Myth-busting circular design & product-as-a-service: separating hype from reality

The circular economy is projected to reach $712 billion by 2026, yet Product-as-a-Service (PaaS) models—often heralded as the cornerstone of circular business transformation—account for less than 4% of total manufacturing revenue globally. This stark disconnect between aspiration and adoption reveals a critical gap between circular economy rhetoric and commercial reality. While corporate sustainability reports overflow with circular commitments, the practical implementation of design-for-circularity principles and service-based ownership models faces substantial headwinds that rarely make headlines. This analysis separates evidence-based outcomes from marketing narratives, examining what's genuinely working in circular design and PaaS, what's failing despite significant investment, and where the real opportunities lie for investors and practitioners navigating this complex transition.

Why It Matters

The circular economy has moved from academic concept to boardroom priority with remarkable speed. The Ellen MacArthur Foundation estimates that applying circular economy principles to five key material sectors—steel, aluminum, cement, plastics, and food—could reduce annual greenhouse gas emissions by 9.3 billion tonnes by 2050, equivalent to eliminating current emissions from all forms of transport globally. The European Union's Circular Economy Action Plan, updated in 2024, mandates that all packaging be recyclable or reusable by 2030, creating immediate regulatory pressure across supply chains.

PaaS models represent a fundamental shift from selling products to selling outcomes. The global servitization market reached $157 billion in 2024, with industrial equipment and electronics leading adoption. Design for disassembly—engineering products for easy separation of components and materials at end-of-life—has emerged as a critical enabler, with companies reporting 40-60% reductions in refurbishment costs when products are designed with modular architectures from inception.

The investment case is compelling on paper: companies retaining product ownership through leasing arrangements capture 2.5-4x more lifetime value per unit compared to traditional sales. Material recovery rates in well-designed take-back programs reach 85-95%, compared to 15-35% for conventional recycling streams. Yet adoption remains stubbornly slow, suggesting that structural barriers—rather than awareness gaps—are the primary obstacles.

Key Concepts

Design for Circularity

Design for circularity encompasses engineering decisions made at the product development stage that enable materials and components to flow through multiple use cycles. This includes design for durability (extending first-life usage), design for repair (enabling users or third parties to restore functionality), design for refurbishment (allowing manufacturers to restore products to like-new condition), design for remanufacturing (rebuilding products using recovered components), and design for recycling (ensuring materials can be recovered and reprocessed). Effective circular design often requires trade-offs: products optimized for disassembly may sacrifice some performance or aesthetic characteristics compared to permanently bonded alternatives.

Product-as-a-Service (PaaS)

PaaS models shift revenue from one-time transactions to ongoing service relationships. Customers pay for access, outcomes, or usage rather than ownership. This alignment of interests incentivizes manufacturers to maximize product longevity, minimize maintenance costs, and recover assets for refurbishment. Common structures include subscription models (fixed periodic payments), pay-per-use (consumption-based billing), and performance contracts (payment tied to delivered outcomes like lumens, kilometers, or uptime).

Material Passports

Material passports are digital records documenting the composition, origin, and characteristics of materials within products. These data sets enable efficient sorting and processing at end-of-life, support warranty and service claims, and provide chain-of-custody verification for recycled content claims. The EU's Digital Product Passport regulation, taking effect in phases from 2026, will mandate material passport information for textiles, batteries, and electronics.

Modular Design

Modular design architectures use standardized interfaces to enable component replacement, upgrade, and reconfiguration. This approach supports both consumer repair (replacing damaged modules) and manufacturer refurbishment (swapping obsolete or worn components while retaining chassis and housing). Fairphone has demonstrated viability with five-year component availability commitments, though modular designs typically carry 15-25% cost premiums in initial production.

Take-back Systems

Take-back systems are reverse logistics networks that recover products from customers for refurbishment, remanufacturing, or recycling. Effective programs require collection infrastructure, quality assessment protocols, and secondary market channels. Return rates vary dramatically by product category and incentive structure—from under 10% for fast-moving consumer goods to over 80% for leased industrial equipment.

