers will keep switching between service providers which would make it difficult to predict the demand. Lower customer retention also means that there is a negative impact on the customer’s lifetime value. This loss offsets the increased profitability to some extent.

• Credit Risk: When a company transitions from a product-based business model to a Product as a Service (PaaS) model, it assumes a lot of credit risk. Of course, companies mitigate this risk by running credit checks on people before they allow them to subscribe to the product. However, there is still a high chance that a person may subscribe to the product and not make timely payments later. The service provider needs to have an entire system in place to mitigate this credit risk. They must know the amount of credit that can be safely given to a customer as well as the mechanism to ensure fewer bad debts. Credit risks make the business model more unpredictable for the business owners making it difficult for them to plan the cash flow.

• Operational Difficulties: Another significant disadvantage of the Product as a Service (PaaS) model is the fact that the company has to overhaul its entire operations. The company needs to have different kinds of systems in place.

  One system may have to deal with insurance whereas the other may have to deal with the maintenance of the product. These different tasks are generally managed by different companies in the traditional model. Under the Product as a Service (PaaS) model, all the tasks are managed by the same company which often adds to operational complexity. A lot of the time, companies are not able to manage the complexity which causes mismanagement of the entire firm.

• Vulnerable to Downturns: The Product as a Service (PaaS) business model is very vulnerable to recessions and other economic downturns. This is because when people buy a product, they are under the obligation to pay for it regardless of their economic circumstances. However, a subscription can be easily canceled in the event of an economic downturn. Hence, Product as a Service (PaaS) based companies tends to witness a lot of idle assets and extremely poor cash inflow in such events. This is what makes the entire business model cyclical and dangerous.

• Expensive Software: Last but not the least, the Product as a Service (PaaS) is dependent upon high-end software. For instance, predictive maintenance is based on data analytics and big data techniques which allow the identification of possible maintenance issues before they arise. Such software can be very expensive and can add to the overall cost of service. This is what makes Product as a Service (PaaS) even more expensive than it already is.

The bottom line is that the Product as a Service (PaaS) model also has some significant disadvantages.