Trend analysis: Circular design & product-as-a-service — where the value pools are (and who captures them)

Product-as-a-Service (PaaS) models generated €350 billion in European revenue in 2024, with circular design principles now embedded in 34% of new product development processes among Fortune 500 manufacturers (Ellen MacArthur Foundation, 2025). Yet value capture remains concentrated among firms that control both product design and reverse logistics infrastructure—leaving many organizations with stranded linear assets as regulatory pressure intensifies.

Why It Matters

The UK's Resources and Waste Strategy, combined with the EU's Ecodesign for Sustainable Products Regulation (ESPR) coming into force in 2025, mandates design for durability, repairability, and recyclability across 35+ product categories. For UK organizations selling into EU markets, compliance requires fundamental product architecture changes—not superficial greenwashing.

Scope 3 emissions reporting under CSRD and ISSB standards now requires lifecycle assessments encompassing end-of-life scenarios. Products designed for linear consumption (manufacture-use-dispose) carry higher embodied carbon burdens than circular alternatives. According to the Carbon Trust's 2024 analysis, circular design can reduce product-level carbon footprints by 40-80% over conventional approaches, primarily through extended use phases and material recovery.

Value pools in this space concentrate in: (1) asset lifecycle management platforms extracting subscription and usage fees, (2) reverse logistics operators commanding 8-15% of product value for collection and refurbishment, (3) materials reclaimers capturing residual value from end-of-life products, and (4) design consultancies charging premium fees for Design for X (DfX) integration. The shift from product sales to service revenue fundamentally alters cash flow profiles—requiring different capital structures and investor expectations.

Key Concepts

Design for Circularity Principles

Circular design integrates six interconnected principles: (1) design for durability through material selection and engineering margins, (2) design for repair via modular components and available spare parts, (3) design for upgrade enabling performance improvements without full replacement, (4) design for disassembly ensuring efficient end-of-life material separation, (5) design for recycling using mono-materials and avoiding contaminants, and (6) design for remanufacture enabling industrial-scale refurbishment to as-new condition.

Product-as-a-Service Business Models

PaaS shifts revenue recognition from point-of-sale to usage-based payments over product lifecycles. Three dominant models exist: subscription (fixed periodic payments for access), pay-per-use (metered consumption charges), and outcome-based (payment for delivered results rather than equipment). Each model carries different working capital requirements—PaaS typically requires 2-4x more capital than equivalent sales models during transition, as products remain on manufacturer balance sheets.

Reverse Logistics Economics

The cost structure of product take-back determines circular model viability. Collection costs range from £2-8 per kg depending on product density and geographic distribution. Sorting and assessment adds £3-15 per unit. Refurbishment costs vary from 15-60% of new product manufacturing cost depending on labor intensity. These economics favor high-value, durable goods (industrial equipment, electronics, vehicles) over low-value consumables.

Sector-Specific KPIs

Metric	Linear Model	PaaS/Circular Model	Value Capture Shift
Customer lifetime value	£500-2,000	£2,500-15,000	3-7x increase
Gross margin	25-40%	45-70%	+20-30 points
Working capital requirement	15-25% revenue	45-80% revenue	2-3x increase
Asset utilization rate	Single user lifecycle	2.5-4 user lifecycles	+150-300%
Scope 3 emissions per use	Baseline 100%	35-60%	40-65% reduction
Material recovery rate	10-25%	75-95%	+50-70 points

What's Working

Philips Healthcare's Managed Equipment Services

Philips' healthcare equipment business demonstrates mature PaaS execution. Their Managed Equipment Services contracts cover MRI, CT, and ultrasound systems across 2,500+ hospital sites globally. Philips retains equipment ownership, handles maintenance, upgrades, and end-of-life management. Revenue per system increased 180% over traditional sales models while customer switching costs created 94% retention rates. In 2024, Philips reported that 25% of healthcare revenue derived from PaaS arrangements, with managed services generating operating margins 12 points above equipment sales (Philips Annual Report, 2024).

