Circular Economy Business Models Explained

With 45% of global greenhouse gas emissions stemming from extraction of materials and manufacturing of goods, the link between production and emissions is becoming more apparent for businesses and enterprises. It is now acknowledged that transitioning to a circular economy is fundamental to a legitimate climate strategy.

The finite nature of key minerals and materials is also crystalizing with supply chain disruption proving to be a key business challenge in the last 12 months. Furthermore, the irony that finite materials such as copper are critical for combating climate change is no longer being lost in the discourse. The necessity to reduce emissions and strengthen supply chains is driving change throughout value chains as a result of the pressure businesses are putting upon one another.

What has truly changed in recent months is legislation and regulation, with the EU’s Green Deal and the recent climate bill passed in the US bringing circular economy to the forefront. As we move into 2023, legislation and regulation will directly impact how companies operate and report as circular economy disclosure becomes mandatory.

All of the above naturally beg the question: how can a company unlock value in this new and needed economy?

The circular economy holds significant value including opportunities for revenue growth, risk reduction, and cost savings. The existing linear economy does not only refer to the material flow of take/make/waste, but it also describes a linear decline of the perceived value of most products. Something new has a high value, once used it is lower, and when discarded, it is perceived to have no value. When the right circular model is selected for a given product type, value can be created through, for example:

• Revenue generation: new revenue streams, increased market access, etc.
• Risk reduction: regulatory, reputational, supply chain etc.
• Cost savings: raw material, labor, production, etc.

By exploring different circular business models, we can identify the value creation that enables profitable executions. The circular economy prioritizes different business models in the following order to allow the highest possible value of goods to be maximized and prolonged:

• product-as-a-service (e.g., leasing, sharing, subscription models),
• product life & use extension (e.g. reusing/reselling, repairing, remanufacturing),
• and resource recovery (e.g. upcycling).

Product-as-a-service keeps the product ownership and responsibility of managing the materials through the entire product lifecycle with the original manufacturer or leaser; this model has the highest likelihood of achieving circular material flows and maintaining high value.

Product life & use extension focuses on creating a second use phase and/or prolonging the useful life of a good; this model creates new or extends the valuable life of products offered at broad, accessible price ranges. Resource recovery leverages waste as an asset to ultimately create new revenue streams or material supply for new products.

Although the rationale with respect to key drivers is becoming clear, businesses continue to struggle to define circularity from their specific perspective and understand which business model best suits their product or service.

When it comes to extending the life or use of a given product, companies can take different approaches. Three common ones are explored below.

Reusing/reselling

Selling used goods has long been the main business of many retailers. This is sometimes called a ‘product to product’ model.

Recently there has been an increase of online businesses facilitating buyback and resale of, for example, used electronics and clothing. Often the secondary markets of goods can be independent, with individual sellers looking to profit from their used items, but increasingly companies are facilitating this resale. A leading global furniture brand and a top US recreation outfitter are just two examples of companies that are ‘buying back’ their used products from consumers with store credit and reselling the products at a discount. There is an inspection process to assess how worn the product is, but the process is quite consumer friendly.

The retailers are acting as a broker offering a value for the item to consumers who do not need to advertise their own item, determine the fair value of the item, and coordinate a sale with a stranger. Social media platforms and the likes of eBay make it possible to find almost anything in used condition for sale, but they lack the scale and inherent trust that comes with buying the product in used condition from the original manufacturer or retailer. As a B2B example, the construction industry leverages reclaimed brick or timber that offers a certain level of quality at a reduced cost compared to new production materials.

In either case, reducing the demand for new materials is slowing the flow of these materials into our economy and keeping others in rotation. Indeed, regulation in the buildings sector is moving towards the introduction of percentage reused or reusable materials as a requirement to achieve certain sustainability standards and certifications.

Repairing

While some repair services are still commonplace for certain high-value, durable products like cars and HVAC systems, there has largely been a decline in repair services available for consumer electronics like televisions, vacuums and home appliances. There are many contributors to this. Buying new can be more economical or convenient than the repair, and products themselves have become less repairable by design. The ‘right to repair’ movement aims to address these issues.

