Case study: Circular design & product-as-a-service — a leading company's implementation and lessons learned

Philips' decision to shift from selling lighting hardware to offering Light-as-a-Service (LaaS) across its European commercial portfolio has become one of the most widely referenced examples of circular design in practice. By 2025, the company's circular revenue streams, including LaaS, refurbished medical equipment, and take-back programmes, generated over EUR 3.1 billion annually, representing approximately 17% of total group revenue (Philips, 2025). The Schiphol Amsterdam Airport contract alone, which replaced 3,700 luminaires under a pay-per-lux model in 2015 and has since been renewed twice, demonstrated that retaining product ownership could reduce material consumption by 35% and energy use by 50% over a 10-year period compared to a traditional procurement cycle (Ellen MacArthur Foundation, 2024). For executives evaluating circular business models, Philips' decade-long implementation offers quantifiable evidence of what works, what creates friction, and what structural changes are required to make product-as-a-service commercially viable at scale.

Why It Matters

The European Union's Circular Economy Action Plan, updated in 2024, explicitly identifies product-as-a-service as a priority business model for reducing resource extraction and waste generation. European manufacturers consume approximately 8.1 billion tonnes of raw materials annually, yet material circularity rates remain below 12% across the bloc according to Eurostat (Eurostat, 2025). Traditional linear sales models incentivise planned obsolescence and rapid replacement cycles because manufacturers profit from each new unit sold. Product-as-a-service reverses this incentive: when the manufacturer retains ownership and charges for performance outcomes (lumens delivered, hours of uptime, diagnostic scans completed), durability, repairability, and energy efficiency directly improve the provider's margins.

The financial case has strengthened considerably since Philips began experimenting with circular models in 2012. Recurring service revenue now carries gross margins of 42 to 48% across Philips' LaaS contracts, compared to 28 to 33% on one-time hardware sales (Philips, 2025). Customer retention rates on service contracts exceed 90% at renewal, creating revenue predictability that hardware sales cannot match. For capital-intensive industries facing volatile commodity prices, the shift from transactional sales to performance contracts offers both margin protection and a hedge against raw material cost swings.

The regulatory tailwind is accelerating. The EU's Ecodesign for Sustainable Products Regulation (ESPR), entering force in phases from 2025, will require Digital Product Passports for categories including lighting, electronics, and textiles by 2027. Companies already operating circular models with full material traceability and take-back infrastructure are positioned to meet these requirements at lower incremental cost than competitors starting from scratch.

Key Concepts

Pay-per-outcome pricing: Philips' LaaS contracts charge customers per lux-hour delivered rather than per luminaire purchased. Schiphol Airport pays a fixed monthly fee for guaranteed light levels of 500 lux at desk height across terminal buildings. Philips retains ownership of all hardware, is responsible for maintenance and replacement, and recovers luminaires at end of contract for refurbishment or material recovery. This model aligns incentives: Philips benefits from designing longer-lasting, more energy-efficient fixtures because every avoided replacement and every kilowatt-hour saved directly improves contract profitability.

Modular design for disassembly: To make product-as-a-service economically viable, Philips redesigned its commercial luminaires for easy disassembly and component reuse. The company's circular lighting range uses snap-fit connections instead of adhesives, standardised LED modules that can be upgraded without replacing the housing, and materials selected for recyclability. A typical circular luminaire can be disassembled into its constituent components in under 90 seconds, compared to 8 to 12 minutes for a conventionally designed fixture (Philips, 2025). This design philosophy reduces refurbishment costs by 40 to 55% and enables 85% of components by weight to be reused across multiple contract cycles.

Reverse logistics and material recovery: Philips operates dedicated reverse logistics hubs in Turnhout (Belgium) and Eindhoven (Netherlands) that process returned products from LaaS contracts, warranty returns, and voluntary take-back programmes. In 2024, these facilities processed over 1.2 million product units, recovering 14,000 tonnes of materials including aluminium, copper, steel, and rare earth phosphors (Philips, 2025). The company's closed-loop recovery rate for commercial lighting products reached 78% in 2024, meaning 78% of materials from returned products were reused in new products or sold as secondary raw materials rather than sent to waste.

What's Working

Philips' Schiphol Airport contract has served as the proof-of-concept that unlocked broader adoption. The original 2015 agreement covered terminal lighting and demonstrated energy savings of 50% compared to the previous fluorescent installation, while reducing the airport's lighting-related carbon emissions by approximately 2,100 tonnes of CO2 annually. The contract was renewed in 2020 and again in 2024, each time expanding scope to include additional terminal areas and connecting corridors. Schiphol's facility management team reported that the LaaS model eliminated the need for in-house lighting maintenance staff (previously 4 full-time equivalents), freed capital that would have been allocated to lighting procurement (approximately EUR 2.8 million per replacement cycle), and delivered consistent light quality with fewer than 12 reported outages per year across 3,700 luminaires (Schiphol Group, 2024).

