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

Despite projections that the global Product-as-a-Service (PaaS) market would reach $126 billion by 2025, actual revenue capture from circular design initiatives has consistently underperformed expectations—with only 8.6% of the global economy operating on circular principles according to the 2024 Circularity Gap Report. Meanwhile, companies investing in circular design strategies report average return rates of 35-45% on their service models, far below the 60-70% retention projections that dominated boardroom presentations in 2020. This disconnect between hype and operational reality demands rigorous examination of what circular design and product-as-a-service models can genuinely deliver, and where the persistent gaps lie.

Why It Matters

The circular economy represents a fundamental shift from the traditional linear "take-make-dispose" model toward systems designed for longevity, repair, and material recovery. Between 2024 and 2025, several market dynamics have intensified pressure on businesses to adopt circular approaches:

Market Growth with Caveats: The global PaaS market grew at a compound annual growth rate (CAGR) of 12.4% from 2022-2025, reaching an estimated $98.7 billion. However, this growth has been concentrated in B2B segments—particularly industrial equipment and enterprise technology—while consumer-facing PaaS models have struggled with unit economics.

Repair Economy Expansion: The Right to Repair movement gained significant legislative traction, with the EU's Ecodesign for Sustainable Products Regulation (ESPR) entering force in 2024 and 32 US states considering repair legislation by early 2025. The repair services market reached $46 billion globally in 2024, with smartphone and laptop repair constituting 38% of that volume.

Design for Longevity Mandates: Extended Producer Responsibility (EPR) schemes now cover over 400 product categories across 78 countries. Companies face material recovery targets averaging 65% for electronics and 55% for textiles by 2030 under various regulatory frameworks.

Financial Pressure: McKinsey estimates that circular business models could unlock $4.5 trillion in economic value by 2030, but realization has been slower than projected. Only 23% of Fortune 500 companies have operational circular revenue streams as of 2024, compared to 67% that have stated circular economy commitments.

The gap between aspiration and implementation creates both risks—for companies investing in unproven models—and opportunities for those who understand the realistic pathways to circular value creation.

Key Concepts

Modular Design

Modular design involves creating products with interchangeable, replaceable, and upgradeable components. Rather than treating a product as a monolithic unit destined for complete replacement, modular architecture allows targeted repairs and performance upgrades. Fairphone exemplifies this approach in consumer electronics, achieving 73% of components replaceable by end users. However, modular design increases initial manufacturing complexity by 15-25% and requires sustained investment in component availability—a commitment many manufacturers abandon after 3-5 years.

Design for Repair

Design for repair encompasses accessibility of components, availability of repair documentation, diagnostic capabilities, and standardization of fasteners and interfaces. The French Repairability Index, mandatory since 2021, scores products from 0-10 across these dimensions. Data from 2024 shows that products scoring above 7 on the index experience 40% longer average lifespans, but only 12% of consumer electronics currently achieve this threshold.

Material Selection for Circularity

Circular material selection prioritizes recyclability, recycled content incorporation, material homogeneity, and avoidance of hazardous substances. The Ellen MacArthur Foundation's Material Circularity Indicator (MCI) provides a standardized assessment framework. Companies targeting high MCI scores face trade-offs: recycled plastics cost 10-35% more than virgin alternatives and often exhibit inferior mechanical properties for structural applications.

Service-Based Business Models

PaaS models transfer ownership from customers to providers, who retain responsibility for maintenance, upgrades, and end-of-life management. Variations include leasing (fixed-term contracts), subscription (ongoing access with flexibility), and pay-per-use (consumption-based billing). Each model creates different cash flow dynamics, customer relationship requirements, and asset management complexities.

Reverse Logistics Infrastructure

Reverse logistics encompasses collection, inspection, refurbishment, and redistribution of products and materials. Effective reverse logistics requires physical infrastructure (collection points, processing facilities), information systems (tracking, quality grading), and economic incentives for return behavior. The reverse logistics market reached $937 billion globally in 2024, but cost efficiency varies dramatically by product category and geography.

Circular Design KPI Metrics by Sector

Metric	Electronics	Fashion/Textiles	Industrial Equipment	Furniture
Product Lifespan Extension	40-60%	25-35%	80-120%	50-70%
Return Rate for Refurbishment	25-40%	8-15%	65-85%	20-35%
Recycled Content (% by weight)	15-30%	20-40%	35-55%	40-60%
Material Recovery Rate	55-75%	12-25%	70-90%	45-65%
PaaS Revenue as % of Total	8-15%	3-8%	25-45%	5-12%
Customer Retention (PaaS)	65-80%	35-55%	85-95%	50-70%
Cost per Return/Collection	$15-45	$8-25	$200-800	$50-150
Refurbishment Cost (% of new)	25-40%	15-30%	15-25%	20-35%

What's Working

Electronics Leasing and Device-as-a-Service

The enterprise Device-as-a-Service (DaaS) market represents the most mature circular PaaS implementation. HP's DaaS program, encompassing 15 million devices under management globally, achieves 94% device recovery at end-of-contract. Dell's circular program has processed over 2.4 billion pounds of electronics since 2007, with their Latitude laptops now incorporating 21% recycled materials on average.

