Recipe
See also: Access over Ownership, Leasing, Pay Per Use
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How: Offer your products or services on a rental basis rather than at a fixed price.
Why: Customers benefit from reduced initial acquisition costs and increased financial flexibility when opting to rent rather than buy products, particularly capital-intensive assets.
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A collection of business models that will help you understand the key drivers of business model success. The card deck will be ready for purchase in the end of 2023 and is now undergoing rigorous testing.
Reserve your deck!Rent for use, not possession
The term Rent Instead of Buy refers to the practice of offering products and services on a rental basis, rather than selling them outright. This option allows customers to access goods that they might not be able to afford to purchase upfront, while also avoiding the need to commit capital for an extended period of time. This can be especially appealing for capital-intensive assets, as it frees up financial resources for other purposes.
One key requirement for offering a rental option is the ability to finance the product in advance, as revenues from providing acecss, or renting out, will only be received at a later date. This is similar to the “Pay Per Use” model, but with the distinction that rentals are typically charged based on the duration of use, rather than the actual usage. It is not uncommon for there to be a degree of overlap between these two models - for example, rental car agencies may charge an additional fee for customers who exceed a predetermined mileage limit.
The circular economy
The Rent Instead of Buy model is closely linked to the circular economy, which represents an alternative to the traditional linear “buy, use, throw away” model. This shift in perspective highlights that the intrinsic value of an asset is not solely determined by the equipment itself, but rather by the use that is made of it and the performance gain that is obtained. This is what is referred to as the economy of use.
Example: renting IT equipment
One of the most common applications of the “rent instead of buy” model can be seen in the realm of IT equipment, such as servers, computers, and printers. Renting these assets, as opposed to buying them outright, can yield a number of benefits. For one, it allows for a high-performance and homogeneous IT system, as the flexibility of an evolutive rental contract enables the replacement of outdated equipment with the latest technology at any point during the term of the contract.
Additionally, renting IT equipment can also result in significant cost savings, as it eliminates the need to bear the maintenance costs associated with outdated equipment. The flexibility of rental agreements also allows businesses to scale their IT infrastructure up or down as needed, providing an added level of cost-efficiency and adaptability.
Why is the Rent Instead of Buy business model interesting for businesses and customers?
There are a number of reasons why the Rent Instead of Buy business model can make sense for the customer.
- Avoiding Initial Acquisition Costs. One of the biggest advantages of the Rent instead of Buy business model is that it allows customers to avoid the initial acquisition costs associated with buying a product outright. This can make it more accessible for customers who might not have the financial means to purchase a product upfront.
- Preservation of Financial Leeway. The Rent instead of Buy model also allows customers to preserve their financial leeway, as capital is not locked up for prolonged periods of time. This can be particularly attractive for customers looking to acquire capital-intensive assets.
For businesses, it caan make sense to offer renting over buying to customers for anumber of reasons.
- Greater Sales Potential. The ability to offer a Rent instead of Buy option can also open up new sales potential for businesses. This is due to the fact that financing the products in question in advance is a prerequisite for such arrangements, as revenues will only come in at a later date.
- Increased Revenue. Implementing the Rent instead of Buy business model can increase revenue for businesses as it allows them to collect rent payments over a period of time, rather than receiving payment for a product upfront. This can provide a consistent stream of income for the business.
What challenges will companies face s they implement the Rent Instead of Buy business model?
- Uncertainty of Long-term Profitability. One of the biggest challenges of implementing the Rent instead of Buy business model is the uncertainty of its long-term profitability. This is still being debated in the business world, and retailers must weigh the potential benefits against the risks before investing in this model.
- Acquiring new customers can also be a challenge when implementing the Rent instead of Buy model, as customers may not be familiar with the concept and may not be inclined to try it out, especially if they are used to buying products outright.
- Maintenance and Upkeep. Another challenge of implementing the Rent instead of Buy model is the need to maintain and upkeep the equipment being rented out. This can be costly and time-consuming, especially if the equipment is in high demand or if it becomes outdated.
- Risk of Default. Businesses that implement the Rent instead of Buy model also run the risk of customers defaulting on their rental payments. This can be financially detrimental for the business and can also damage the business’s reputation.
Where did the Rent Instead of Buy business model pattern originate from?
The practice of Rent Instead of Buy, dates back to ancient civilizations, with evidence suggesting that even the Romans engaged in such business transactions as early as 450 BC. This model was later adopted and applied to various sectors, including the medieval noble class, who rented out their lands to farmers in exchange for a tithe of the crops. In modern times, the most prevalent form of renting can be found in the real estate market, with a significant portion of apartments in German-speaking countries being rented rather than owned.
Applying the Rent Instead of Buy business model
The concept of offering products or services on a rental basis, rather than for a fixed price, is a widely applicable strategy. As consumer preferences shift towards a desire to use and access goods rather than necessarily owning them, industries ranging from consumer goods to automotive are starting to adopt this trend. It is likely that other sectors will follow suit in the near future.
Trigger Questions
- Is it the desire of our customers to possess our products, or are they content with simply utilizing them on a temporary basis?
- What financing options would be most sustainable in terms of generating a consistent flow of cash for our products?"
- Are our customers struggling to afford to buy our products outright?
- Is being more environmentally friendly important for our business?
- Are we looking for ways to reduce our inventory costs?
Examples
Dropbox
Customers rent hosting space from Dropbox, eliminating the need for physical hard drives shared over internal networks, which was the standard way of sharing files before Dropbox arrived.
Xerox
In the late 1950s, Xerox pioneered the supply of photocopiers on a rental basis to overcome high initial equipment expenditures.
Blockbuster
Blockbuster, a rental service for videos, DVDs, and online films, reached its peak in the late 20th and early 21st centuries with 60,000 employees in 17 countries worldwide. However, mismanagement and increased competition led to significant revenue loss and bankruptcy in 2010.
Airbnb
Airbnb is an online marketplace that allows people to rent out their homes or apartments to travelers. Instead of staying in a hotel, travelers can stay in someone’s home and get a more authentic experience of the local culture. This model has disrupted the traditional hotel industry and it has allowed people to make money by renting out their homes when they’re not using them.
Rent the Runway
Rent the Runway is an online service that allows people to rent designer dresses and accessories for special occasions. Instead of buying a dress or outfit that they’ll only wear once, customers can rent it for a fraction of the cost. This model is particularly popular with women who want to wear a designer dress to a special event but don’t want to spend a lot of money on it.
WeWork
WeWork is a co-working space provider that allows people to rent office space on a flexible basis. Instead of buying or leasing an office, customers can rent a desk or private office on an as-needed basis. This model is particularly popular with freelancers and small business owners who don’t need a full-time office, but still want a professional place to work.
Diebold ATMs
Facing a stagnant market for full-function ATMs, Diebold recognized a growing need for simple cash dispensers in high-traffic areas such as convenience stores and hotel lobbies. Initially, they tried to sell a straightforward cash dispensing product, but the businesses were not interested in buying hardware. Instead, Diebold adapted their approach and offered the cash dispensers as a service, leasing them at affordable rates and earning transaction revenues through convenience fees. This strategy led to the proliferation of mini-ATMs in various locations, turning the product into a service and creating a profitable new business model based on recurring revenues.
Source: The Pinocchio Problem: Why Your Product Wishes It Could Be a Service
Related plays
- Rent Instead of Buy business model pattern by Karolin Frankenberger and Oliver Gassmann
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