The success at Schiphol catalysed adoption by other large European facility operators. By 2025, Philips had active LaaS contracts with over 350 commercial clients across 14 European countries, including contracts with the Port of Rotterdam (1,200 industrial luminaires), the Rabobank headquarters in Utrecht (2,400 office luminaires), and the Bordeaux metropolitan transit authority (8,500 street and station luminaires). Total installed base under service contracts exceeded 850,000 luminaires, making Philips the largest LaaS operator in Europe by deployed units (Philips, 2025).

Signify, the Philips lighting spin-off that operates the LaaS business, extended the circular model beyond lighting into adjacent product categories. Its Interact IoT platform, embedded in LaaS installations, collects occupancy, energy, and environmental data from connected luminaires. This data layer has become a standalone revenue stream: clients pay EUR 0.50 to EUR 2.00 per luminaire per month for analytics dashboards that inform space utilisation decisions, HVAC scheduling, and cleaning frequency optimisation. The analytics add-on increases contract revenue by 8 to 15% while strengthening customer lock-in through data dependencies (Signify, 2025).

IKEA pursued a complementary approach with its furniture leasing pilot, launched in Switzerland in 2020 and expanded to 8 European markets by 2025. The programme allows commercial customers to lease office furniture on 36-month contracts, after which IKEA collects, refurbishes, and re-leases the products. IKEA reported that refurbished furniture retains 65 to 75% of its original retail value at second lease, and that the programme has diverted over 12,000 tonnes of furniture from landfill since launch (IKEA, 2025). The model works particularly well for standardised product lines (desks, shelving, storage units) where demand for refurbished items is strong, but has proven less effective for soft furnishings and textiles where hygiene perceptions limit second-life acceptance.

What's Not Working

Customer acquisition costs remain the primary commercial challenge for product-as-a-service models. Philips reports that the average sales cycle for a new LaaS contract is 9 to 14 months, compared to 2 to 4 months for a traditional lighting procurement. The longer cycle results from several factors: procurement teams are unfamiliar with service-based contracts and default to comparing unit prices rather than total cost of ownership; legal departments require extensive review of asset ownership clauses, insurance responsibilities, and end-of-contract terms; and finance teams must reclassify spending from capital expenditure to operating expenditure, which affects budgeting and financial reporting. Philips estimates that customer acquisition costs for LaaS are 2.5 to 3.5 times higher per euro of first-year revenue than for equivalent hardware sales (Philips, 2025).

Accounting treatment creates friction on both sides. Under IFRS 16, customers that enter long-term service contracts may be required to recognise right-of-use assets and lease liabilities on their balance sheets, partially negating the "off-balance-sheet" appeal that originally attracted some clients to the model. Philips has responded by structuring contracts with performance-based variable components that fall outside the scope of IFRS 16 lease classification, but this requires contract-by-contract structuring that increases legal costs by EUR 15,000 to EUR 40,000 per agreement (Deloitte, 2024).

Scaling reverse logistics to match growing installed base volumes has proven operationally complex. Philips' Turnhout facility was designed to process 800,000 units per year but handled over 1.2 million in 2024, creating backlogs of 6 to 10 weeks during peak return periods (Q4 contract renewals and facility renovations). The company has invested EUR 28 million in expanding processing capacity and automating disassembly workflows, but the economics of reverse logistics remain marginal for lower-value product categories. Philips found that products with an original manufacturing cost below EUR 15 per unit generate negative net value in the return-refurbish-redeploy cycle after accounting for transport, inspection, cleaning, and repackaging costs.

Material degradation across multiple use cycles limits the number of times components can be reused. LED driver electronics, which represent approximately 30% of a luminaire's value, show failure rates that increase from 2% per year in the first cycle to 5 to 7% per year in the third cycle, making third-cycle reuse uneconomic for mission-critical installations. Philips currently targets two full use cycles (typically 7 to 10 years each) before channelling components to material recycling rather than reuse.

Key Players

Established Companies

Signify (Philips Lighting): Largest European LaaS operator with 850,000+ luminaires under service contracts; generated EUR 3.1 billion in circular revenue in 2024.

IKEA: Expanded furniture leasing to 8 European markets; refurbishment programme diverted 12,000 tonnes from landfill since 2020.

Schneider Electric: Offers electrical equipment-as-a-service for commercial buildings, including power distribution and building automation systems under performance contracts.

Rolls-Royce: Pioneer of "Power by the Hour" for aircraft engines, the original product-as-a-service model that has operated since 1962 and now covers over 4,500 engines globally.

Startups

Grover: Berlin-based electronics subscription platform offering consumer and business tech on monthly rental plans with end-of-life refurbishment and recycling.

Bundles: Dutch startup offering home appliance subscriptions (washing machines, dishwashers) with usage-based pricing and manufacturer take-back at end of life.

Lena the Fashion Library: Amsterdam-based clothing library enabling subscription-based access to designer fashion, extending garment use cycles by 3 to 5 times.

Investors

Circularity Capital: Edinburgh-based growth equity fund focused exclusively on circular economy businesses, with EUR 150 million under management.