Grover, the Berlin-based consumer electronics subscription platform, reached 500,000 subscribers across Europe by 2024. Their model works because electronics depreciate rapidly regardless of ownership model, repair is technically feasible, and residual values remain predictable within 24-36 month windows. Critically, Grover's success depends on secondary market liquidity—they resell refurbished devices representing 60% of their inventory turnover.

Equipment-as-a-Service in Heavy Industry

Caterpillar's remanufacturing operation, Cat Reman, represents industrial circular design at scale. The program remanufactures over 2.2 million components annually, with remanufactured parts costing 50-60% of new while meeting identical performance specifications. Caterpillar designs new equipment with remanufacturing in mind, using standardized core specifications that persist across product generations.

Rolls-Royce's "Power by the Hour" model, where airlines pay per engine flight hour rather than purchasing engines outright, has generated over $16 billion in service revenue. This model works because engine maintenance requires specialized capabilities airlines cannot replicate, asset lifecycles extend 25-30 years, and performance monitoring enables predictive interventions.

Fashion Rental in Premium Segments

Rent the Runway has demonstrated viability in premium fashion rental, achieving 137,000 active subscribers and processing over 100,000 items through their logistics network daily. Their success factors include high-value items (average retail price over $400), fashion-driven obsolescence that favors access over ownership, and consolidated logistics through centralized fulfillment. Notably, Rent the Runway's unit economics improved when they shifted from unlimited subscription to tiered models with usage-based pricing.

What's Not Working

Consumer Behavior Transformation at Scale

The fundamental challenge for consumer-facing circular models is behavioral inertia. Studies from the University of Cambridge show that only 18% of consumers actively consider product lifespan when making purchases, and willingness-to-pay premiums for sustainable products averages just 7-12%—below the cost premiums required for circular design. Consumer acceptance of refurbished products remains limited: 34% of consumers express willingness to purchase refurbished electronics, but actual purchase rates are below 8%.

Revenue Timing and Cash Flow Misalignment

PaaS models fundamentally alter cash flow patterns. A product sold outright generates immediate revenue recognition; the same product offered as a service spreads revenue over 24-48 months while requiring upfront capital for inventory. Companies transitioning to PaaS models experience 18-36 months of reduced reported revenue before service income compensates. Public market pressure for quarterly performance makes this transition particularly challenging for listed companies.

Operational Complexity Multiplication

Circular business models add complexity across every operational dimension. Inventory management must accommodate multiple product states (new, returned, under refurbishment, refurbished, end-of-life). Quality assessment requires new competencies and technologies. Customer service must handle return logistics, condition disputes, and repair coordination. Many companies underestimate this complexity multiplication by 3-5x in their circular business planning.

Key Players

Established Leaders

HP Inc. operates one of the world's largest closed-loop recycled plastics programs, having incorporated over 1 billion pounds of recycled content since 2000. Their Planet Partners program operates in 76 countries with 90% collection coverage.

Dell Technologies has committed to using 50% recycled or renewable materials across all products by 2030. Their circular design principles now influence 100% of new product development, with closed-loop recycled gold from e-waste appearing in their motherboards.

Caterpillar generates over $1.5 billion annually from remanufactured products, representing the largest industrial remanufacturing operation globally.

Philips has committed to deriving 25% of revenue from circular business models by 2025. Their refurbished medical imaging equipment program generates margins comparable to new equipment sales.

Interface pioneered carpet tile leasing and now operates carbon-negative manufacturing processes, with 78% recycled content across their product line.

Emerging Innovators

Grover leads consumer electronics subscription in Europe with over €300 million in annual transaction volume.

Rheaply provides enterprise asset exchange software, enabling internal circular material flows across large organizations.

Lena Fashion offers fashion rental in Scandinavia with fully integrated reverse logistics and cleaning operations.

Fairphone produces the most modular smartphone available, with 5+ year software support commitments.

Key Investors and Funders

Closed Loop Partners has deployed over $500 million in circular economy investments across 65+ companies. Circularity Capital focuses exclusively on European circular economy ventures with €150 million under management. The European Investment Bank committed €10 billion to circular economy projects through 2027. TPG Rise has made significant investments in circular businesses including the $5.6 billion flagship climate fund with circular allocation.

Myths vs Reality

Myth 1: Circular Design Automatically Commands Premium Prices

Reality: Consumer willingness-to-pay for circular products averages only 7-12% above conventional alternatives, while circular design often adds 15-25% to production costs. Price premiums are sustainable only in B2B contexts where total cost of ownership analysis favors circular options, or in luxury consumer segments where brand values align with sustainability messaging.

