As I hear more about the environment, the more I ask myself: “What can I do to help?” One of the best ways to make a big impact is by leveraging new ways of using the planet’s resources. After all, our resources are finite so we need to be more mindful of material flows through production and how long a product’s life cycle is.
It’s hard not to feel a certain way when you see images of landfills and plastic-infested oceans. Luckily, there is hope in the form of circular business models. So what exactly are circular business models and how does their value chain work?
What Are Circular Business Models?
Circular business models refer to a type of economic system in which resources, materials, and products are kept in use for as long as possible. Instead of the traditional linear model – which is more straightforward but wasteful, circular models focus on closed-loop systems.
This means that instead of producing, using, and disposing of products, circular businesses can keep items in use for as long as possible, while still generating profits. Customers can also enjoy the items and services they desire without the necessity of product ownership.
From the success of circular business models and government support, one can have a circular economy, in which circular businesses interact and share resources. This type of business model is based on the idea that resources should be reused, recycled, and repurposed so that companies can reduce their environmental footprint.
Some countries are already exploring circular economies, introducing legislation that encourages circular businesses to develop. This is especially true in Europe, where the EU has created a circular economy package that offers circular businesses various benefits such as tax incentives, grants, and research support.
Circular Business Categories
This type of business model can be divided into three main categories: circular supply chains, circular services, and circular products. Circular supply chains involve the reuse of materials such as plastics or metals, while circular services involve the reuse of goods such as automobiles, appliances, or furniture. Lastly, circular products are made to last longer and can be reused again and again.
Difference Between a Linear and Circular Business Model
The main difference between a linear and circular business model is in their respective value chain flows. A linear model production process involves a single-use of resources, which are then discarded. Linear models are characterized by short-term thinking, whereas circular models value long-term sustainability that can lead to a zero-waste economy.
One of the key elements of linear business models involves the use of raw natural resources, which can be damaging to the environment if not managed properly. Remember, some raw materials from the planet can replicate themselves such as water and air, however, others such as metals or fossil fuels deplete with continued use in a global economy.
Let’s think back to the landfills filled with plastic waste – this is the result of a linear business model, where resources are used and then discarded.
In contrast, circular models strive to minimize ecological and social costs, while also maximizing efficiency and profitability. In a circular model, plastic materials are sourced, reused, and recycled to create new products or services.
This reduces waste and helps circular businesses save on costs while still providing a quality service. A great example is in Mexico where you can keep your large water bottles and take them to a refill station around the city. Reducing emissions is a result of reusing the same water bottles instead of constantly having to produce them.
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5 Different Circular Economy Business Models to Know
1. Product-as-a-Service (PaaS)
This circular business model articulates how customers can have access to a product or service for a fee, rather than purchasing an item outright. PaaS is perfect for businesses that want to reduce their environmental impact by minimizing waste and maximizing the use of resources. One of the most popular versions of this circular economy model involves how people consume entertainment.
While movie theaters still exist, the rise of PaaS has created major competition and allows people to save carbon emissions by not driving to a theater. Customers no longer have to store or discard VHS tapes or DVDs.
When Netflix made the transition from selling physical DVDs to streaming content, it was a great example of a circular economy in action. Not only did Netflix eliminate the need for DVD production, but it also reduced the environmental impact of shipping DVDs across the world. Today, any subscriber can log into any device to watch programming without being a consumer of physical DVDs.
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2. Leasing
Leasing is a circular business model that allows customers to use a product or service for a set period, after which they can either return or renew it. This circular model eliminates the need to own a product and reduces waste by returning it to the circular economy.
Companies can create more sustainable products by leasing them instead of selling them. This has the added benefit of allowing companies to extend their reach and bring more products to more customers.
This model provides customers with access to products that they would typically not be able to afford, such as designer clothing, luxury cars, and high-end electronics.
Did you know you could rent a luxury bag from Gucci for a fraction of the price? Most celebrities don’t own the bags, dresses, or jewelry they flaunt on the red carpet. Regular customers can also take advantage of this.
Leasing is also popular in the construction industry, as companies can rent heavy equipment for short periods, rather than investing in their own. It serves as a way for even the smallest company to experience economic growth without the need for large capital investments.
Blend Coffee has taken this approach, by leasing commercial coffee equipment to cafes across the country. By leasing equipment to customers, Blend Coffee allows businesses to spend less upfront and more easily transition to more sustainable equipment.
It helps coffee businesses put more into sourcing the highest quality coffee bean or sourcing larger properties to fit more customers. More room for eager customers means more money.
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3. Sharing
By creating a marketplace for leasing or renting products, companies can reduce their environmental impact and expand their reach. Looking at the car-sharing model, people can access a vehicle when they need it and return it when they don’t, significantly reducing the environmental impact of car ownership.
The same model can be applied to everything from office space to power tools. A company known as Getaround has created a platform for shared car ownership, leasing cars from individuals and businesses to customers who need them. Coworking spaces have been around for years, as they allow individuals and companies to rent flexible and affordable office space that others share at different times.