Caterpillar's Remanufacturing Operations

Caterpillar operates the world's largest remanufacturing business, refurbishing 8,000+ product types from engines to transmissions. Their Cat Reman program processes 2.2 million units annually, using 85% less energy and 80% less material than new manufacturing. Remanufactured components sell at 50-70% of new prices while achieving equivalent performance specifications. The program generated $1.8B in 2024 revenue with 40%+ gross margins—substantially above new equipment manufacturing. Critically, Caterpillar controls design specifications ensuring components remain remanufacturable across 3-5 lifecycle iterations.

Bundles' Circular Washing Machines

Dutch startup Bundles offers washing machines on subscription, retaining ownership and responsibility for maintenance, repair, and end-of-life processing. Their appliances are designed for 20-year lifespans (versus 7-10 year industry average) with modular components enabling repair in <2 hours. Bundles achieved 98% first-time repair success rates by controlling both product design and service delivery. The model reduces per-wash carbon emissions by 35% through optimized machine efficiency and extended asset life.

What's Not Working

Premature PaaS Transitions Without Design Changes

Organizations attempting PaaS models with products designed for linear consumption face unsustainable unit economics. Products with non-modular components, welded assemblies, or short design life cannot be economically refurbished. A 2024 Deloitte study found that 62% of PaaS pilot failures stemmed from attempting servitization without corresponding product redesign—creating negative gross margins as repair and replacement costs exceeded subscription revenue.

Fragmented Reverse Logistics Capabilities

Many manufacturers lack infrastructure for product collection, assessment, and refurbishment. Outsourcing to third-party logistics providers often fails due to information asymmetries—carriers lack product knowledge to perform accurate condition assessments, leading to refurbishment cost overruns. The Ellen MacArthur Foundation estimates that <15% of manufacturers have integrated reverse logistics capabilities at scale.

Consumer Behavior Barriers

Despite environmental preferences, consumer adoption of PaaS remains limited outside B2B contexts. Furniture-as-a-service pioneer Lyft (not the rideshare company—the Swedish furniture subscription service) ceased operations in 2023 after struggling to achieve unit economics with residential customers. Challenges include installation logistics, damage liability disputes, and consumer preference for ownership—particularly in UK markets where home ownership culture remains strong.

Key Players

Established Leaders

• Signify (Philips Lighting) – Pioneer of lighting-as-a-service, now operating 10M+ connected light points globally. Their circular lighting systems achieve 75% material circularity through design for disassembly.
• Caterpillar – Largest industrial remanufacturer globally with 50+ years of operational experience. Their closed-loop supply chain captures 95%+ of material value from end-of-life equipment.
• Rolls-Royce – "Power by the Hour" model for jet engines, charging airlines per flight hour rather than selling engines. This model now accounts for 55% of civil aerospace revenue.
• HP – Instant Ink subscription and closed-loop cartridge recycling process 4.8B cartridges annually with 75% recycled plastic content in new products.

Emerging Startups

• Grover – Berlin-based electronics subscription platform with 500,000+ subscribers across Europe. Products undergo 5+ use cycles with refurbishment between users.
• Rheaply – Chicago startup operating B2B asset exchange platforms, enabling circular procurement for enterprise furniture, equipment, and materials.
• Circulor – UK traceability platform tracking materials through circular supply chains using blockchain, serving EV battery and fashion sectors.
• Back Market – French refurbished electronics marketplace valued at €5.7B, processing 7M+ devices annually through certified refurbisher network.

Key Investors & Funders

• Closed Loop Partners – $300M+ invested in circular economy infrastructure and innovation across materials recovery and reuse systems.
• SYSTEMIQ – B Corp advisory and investment firm focused on circular economy transitions, advising €50B+ in industrial assets.
• Circularity Capital – Edinburgh-based fund with £200M AUM targeting circular economy businesses in Europe.
• UKRI's Transforming the Foundation Industries – £66M program supporting circularity in cement, steel, glass, and chemicals manufacturing.