Myth 2: Product-as-a-Service Models Are Inherently More Profitable

Reality: PaaS models can achieve higher lifetime customer value, but they require 3-5x more working capital, create complex revenue recognition challenges, and demand operational capabilities most product companies lack. Successful PaaS implementations typically take 4-7 years to reach profitability parity with traditional sales models.

Myth 3: Consumers Will Embrace Repair If Given the Opportunity

Reality: Even when repair is accessible and economical, consumer repair rates remain low. Data from the French Repairability Index shows that repair rates increased only 4 percentage points after mandatory labeling, and independent repair shop utilization remains below 15% for consumer electronics despite Right to Repair legislation.

Myth 4: Reverse Logistics Can Be Bolted Onto Existing Supply Chains

Reality: Effective reverse logistics requires purpose-built infrastructure, different from forward logistics in nearly every dimension. Companies that attempt to add reverse flows to existing logistics networks experience costs 2-3x higher than purpose-designed reverse logistics operators.

Myth 5: Material Recycling Closes the Loop Completely

Reality: Recycling processes involve inherent material losses (typically 5-20% per cycle), quality degradation (especially for plastics and textiles), and energy consumption. True closed-loop recycling at scale has been achieved only for aluminum and certain glass applications. Most circular material flows are actually "downcycling" to lower-value applications.

Action Checklist

Conduct total cost of ownership analysis comparing linear vs. circular options for your top 10 products by revenue
Map current reverse logistics capabilities against circular business model requirements, identifying capability gaps
Evaluate product architecture for modularity and repairability using the French Repairability Index methodology
Model cash flow implications of PaaS transition over a 5-year horizon, including working capital requirements
Identify 2-3 pilot products or customer segments for controlled circular model testing before enterprise rollout
Establish baseline measurements for product lifespan, return rates, and material recovery to track circular progress
Assess supplier readiness for recycled content incorporation and design-for-disassembly requirements

FAQ

Q: What is the realistic payback period for circular design investments? A: Circular design investments typically require 3-7 years to achieve positive returns, depending on sector and model type. B2B equipment-as-a-service models achieve faster payback (3-4 years) due to higher asset values and predictable usage patterns. Consumer product circular initiatives often require 5-7 years and significant scale before reaching profitability, primarily due to reverse logistics costs and lower return rates.

Q: How should companies prioritize between design for longevity and design for recyclability? A: Prioritization depends on product category and usage intensity. For high-use products (commercial equipment, workwear), design for longevity delivers greater environmental and economic returns. For fashion-driven products with inherent obsolescence, design for recyclability may be more practical. Life cycle assessment should guide prioritization, focusing on the life stage with highest environmental impact—typically use phase for energy-consuming products and production phase for passive goods.

Q: What return rates are needed for PaaS models to be economically viable? A: Economic viability thresholds vary by product value and refurbishment cost. For electronics, 60-70% return rates are typically required. For high-value industrial equipment, 85%+ returns are necessary due to specialized refurbishment requirements. Fashion rental requires near-complete returns (95%+) given narrow per-wear margins. Companies should model break-even return rates before launching PaaS programs.

Q: How does circular design affect warranty and liability obligations? A: Circular business models typically increase warranty exposure since manufacturers retain ownership or responsibility throughout extended product lifecycles. Companies should budget 15-25% higher warranty reserves for PaaS offerings. Liability for refurbished products requires careful legal structuring, with clear disclosure of refurbishment scope and performance warranties distinct from new-product guarantees.

Q: What regulatory changes should companies prepare for by 2027? A: Key regulatory developments include the EU Ecodesign for Sustainable Products Regulation (ESPR) mandating Digital Product Passports for most product categories by 2027, expanded EPR schemes with higher collection and recycling targets, and potential mandatory recycled content minimums for plastics and textiles. Companies should begin Digital Product Passport implementation planning in 2025 to meet 2027 compliance timelines.

Sources

Circle Economy. "The Circularity Gap Report 2024." Amsterdam: Circle Economy Foundation, 2024.
Ellen MacArthur Foundation. "Completing the Picture: How the Circular Economy Tackles Climate Change." 2023.
McKinsey & Company. "The Circular Economy: Moving from Theory to Practice." McKinsey Sustainability, 2024.
European Commission. "Ecodesign for Sustainable Products Regulation (ESPR)." Official Journal of the European Union, 2024.
Accenture. "The Circular Economy Handbook: Realizing the Circular Advantage." 2023.
World Economic Forum. "A New Circular Vision for Electronics: Time for a Global Reboot." 2019, updated 2024.
Deloitte. "The Growing Importance of Product-as-a-Service Business Models." Deloitte Insights, 2024.