5 Reasons You Need to Adopt a Circular Economy Business Model
For entrepreneurs interested in sustainability, adopting the circular economy business model is one way to go about it.
What goes around comes around, the saying goes, and everything that was once old will soon be new again. Life moves in cycles, and everything has its season.
The cyclical nature of existence is reflected in the concept of the circular economy, which outlines ways to develop our businesses by using resources in a sustainable way. As entrepreneurs, we all have an eye on the long game. So a circular economy business model makes sense, both for our brands and for our customers and clients.
Let me tell you why.
Circular economy in business
All good business ventures have the goal of becoming self-sustaining. When I launch a new company, I trust that the time and money invested at the beginning will bring me a return on my investment. It takes time, but I work towards the goal of each business making enough to pay for its own expenses, as well as paying down the cost of startup and rewarding any other investors.
To me, that’s an echo of the circular economy. The concept of the circular economy is centered on increasing asset longevity and gradually reducing waste. Both in and out of the business world, a circular economy is “restorative and regenerative by design”. It’s about using every aspect of what you’ve got to get you to the next step in your plan.
In theory, a circular economy business model should cut expenses, increase the longevity of tools and products, reduce waste, and maximize assets. It sounds great, right? The challenge lies in implementing the model effectively.
The details vary, but before you say that it’s too good to be true — or unrealistically difficult to implement — there are five excellent reasons to bring this business model into your own venture.
Extend the life and value of products
One of the main benefits of this business model, as identified by Accenture, is the extension of the value and lifecycle of individual products. Rather than developing products that wear out quickly and must be replaced, adding to landfills and waste deposits, circular economy companies focus on maintaining the value of their products, through maintenance, upgrades, repair, or re-marketing. It’s what makes the difference between a consumer happily using the same computer for five years or constantly searching for where to recycle old laptops.
The linear approach to business models makes it seem like this is unrealistic. The more money you put into your products, the higher the price point, the fewer units sold, the lower the profit.
It’s true that developing superior products requires greater investment on the front end — both for the manufacturer and the consumer.
But it also opens the way for additional products and services, builds the reputation of the company, and makes it more likely that customers will continue to work with your brand because they know it’s reliable.
Even setting aside the benefit to the environment — which is by no means negligible — it works out for the benefit of the brand, too.
Form new revenue streams
With the production of longer-lived items comes the issue of maintaining those products. As the motivating force behind my startups, I had a choice: to look at maintenance as a challenge or to view it as an opportunity.
My advice: choose the latter.
Maintenance, upgrading, remanufacturing, and similar processes all allow for additional revenue streams. Servicing products becomes an integral part of the relationship between manufacturer and consumer. This is seen frequently with tech products. The big tech companies have in-house tech support to address any issues the customer has. A satisfactory experience with tech support — an apparently rare occurrence — boosts the loyalty between customer and brand.
Along with that comes the opportunity for upselling — for instance, a computer manufacturer might also develop anti-virus software and sell subscriptions along with their products. If not developing the software themselves, partnering with another company — like Acer and Norton Antivirus, for example — can still bring in extra revenue.
Another consideration is the rise of “products as a service” businesses, which focus on leasing or renting items rather than selling them. This follows the same general outline as the subscription model, in that the assets never leave the ownership of the company. After they’ve reached the end of their lifespan as rentals, they can be repurposed, upgraded, or sold to maximize profits.
Allow resources to recover
With a linear business model, companies are forced to continue to churn out new products to replace the ones that are reaching the end of their lifespan. It’s a never-ending rush to keep up with the demand. If you run out of material, however, that’s it — you just have to wait until it’s replenished or restocked in order to continue.
The lack of recovery time can cause an entire manufacturing chain to grind to a halt.
On the other hand, there’s a reason why the circular model is touted as “regenerative by design.” It creates a buffer of time between the sale of one model and the sale of the next. Creating better products with a longer lifespan allows companies to spend that buffer on the development of the next model, rather than rushing it to manufacture immediately. In turn, that allows for the replenishment of resources and materials.
This is better for both the brand and the consumer because it enables us to keep up with the demand in a more effective manner. And speaking of that…
Manage assets more effectively
Another plus of allowing time for recovery and regeneration is the more efficient use of existing assets and the addition of new ones. Circular economy business models fall in line with the “reduce, reuse, recycle” philosophy, so managing existing assets is vital to the sustainability of a company.
Here are a few examples of how this works:
Maximizing product lifespan minimizes investment for production costs
Keeping track of unsold goods allows for effective repurposing or upcycling of unused assets
A balanced approach to production allows you to redirect your resources as necessary, based on current need
Find hidden assets
A final reason to adopt the circular economy business model for your own venture is the focus on turning underutilized products or services into valuable assets.
Perhaps one of the most well-known examples of this is Airbnb, the house-sharing company that started it all. It took an overlooked asset — our homes — and connected it with a need — affordable vacation destinations, for one thing. And it did it without drawing from our environmental resources or creating additional waste, while at the same time providing new jobs and sources of income for thousands of people. It’s the circular economy in a nutshell.
This gives us a challenge, as entrepreneurs. What “hidden” assets do we have that could be utilized within our business model to reduce waste and provide extra revenue? The answer will be different for each of us, but the principle is valuable for everyone.
This aspect requires creativity and outside-the-box thinking. But as entrepreneurs and owners of startups, we’re driven by creativity. It’s a requirement for success in business. The entrepreneurial spirit is dependent on thinking outside of the box. So turning “cold” assets into “gold” assets is a huge benefit of adopting this particular business model.
The cycle of success
Creating a sustainable cycle of success for my business hasn’t been easy, and I know that the same is the case for others out there, too. But it isn’t beyond our reach.
Maximization of assets, effective resource management, and focus on quality over quantity all add up to a workable, efficient business model that benefits the company, the consumer, and the environment. I call that a win-win-win.
Entrepreneur Leadership Network Contributor