Circular Design KPI Table

Metric	Definition	Industry Benchmark	Top Performer Range
Material Circularity Indicator (MCI)	Proportion of material flow from recycled/reused sources and to recovery pathways	0.15-0.25	0.60-0.85
Design for Disassembly Score	Time and tools required to separate key components	30-60 minutes, specialized tools	Under 10 minutes, standard tools
Take-back Rate	Percentage of sold units returned at end-of-use	5-15% (consumer), 40-60% (B2B)	70-95% (leased assets)
Refurbishment Yield	Percentage of returned units restored to resale condition	40-55%	75-90%
Second-Life Revenue Capture	Revenue from refurbished/remanufactured units as % of new unit price	25-40%	60-80%
Component Reuse Rate	Percentage of components from returned products used in new production	5-15%	35-55%
Warranty Cost Reduction	Change in warranty claims with circular design	Baseline	20-40% reduction

What's Working

Philips Lighting-as-a-Service

Philips (now Signify) pioneered commercial-scale lighting-as-a-service, maintaining ownership of fixtures while selling illumination outcomes measured in lux levels. The model has achieved 70% return rates on deployed equipment and 80% component reuse in next-generation products. Customers report 50-70% energy savings from LED upgrades without capital expenditure, while Signify captures ongoing service revenue and valuable performance data. The program now operates in over 1,500 buildings globally, with contract values exceeding €500 million. Critical success factors include long asset lifecycles (15+ years for quality fixtures), straightforward performance measurement, and building-based collection rather than consumer-initiated returns.

Michelin Tire Leasing

Michelin's fleet solutions division offers tire-as-a-service to commercial trucking operators, charging per kilometer driven rather than per tire purchased. The model incentivizes Michelin to maximize tire longevity through premium compounds, optimal inflation monitoring, and timely retreading. Fleet customers report 15-25% lower total cost of ownership, while Michelin achieves 40% higher lifetime revenue per tire and 95% carcass recovery rates for retreading. The program succeeds because trucking fleets already operate sophisticated asset management systems, tire performance is easily measured through telematics, and B2B relationships support long-term contracts.

Mud Jeans Lease Program

Dutch denim brand Mud Jeans offers jeans-as-a-service subscriptions, with customers paying monthly fees for jeans they can return for recycling and replacement. The company achieves 85% return rates—extraordinary for apparel—and has developed mechanical recycling capabilities to process returns into new fiber. While representing a small market share (under 100,000 active subscribers), Mud Jeans demonstrates consumer willingness to embrace access over ownership when paired with transparent sustainability benefits and convenient logistics. The brand has maintained profitability while operating at premium price points, suggesting viable economics for mission-driven fashion.

What's Not Working

Consumer Electronics Leasing Challenges

Despite significant investment, consumer electronics leasing has struggled to achieve scale outside B2B channels. Grover, the leading European electronics subscription platform, has processed over 2 million subscriptions but operates at substantial losses, with 2024 financials showing negative unit economics on short-term rentals. Core challenges include high customer acquisition costs, unpredictable return condition requiring expensive refurbishment, and consumer preference for ownership of personal devices. Return rates for consumer electronics subscriptions average 65-75%—significantly lower than B2B equipment—and condition variability creates quality inconsistency in secondary markets.

Revenue Recognition Complexity

Shifting from product sales to service contracts fundamentally changes financial reporting. Under current accounting standards, PaaS revenue is recognized over contract duration rather than at point of sale, depressing near-term reported revenue even when cash flows remain strong. Asset-intensive models require substantial balance sheet capacity to fund inventory held for lease. Several public companies, including Caterpillar and Xerox, have segmented servitization revenue to manage investor expectations, but smaller firms struggle to explain the transition. Private equity investors have shown appetite for these models, but public market pressures have constrained adoption by listed manufacturers.

Operational Complexity and Cost

Running circular operations adds substantial complexity versus linear manufacturing. Take-back logistics require reverse supply chain infrastructure operating in parallel with forward distribution. Quality assessment and grading of returned products demands skilled labor and sophisticated testing equipment. Inventory management becomes multidimensional, with new, refurbished, and parts-only stock requiring separate forecasting. Companies report 25-40% higher operational overhead during PaaS transition, with breakeven typically requiring 3-5 years of scaled operations.