European Investment Bank: Provided EUR 60 million in green financing to Signify for circular lighting infrastructure expansion.

KPI Summary

Metric	Philips LaaS (2024)	Industry Average	Top Quartile
Service Contract Gross Margin	42-48%	30-35%	45%+
Customer Retention at Renewal	91%	78%	93%+
Closed-Loop Material Recovery	78%	45%	82%+
Avg. Sales Cycle Length	11 months	8 months	6 months
Luminaire Disassembly Time	90 seconds	8 minutes	<60 seconds
Energy Savings vs. Baseline	50%	30%	55%+
Component Reuse Rate (1st cycle)	85%	55%	88%+
Reverse Logistics Processing Time	6-10 weeks peak	8-12 weeks	<4 weeks

Action Checklist

• Conduct a product portfolio analysis to identify which product lines have sufficient unit value (above EUR 15 manufacturing cost) to support economically viable return-refurbish-redeploy cycles
• Redesign target product lines for modular disassembly, aiming for sub-2-minute disassembly times using snap-fit connections and standardised fasteners
• Develop pay-per-outcome pricing models that align customer value with measurable performance metrics (lux-hours, uptime percentage, energy efficiency)
• Structure service contracts with performance-based variable components to avoid IFRS 16 lease classification where appropriate
• Establish or partner with reverse logistics facilities capable of processing returned products within 4-week turnaround targets
• Implement Digital Product Passport infrastructure to track material composition, use history, and refurbishment records across multiple product cycles
• Train sales teams on total-cost-of-ownership selling and equip them with ROI calculators that compare service contracts against traditional procurement
• Set component reuse cycle limits based on failure rate data, typically 2 full cycles for electronics and 3 to 4 for mechanical and structural components

FAQ

Q: What types of products are best suited for product-as-a-service models? A: Products with high unit value, long physical lifespans, and predictable performance degradation profiles are the strongest candidates. Lighting, industrial equipment, medical devices, and commercial appliances fit these criteria well. Philips' experience suggests a minimum manufacturing cost of EUR 15 per unit for the return-refurbish-redeploy economics to work. Products must also be designable for modular disassembly, which is difficult to retrofit into existing product architectures. Soft goods, consumables, and products with rapid technology obsolescence cycles (such as consumer smartphones) are generally poor candidates unless the refurbishment and resale market is robust.

Q: How does product-as-a-service affect a company's financial statements? A: The shift from product sales to service contracts fundamentally changes revenue recognition, asset classification, and cash flow timing. Revenue shifts from one-time recognition at point of sale to recurring recognition over the contract period, typically 5 to 10 years. Products retained by the manufacturer appear on the balance sheet as service assets rather than inventory, increasing total assets and potentially affecting return-on-assets metrics. Cash flow timing changes from immediate payment at sale to monthly or quarterly service payments, creating a "revenue valley" during the transition period where new service revenue has not yet offset declining product sales. Philips managed this transition over 8 years, gradually increasing the service revenue share to avoid a sharp earnings impact.

Q: How do companies handle product obsolescence risk when they retain ownership? A: Retaining ownership concentrates technology obsolescence risk with the manufacturer, which can be managed through modular product architecture and contract structuring. Philips designs its luminaires so that LED modules and driver electronics can be upgraded independently of the housing and optics, allowing mid-contract technology refreshes without full product replacement. Contracts typically include technology refresh clauses at the 5-year mark, with costs shared between Philips and the customer. The manufacturer also benefits from residual value through material recovery at end of life. Well-designed products retain 30 to 45% of their original material value through component reuse and secondary raw material sales.

Q: What is the minimum contract size for LaaS to be commercially viable? A: Philips' experience suggests a minimum contract value of EUR 50,000 per year (approximately 500 to 800 luminaires) for a dedicated LaaS agreement to cover sales, legal, and contract management overhead costs while generating acceptable margins. Below this threshold, the customer acquisition and contract administration costs erode margins to the point where traditional hardware sales are more profitable. For smaller installations, Philips offers standardised "Circular Lighting Bundles" with simplified terms and digital-first onboarding, reducing acquisition costs but also limiting contract customisation.

Sources

• Philips. (2025). Annual Report 2024: Circular Economy Performance. Amsterdam: Koninklijke Philips N.V.
• Ellen MacArthur Foundation. (2024). Circular Economy Case Studies: Philips Lighting-as-a-Service. Cowes: Ellen MacArthur Foundation.
• Eurostat. (2025). EU Circular Material Use Rate: 2024 Data Release. Luxembourg: European Commission.
• Signify. (2025). Sustainability Report 2024: Circular Lighting and Connected Systems. Eindhoven: Signify N.V.
• Schiphol Group. (2024). Sustainability Performance Report: Airport Operations 2023-2024. Schiphol: Royal Schiphol Group.
• IKEA. (2025). Circular Products and Services: Annual Progress Report. Leiden: Inter IKEA Group.
• Deloitte. (2024). Accounting for Circular Business Models: IFRS 16 and Performance-Based Contracts. London: Deloitte LLP.