Many circular economy initiatives begin with an engineering question: can this product, component or material be recovered and returned to useful service? That question matters, but it is not enough. A technically successful remanufacturing process can still fail commercially if retailers prefer selling new products, customers distrust restored ones, returns arrive unpredictably, warranty responsibility is unclear, or one party captures the value while another carries the cost.
There is also a deeper issue. If a manufacturer earns money mainly by selling more units, durability and repairability can work against its own revenue. Recycling more at the end of life does not change that incentive. A different approach, sometimes called the performance economy, sells the use, availability or outcome of a product while the producer keeps an economic connection to it, often by retaining ownership. Then longevity, maintenance and recovery become sources of profit rather than costs.
This article explains why circular products need commercial design as much as reverse logistics, how ownership and incentives shape the economics, how to decide whether selling performance could work for your products, and the capabilities and cash flow changes involved.
From linear to performance
The economist Walter Stahel, in a 2016 commentary in the journal Nature, distinguished three industrial logics:
- A linear economy: resources are extracted, products are made and sold, and ownership and end-of-life responsibility pass to the buyer.
- A circular economy: products and materials are kept in use through maintenance, reuse, repair, remanufacturing and recycling.
- A performance economy: the business sells access, use or results, such as hours of operation, distance travelled or clean items, while it or an asset manager keeps ownership of the product.
The distinction matters because a business can recycle more without changing its incentive to sell more new products. The performance model asks a harder question: can the business earn more by preserving the productive value of its products than by repeatedly replacing them?
Common misreadings
- Circularity means recycling. Recycling sits late in the hierarchy of value preservation. Maintenance, reuse, repair and remanufacturing preserve far more of the design, labour, energy and materials embodied in a product.
- Reverse logistics is the main challenge. Collecting products back is hard, but a good collection network cannot fix conflicting incentives.
- Recovered products are automatically cheaper. Remanufacturing involves inspection, uncertain condition of returns, disassembly, testing, rework, certification and warranty risk. Low acquisition cost does not guarantee low commercial cost.
- Product-as-a-service is just financing. Leasing can help cash flow, but the strategic value comes from redesigning incentives across the product’s life.
- Retaining ownership guarantees circularity. A poorly run leasing model can still waste resources. The business needs the capability to maintain, recover, refurbish and redeploy products.
- Customers judge restored products on price alone. Reliability, warranty, availability, trust and brand matter as much as the discount.
Four flows that must work together
A circular product involves more than material moving backwards. Four flows need to support one another:
- Material flow: products, cores, parts and waste moving forward and back.
- Information flow: product condition, history, ownership, demand and warranty records.
- Cash flow: deposits, credits, buy-backs, channel margins, service revenue and working capital.
- Decision flow: who sets prices, acceptance criteria, marketing effort and customer promises.
Weakness in any one can block the others. A circular business model is therefore largely a problem of coordination between parties.
Design value across the channel
Research by Zhao and colleagues in 2017 on marketing remanufactured products found that the best commercial arrangement between producer and retailer depends on how dependent they are on each other, with collaborative arrangements becoming more important as interdependence grows. The practical lesson is to map, for any circular offer:
- Where value is created: savings, revenues, avoided costs and strategic benefits.
- Where burdens fall: collection, inspection, inventory, warranty, financing and compliance.
- Who decides: price, acceptance of returns, marketing and customer promises.
- Whether incentives match: whether channel margins, sales rewards and return credits support the behaviour the model needs.
If distributors earn more on new products, sales staff are rewarded on new-product revenue and customers lack a reason to return used products, the business has circular technology but a linear commercial structure.
Cannibalisation is a portfolio question
Remanufactured or service-based offers can take sales from new products. That is often treated as a problem to minimise. At the level of the whole business, some displacement can be sensible if the circular offer protects a customer relationship, reaches a price segment the business would otherwise lose, creates service revenue, secures supply of scarce materials or reduces exposure to price swings. Judge the portfolio on total lifetime value across products, services and customer relationships, not on protecting new-product sales alone.
When selling performance makes sense
A performance model is more likely to work when:
- Customers value the outcome more than ownership. Many customers want availability, function or results rather than the asset itself.
- The product has meaningful lifetime value that maintenance, upgrades or remanufacturing can preserve.
- The provider can influence performance. If misuse by customers dominates failures and cannot be controlled by contract, retained ownership creates unmanaged risk.
- Recovery economics are credible. Transport, inspection, repair and redeployment must cost less than the value preserved.
- The business can finance the asset base. Moving from one-off sales to recurring revenue changes cash flow, and the business must be able to fund products it no longer sells outright.
A sixth question cuts across all five: does retaining responsibility create an advantage competitors cannot easily copy? If not, the model may add complexity without differentiation.
Contracts for performance offers
Selling an outcome rather than a product needs a different kind of contract. It should define the performance being sold and how it is measured, such as availability, output or hours of operation. It should set out the customer’s obligations, such as using the equipment within agreed limits, providing access for maintenance and reporting problems promptly. It should cover who owns the equipment and the data it produces, what happens if the equipment is damaged or misused, how prices change over time, and what happens at the end of the term, including return of the equipment in an agreed condition. Clear contracts protect both sides and reduce the risk that customers use equipment in ways the provider cannot control. Take legal advice on drafting.