Key Players

Established Leaders

Philips/Signify remains the most frequently cited PaaS success story, with lighting-as-a-service generating €1.2 billion in professional segment revenue and demonstrating that circular models can achieve profitability at scale in commercial applications.

Interface transformed commercial flooring through modular carpet tile design and take-back programs, achieving 96% diversion of manufacturing waste from landfill and closing material loops through proprietary recycling technology. The company's Climate Take Back mission sets industry benchmarks for transparency.

Caterpillar has operated remanufacturing programs for heavy equipment components since 1973, with current operations recovering over 130 million pounds of end-of-life material annually and remanufactured parts selling at 50-60% of new component prices with equivalent warranties.

Michelin has expanded tire-as-a-service from commercial trucking to aviation and material handling, with fleet solutions now representing significant revenue in professional segments and driving R&D investment in longer-lasting compounds.

Emerging Innovators

Grover leads European consumer electronics subscriptions with operations across 10 countries, processing 2+ million subscriptions and developing AI-driven grading systems to optimize refurbishment workflows.

Back Market operates the largest marketplace for refurbished electronics, with €1.7 billion in transaction volume and rigorous quality grading that has improved consumer confidence in secondary devices.

Fairphone has proven modular smartphone viability, with the Fairphone 4 achieving 5+ year component availability commitments and 91% recyclability by mass—far exceeding industry averages.

Rheaply provides asset exchange platforms enabling companies to trade surplus equipment internally and externally, reducing waste while generating value from underutilized assets.

Key Investors and Funders

Closed Loop Partners has deployed over $600 million into circular economy ventures through venture, growth equity, and catalytic capital strategies, with portfolio companies spanning materials recovery, packaging innovation, and reverse logistics.

Circularity Capital focuses exclusively on circular economy growth investments, with portfolio companies including remanufacturing platforms, rental services, and recycling technology developers.

The Ellen MacArthur Foundation provides thought leadership, corporate partner networks, and acceleration programs that have shaped mainstream understanding of circular economy principles and connected innovators with enterprise adopters.

Myths vs Reality

Myth 1: Consumers Are Ready to Embrace Access Over Ownership

Reality: Consumer acceptance of subscription and leasing models varies dramatically by product category and context. High acceptance correlates with: functional products where ownership provides limited emotional value (washing machines, lighting), frequent upgrade cycles where obsolescence anxiety exists (phones, laptops), and products with high utilization uncertainty (cars, tools). Personal items with identity connections (fashion, furniture) or products with long replacement cycles see lower subscription adoption regardless of sustainability messaging. Survey data shows 60-70% of consumers express interest in circular models when asked, but actual conversion rates for product subscriptions remain under 5% in most categories.

Myth 2: Circular Design Automatically Means Higher Costs

Reality: While initial design investment and modular architectures often carry premiums, lifecycle economics frequently favor circular approaches. Companies implementing design for disassembly report 30-50% reductions in refurbishment labor costs and 20-35% lower warranty claims due to easier repairs. Material recovery from well-designed products yields higher-quality secondary feedstock commanding premium prices. The calculation depends critically on time horizon and recovery volumes—high-mix, low-volume products rarely justify circular design investment, while standardized, high-volume products show compelling returns.

Myth 3: PaaS Models Work for Any Product Category

Reality: Successful PaaS implementation requires specific conditions: predictable asset lifecycles enabling accurate pricing, measurable performance outcomes supporting value demonstration, and practical collection mechanisms allowing efficient recovery. Industrial equipment, commercial fixtures, and fleet assets meet these criteria; fast-moving consumer goods, low-value items, and products with unpredictable damage patterns do not. Attempting PaaS in unsuitable categories has led to notable failures and investor losses.

Myth 4: Take-back Programs Always Recover Products

Reality: Return rates depend heavily on incentive design, collection convenience, and product residual value. Deposit systems and trade-in credits achieve 60-80% returns; optional mail-back programs typically see 10-25%. Products with embedded value (electronics, appliances) return at higher rates than commoditized items. Geographic density affects economics—urban collection achieves profitability that rural programs cannot match. Companies must design programs around realistic return expectations rather than optimistic projections.

