Element
See also: Access over Ownership
| Key Partners | Key Activities | Value Propositions | Customer Relationships | Customer Segments | |||||
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How: The business typically maintains ownership of the leased product and is responsible for delivery, maintenance, and take-back. The customer pays for continuous access to the product and its service rather than for the number of uses.
Why: Let customers acquire the right to use a product without having to make a large payment up front. Profit from a relationship-based service contract and a higher price paid in several instalments.
This business strategy is part of the Business Model Patterns printed card deck.
Proven business models that have driven success for global leaders across industries. Rethink how your business can create, deliver, and capture value.
Get your deck!Under the Leasing business model, a company purchases a product and then leases it to a customer for a periodic fee. The seller passes the property of the item to a financier, enabling the buyer to use the item for a given period of time. In the end, the buyer has the option to purchase the item at the current market rate. This arrangement allows the seller to dispose of the item, the financier to profit from it, and the buyer to use it while avoiding the total costs of ownership.
Companies that use the leasing business model sell continuous access to a product or service over an agreed period. The model typically involves three parties:
- The seller: the owner of the product or service that sells ownership of the item to the lessor in exchange for payment.
- The buyer (lessee): negotiates access to the product or service in exchange for periodic payment to the lessor
- The financier (lessor): a third-party that enters into an agreement with the lessee and provides the item for temporary possession.
The leasing business model is often used in transactions involving the exchange of expensive physical goods, including:
- Commercial and industrial fleet vehicles
- Manufacturing and industrial plant equipment
- Restaurant and hospitality equipment
- Medical and laboratory equipment
- Municipal equipment
There are advantages to the leasing business model for the seller, lessee, and lessor. For the seller, leasing can provide early revenue and the opportunity to build a sustainable and loyal relationship with a buyer. For the lessee, the leasing business model offers affordability and the ability to continuously upgrade equipment. For the lessor, the model can increase sales and offer tax benefits.
There are also disadvantages to the leasing business model. For the seller, there may be a loss of control over the product and the potential for decreased profitability. For the lessee, there may be additional costs and the inability to fully customize the product. For the lessor, there is the risk of default on payments and the need for careful risk assessment.
Applying the Leasing business model
Product manufacturers may consider transitioning from a single-transaction sale model to a relationship-based service contract. Leasing differs from a pay-per-service unit model in that the customer pays for continuous access to a service over a defined period, rather than based on the number of uses.
Leasing arrangements create ongoing relationships between sellers and lessors, and often involve a service agreement requiring the seller to provide support throughout the term of the contract. Sellers of leased equipment rely on relationship-building and high-quality customer service, and focus on generating repeat sales in the form of lease renewals or expanded leasing arrangements.
To succeed in the leasing model, equipment must retain residual value, demonstrate reliability and durability over time, and be compatible with high-quality control. Leasing revenues can provide early customers and early revenues for the seller, but also come at the cost of full revenue potential since revenues are shared with the lessor.
Key metrics to consider include the cost of financing, since leasing of technology typically requires the participation of a financial backer.
Examples
Rent the Runway
As a subscription service, the fashion service enables women to rent unlimited designer clothing.
LeasePlan
Being one of the largest vehicle leasing companies in the world, it also offers fleet management for its biggest customers.
Tesla
Tesla has its own leasing arm, which is a crucial distribution element that enables the company to increase its sales. By offering leasing options, Tesla can make its products accessible to more people who may not otherwise be able to afford them. Tesla can also adjust the price of the lease based on the driving behavior of drivers, making it more affordable for good drivers.
Source: Four Week MBA
Trigger Questions
- Can establishing a long-term leasing relationship pave the way for easier upgrades, cross sells and upsells later?
- How can you repurpose or sell assets as customers end their lease?
This business strategy is part of the Business Model Patterns printed card deck.
Proven business models that have driven success for global leaders across industries. Rethink how your business can create, deliver, and capture value.
Get your deck!Related plays
- Leasing by WBCSD
- What Is The Leasing Business Model? by Gennaro Cuofano
- The leasing revenue model and leasing arrangements by MaRS Startup Toolkit