There is consumer demand for the repairability of durable goods, but the current barriers need to be addressed. Designing for repairability and conducting repairs is a critical component of the circular economy because it slows the consumption of materials by extending the useable life of products.

As regulation and consumer demands pressure manufacturers to improve the repairability of products, this market is positioned to grow. The automotive industry is a good example where effective legislation has dictated that parts, tools, and software must be made available to independent repairers who currently make up about 70% of the repair services market, with dealerships making up the remaining 30%.

Repair generates value for the consumer when they are able to fix their existing item and maintain satisfactory functionality for a significantly lower cost than replacing the item. Manufacturers often have repair services existing as part of a warranty that incentivizes consumer repair at no cost or at a fixed cost. There is an opportunity to scale these operations for regular repairs beyond warranties and/or supply replacement parts to independent repairers for the life of the product. Repair & maintenance contracts are also becoming more commonplace to extend product use and product life, such contracts make commercial sense. Remanufacturing

A remanufactured item is not ‘used’ or ‘second-hand’; it performs ‘as new’ but is produced at lower cost and sold at a lower price to the consumer. There are many highly successful examples of this approach, such as photocopiers and construction equipment.

A profitable remanufacture business is most fit for original products that have 1) high value, durability, and quality 2) enduring product architecture and component compatibility through progressive generations (enabling components to be upgraded, not simply replaced) and 3) ‘cores’ or valuable parts that are recoverable and have second-life potential.

With a commitment to these criteria, operations can be optimized around these attributes, driving further efficiencies. Consumers are gaining increased access to remanufactured products; in fact the largest online retailer has an entire version of their platform dedicated to ‘renewing’ (replacing any broken parts with new parts) and refurbishing products, namely consumer electronics. This is important because it shows that even if the original manufacturer is not interested in this model, third parties will profit in these markets.

An equipment remanufacturer can sell products at a significant discount to customers through dealerships. Along with that deal, a deposit is required for the ‘cores’ that incentivizes the return of the valuable components. If a customer fails to return the core, the price is equivalent to buying a new product at full price. This helps close the loop to secure materials for the remanufacturer, which minimizes the material inputs and components for the next remanufactured product.

The reuse of salvaged or used parts in a remanufactured product requires inspection and quality testing but creates a reliable and low-cost inventory of parts. In a world with increasingly complex and disrupted supply chains, an increasing number of manufacturers will find that a remanufacturing model aligns with their need to create closed loop supplies of key materials and improve the stability of material costs and availability.

While product-as-a-service and product life-extensions are increasingly popular, recovering resources and upcycling is less mature. However, getting it right might yield all the more returns.

Improvements in technology and scale are creating the opportunity to recover and reprocess more materials across sectors. As consumer and market demands for secondary (or recycled) materials increase, in part due to regulations in some industries, supply to meet this demand will increase accordingly. In order for products and their raw materials to be recovered and reused, infrastructure to collect the product and ability to access and process the valuable components must be possible.

Enablers of this are product-as-a-service or deposit models that increase the return rates via contractual agreement or economic incentive. Increasing demand for secondary sources of materials is driving some manufacturers to create their own strategic sources by entering into the recycling and reprocessing industry alone or with specialized partners. This allows companies to have control over the quality of a recovered material that may not otherwise be available in current secondary markets. It also provides an opportunity for them to sell any excess material to competitors.

There are various business models that can provide economic and supply chain advantages to companies that align with the vision of the circular economy. Because circular economy is wide-ranging, the implementation of these principles will be nuanced and requires a thoughtful evaluation to determine where it makes the most sense to apply these strategies.

It is important to take stock of your particular enterprise and its particular pressures internally and externally from regulations, customers, and competition. This is a concerted effort that is necessary to guide your organization to the correct strategic decisions.

Adopting these approaches can lower supply chain risk by independently creating material sources, increasing the efficiency of operations by embracing design standards through product generations, and improve customer retention by increasing touchpoints from a single purchase to regular transactions.

The transition to the circular economy offers ample opportunity for value creation, including first-mover advantage, as business models are applied in new and broader ways.