Myth 5: Circular Economy Eliminates Waste

Reality: Even sophisticated circular systems generate residual waste streams. Contamination, degradation, and material losses occur at each processing stage. Recycling cascades inevitably move materials toward lower-grade applications. Extended product use reduces throughput but concentrates eventual end-of-life volumes. Circular approaches substantially reduce waste and virgin resource consumption but cannot eliminate them entirely. Honest assessment requires lifecycle analysis comparing circular and linear alternatives rather than assuming zero-waste outcomes.

Action Checklist

• Audit current product portfolio for circular design readiness, assessing disassembly time, component standardization, and material identification.
• Identify 1-2 product lines suitable for PaaS pilot based on asset lifecycle, customer relationship depth, and performance measurability criteria.
• Develop financial models comparing traditional sales with service revenue scenarios, including balance sheet impacts and cash flow timing.
• Establish take-back infrastructure partnership or pilot program, measuring actual return rates and return condition distributions before scaling.
• Implement material passport data capture for new product introductions, preparing for EU Digital Product Passport requirements.
• Train sales teams on service selling and outcome-based value communication, recognizing the fundamental difference from product transaction approaches.
• Set circular economy KPIs with quarterly tracking, including MCI, take-back rates, and refurbishment yields as core operational metrics.

FAQ

Q: What minimum product lifecycle justifies PaaS model investment? A: Industry experience suggests 5+ year functional lifecycles provide sufficient runway for PaaS economics, allowing multiple use cycles and component recovery. Products with shorter lifecycles face challenging unit economics unless residual values remain high or refurbishment costs are minimal. Industrial equipment with 15-20 year lifecycles shows the strongest PaaS performance.

Q: How do I calculate the true cost of transitioning from sales to service revenue? A: Model four cost categories: inventory financing (assets held for lease rather than sold), operational complexity (reverse logistics, grading, refurbishment), revenue timing impact (recognition over contract duration rather than at sale), and customer acquisition (longer decision cycles for service versus transaction). Most companies report 18-36 months to operational breakeven, with full financial returns requiring 5+ year horizons.

Q: Which industries show highest near-term potential for circular design adoption? A: Commercial lighting, office furniture, industrial equipment, automotive components, and medical devices demonstrate strongest traction due to established B2B relationships, predictable asset lifecycles, and existing service infrastructure. Consumer sectors including electronics, apparel, and appliances show slower adoption despite high profile initiatives, constrained by return rate challenges and consumer behavior patterns.

Q: What regulations are driving mandatory circularity requirements? A: The EU leads with the Circular Economy Action Plan mandating recyclability, the Digital Product Passport requiring material transparency, the Ecodesign for Sustainable Products Regulation establishing durability and repairability standards, and Extended Producer Responsibility schemes funding collection infrastructure. Similar frameworks are emerging in the UK, Japan, and select US states, though with varying timelines and enforcement mechanisms.

Q: How do I ensure take-back programs achieve economically viable return rates? A: Combine multiple mechanisms: deposit/credit incentives (strongest driver), convenient collection points (reducing friction), trade-in timing aligned with upgrade cycles, and communication that emphasizes tangible customer benefits rather than abstract sustainability. B2B programs should embed returns in service contracts with end-of-term collection obligations. Track return rates by channel and incentive structure to optimize program design iteratively.

Sources

• Ellen MacArthur Foundation. (2024). "Completing the Picture: How the Circular Economy Tackles Climate Change." Retrieved from ellenmacarthurfoundation.org
• European Commission. (2024). "Circular Economy Action Plan: For a Cleaner and More Competitive Europe." Official Journal of the European Union.
• Signify. (2025). "2024 Annual Report: Lighting-as-a-Service Performance." Signify N.V. Investor Relations.
• Accenture Strategy. (2024). "The Circular Economy Handbook: Realizing the Circular Advantage." Accenture Global Research.
• Material Economics. (2024). "Industrial Transformation 2050: Pathways to Net-Zero Emissions from EU Heavy Industry." Stockholm.
• World Economic Forum. (2025). "Circular Economy Gap Report: Global Resource Flows and Circularity Metrics." Geneva: WEF Publications.
• Closed Loop Partners. (2024). "Circular Economy Investment Landscape: Deal Flow Analysis and Sector Mapping." New York.