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4. Upcycling
Companies can use product life extension by finding creative ways to repurpose them. Think of it as high-end recycling.
By designing products to last longer and be more repairable, companies can ensure that materials are reused and repurposed as long as possible. This model makes it easier to repurpose items that are hard to traditionally recycle. In some cases, an upcycled item can be worth more than its original version.
Patagonia, for example, makes its garments out of recycled materials and creates clothing designed to last a long time. This not only creates a more sustainable product but also reduces the company’s need to produce new materials and lowers its carbon footprint.
The outdoor clothing company has long prided itself on creating sustainable products, like its line of hemp clothing and its Worn Wear program, which repairs and repurposes clothing so it can be used longer.
Nike has found a way to recycle or repurpose their shoes by creating a Reuse-a-shoe program. Customers turn in old shoes that are remade into new shows, store material, apparel, and more.
Look at it this way. Instead of producing multiple versions of the same item. The company manufactures it once and then allows the same product to go through different life cycles.
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5. Recycling
Recycling is the circular business model that everyone knows and is familiar with. Companies have found ways to reuse materials to make new products, without having to constantly go back to sourcing raw materials for each item.
The same can be said for electronics. Companies like Nokia have created programs to recycle old mobile phones, batteries, and other electronics.
They have also found ways to recycle their own products, such as the Nokia Recycle program. The company takes old phones, upcycles them into new items, and resells them.
Let’s not forget about Apple’s well-known and highly utilized recycling program. Apple’s Reuse and Recycling Program allows customers to trade in old iPhones, iPads, Macs, and other devices for credit that can be used to purchase new items from the Apple Store. Even their refurbished products are still high quality and often in the same new condition.
Even medical facilities can benefit from the recycling category. Philips allows hospitals to trade in old medical equipment in exchange for discounts on new ones.
Like Apple, they take these old items with necessary precautions, recondition them, and resell them with a warranty. So medical facilities and hospitals can maintain up-to-date equipment while making a profit.
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Benefits of Circular Economy Business Models
By rethinking traditional business models and finding ways to create a closed-loop system, companies can help themselves and the planet.
Cost Savings
By implementing circular economy business models, corporate leaders can reduce overhead costs by using fewer resources and reducing energy consumption. These cost savings can then be reinvested into research and development, allowing circular businesses to remain competitive in the market.
By streamlining their processes, circular businesses can even reduce food waste. Yes, food production doesn’t have to be a linear process! China has used discarded corn husks for energy production since the 1980s.
Environmental Benefits
As many as 91% of circular economy businesses have been able to save money by reducing their use of resources and energy, while also creating jobs. Greenhouse gas emissions from many manufacturing processes are a huge source of pollution.
Scant Resources
Depending on the product model, some companies may deal with scant resources that can jeopardize their longevity. Companies relying on limited resources, such as rare metals, fossil fuels, or minerals can turn things around by utilizing biodegradable resource inputs.
For example, many famous car companies like Ford have begun producing electric cars and hybrids that significantly reduce their reliance on fossil fuels. Even luxury brand Mercedes-Benz has announced plans to go electric by 2030.
Variety of Approaches
A circular economy approach can take many forms, from product-as-a-service to leasing, sharing, and upcycling. Some companies can combine elements of these models. For example, the fashion or home goods industry can create products by upcycling and then use leasing as a way to keep the circular system going.
Industry Leadership
As more companies create or transition existing business models into circular business solutions, they will forge a path that will make them industry leaders along the likes of Apple, Philips, Toyota, Dell, and more. This will create more circular businesses and circular economy solutions, leading to new innovations for people and the planet.
As more individual companies get on the same path, a circular economic business system will be the norm. As a result, the planet will get a break and benefit from resource recovery.
Customer Satisfaction
Companies can create more desirable products in a circular economy that people are proud to show off and don’t feel guilty using. Circular business models can also help companies retain their customers longer, improve their reputations, and reduce the need to spend money on new materials thanks to product life extension capabilities.
These models can also create new customer experiences, allowing customers to be more involved in the product creation process and fostering brand loyalty. By rethinking their business models and finding ways to create a closed-loop system, companies can keep up with the ever-evolving consumer trends while helping to reduce their environmental impact.
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How To Get Started With Circular Economic Business Models
Adopting a circular business model requires changing the way companies operate and bringing new partners into the business model. To get started, companies should first assess which parts of their business are circular.
Where are there opportunities to close the loop and make products more sustainable? What partners can contribute to a more circular approach? How might customers benefit from a more circular business model?
Once companies have identified areas of opportunity, they can begin thinking about how to bring circular economic business models into their operations. This will require new ways of thinking and a long-term mindset, but the benefits may be worth the effort.
One way to kick off the process is to create a “business model canvas.” This visual tool helps companies identify their core strengths and weaknesses and brainstorm ways to bring circular supply models into their business.
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