Real-World Examples

1. Michelin's Tire-as-a-Service: Michelin's fleet tire management services charge customers per kilometer driven rather than selling tires. By retaining ownership, Michelin optimizes tire selection, maintenance, and retreading—extending tire life by 40% and reducing fleet fuel consumption by 5% through proper inflation management. The model generates 15% higher lifetime margins than tire sales while reducing material consumption by 30%.

2. IKEA's Furniture Leasing Pilot: IKEA tested furniture-as-a-service in Switzerland, Netherlands, and Sweden during 2023-2024, offering office furniture subscriptions to SMEs. Products were designed for disassembly and refurbishment. Results showed 60% lower lifecycle emissions but challenging unit economics—collection and refurbishment costs consumed 45% of subscription revenue, limiting geographic expansion.

3. MUD Jeans' Circular Denim: Dutch brand MUD Jeans offers jeans on lease (€9.95/month for 12 months) or purchase, with guaranteed take-back and recycling. Returned jeans are either refurbished for resale or recycled into new denim—achieving 40% recycled cotton content. The model achieves 72% gross margins on leased jeans versus 48% on purchased pairs, as each garment serves 2-3 customers.

Action Checklist

• Conduct Design for Circularity assessment across top 20 product SKUs representing 80%+ of material flows
• Map total cost of ownership including end-of-life scenarios under ESPR requirements for products sold into EU
• Pilot PaaS model with one product line in B2B segment before consumer applications
• Establish or partner for reverse logistics infrastructure with <7 day collection-to-assessment capability
• Integrate remanufacturing cost projections into new product development stage-gates
• Train finance teams on PaaS revenue recognition and working capital requirements

FAQ

Q: How do we account for PaaS revenue under UK accounting standards? A: IFRS 16 applies to lessor accounting for PaaS arrangements. Revenue recognition depends on whether arrangements qualify as operating leases (revenue recognized over lease term) or finance leases (upfront recognition with interest). Products remaining on balance sheets require depreciation over expected service life. Most PaaS models qualify as operating leases, creating smoother but delayed revenue recognition compared to sales.

Q: What product categories are most suitable for circular design transitions? A: High-value, durable products with significant material content and technical complexity show strongest circular economics. Industrial equipment, commercial HVAC, medical devices, and commercial vehicles demonstrate positive ROI. Consumer electronics represent an emerging opportunity as repairability regulations (EU Right to Repair) mandate spare parts availability. Fast-moving consumer goods and single-use packaging remain challenging due to low unit values and contamination issues.

Q: How does circular design affect Scope 3 emissions reporting? A: Products designed for extended life and multiple use cycles can claim lower per-use emissions in Scope 3 Category 11 (use of sold products) calculations. However, retained ownership in PaaS models shifts emissions from Category 11 to Scope 1/2 if manufacturers operate products, or Category 13 (downstream leased assets). Organizations should work with auditors to ensure consistent boundary setting across business model transitions.

Q: What insurance and liability considerations apply to PaaS models? A: Manufacturers retaining product ownership bear ongoing product liability throughout service life—potentially 15-20+ years for durable goods. Insurance requirements include: product liability extending through use phase, professional indemnity for service delivery, and residual value insurance covering end-of-life asset recovery. Premium costs typically add 1-3% of subscription revenue.

Sources

• Ellen MacArthur Foundation. (2025). Circular Economy in Action: Europe 2025. Ellen MacArthur Foundation.
• Carbon Trust. (2024). Product Carbon Footprinting for Circular Economy. Carbon Trust.
• Deloitte. (2024). Servitization Success Factors: Global Survey Results. Deloitte Insights.
• Philips. (2024). Annual Report 2024. Koninklijke Philips N.V.
• Caterpillar. (2024). Sustainability Report 2024. Caterpillar Inc.
• European Commission. (2024). Ecodesign for Sustainable Products Regulation Implementation Guidance. EC.