The installed base becomes a resource
When a business keeps an economic connection to its products, through ownership, deposits, buy-back agreements, take-back rights or service contracts, products in customers’ hands become more than past sales. They are a source of components for remanufacturing, service revenue, upgrade opportunities, usage data and future material supply. That can be especially valuable where materials are expensive or supply is unreliable. The aim is to preserve a pathway back to value, which does not always require legal ownership.
New capabilities are needed
Circular and performance models are knowledge and labour intensive. A business may need asset tracking, condition monitoring, service networks, reverse logistics, inspection and grading, remanufacturing processes, spare parts planning, modular product design, contracts that define use, maintenance and return, and accounting for residual values. These are not side activities. They become part of how the business competes. Selling performance without building them means carrying the risks of ownership without capturing the benefits.
Design for the return trip
When a producer keeps responsibility after sale, design decisions made at the start shape later costs and value. Products that are easy to disassemble, identify, repair, upgrade and recover create options. Products with inseparable materials or no way to assess their condition create liabilities. Connect product design with the commercial model and the recovery system. In some product categories, extended producer responsibility and product stewardship schemes also create obligations, so check what applies to your products.
Six commercial tests
Before scaling a circular offer, check:
| Test | Question |
|---|---|
| Customer proposition | Why would a customer choose it, beyond price? |
| Value map | Where are savings, revenues and avoided costs created, and for whom? |
| Burden map | Who carries collection, inspection, inventory, warranty and financing? |
| Decision rights | Who controls price, acceptance, marketing and promises? |
| Incentives | Do margins, sales rewards and return credits support the model? |
| Portfolio effect | What happens to new sales, service revenue, retention and future design? |
An attractive process that fails one of these tests is not necessarily a bad idea. It is an incomplete business model.
A worked example
This is an illustration. A manufacturer of industrial air compressors sells units outright through distributors. It also remanufactures used compressors, which cost about 40% less to produce than new ones, but sales of remanufactured units are tiny. Distributors earn more on new units, sales staff are paid on new-unit revenue, customers worry about warranty support and used units come back unpredictably because customers have no reason to return them.
The manufacturer tests a performance offer with a few industrial customers: a fixed monthly fee for guaranteed compressed air capacity, including maintenance, monitoring and replacement. The manufacturer retains ownership of the compressors. Distributors earn a monthly service commission rather than a one-off margin. Sales staff are rewarded on contracted monthly revenue. Remanufactured units carry the same performance guarantee as new ones, because the customer is buying availability, not a particular machine.
Because the manufacturer now pays for breakdowns and energy-inefficient running, its engineers redesign the next model for easier servicing and modular replacement of wearing parts, and add remote monitoring to schedule maintenance before failures. Returned units flow predictably at contract end and become feedstock for remanufacturing.
The pilot shows two challenges. The manufacturer must fund the compressors on its own balance sheet, so it arranges asset finance for the program. And some customers prefer to own equipment outright, so the traditional sale remains available alongside the service offer. Over two years, the service offer grows steadily, remanufactured units become a significant share of deployed equipment and customer retention rises.
How this applies to a small Australian business
Small manufacturers and equipment suppliers can explore circular and performance models step by step:
- Start with one product that has high lifetime value and clear service potential.
- Map the full lifecycle: sale, use, maintenance, failure, return, recovery and end of life.
- Map who gains and who pays across your business, your channel and your customers.
- Align incentives for distributors, sales staff and customers.
- Pilot with a few customers, measuring utilisation, maintenance cost, recovery rate, residual value and cash flow.
- Plan the finance needed to hold assets on your balance sheet, and discuss it with your accountant and financier.
- Check obligations under any product stewardship or take-back schemes that apply to your products.
- Make claims carefully: environmental claims about remanufactured or circular products must be accurate under the Australian Consumer Law.
The articles on turning waste into a resource, qualifying recycled materials for real products and durability is sustainability cover related ideas.
Signals worth watching
- Return rates without good return quality or processing times.
- Distributors offering circular products but rarely recommending them.
- Recovery costs exceeding residual value.
- New product designs becoming harder to repair or recover.
- Service revenue rising while asset utilisation falls.
- Balance sheet pressure during the transition.
- Circular claims based mainly on recycling while product life shortens.
Common mistakes
- Treating circularity as a logistics problem only.
- Leaving channel incentives unchanged.
- Assuming remanufactured products are cheap to sell.
- Measuring success by protecting new-product sales.
- Retaining ownership without the capability to maintain and recover.
- Underestimating the finance needed to hold assets.
Frequently asked questions
Do we need to own the products to run a circular model? Not necessarily. Deposits, buy-back guarantees, trade-in programs and service contracts can create a similar economic connection without legal ownership.
Will customers accept remanufactured products? Many will if warranties, performance and support are equivalent to new products and clearly explained. Trust often matters more than the discount.
What happens to the equipment at the end of a contract? Plan for it from the start: inspect, refurbish and redeploy it with another customer, remanufacture key components, or recycle what cannot be reused. Residual value at the end of contracts is a key part of the model’s economics.
Is product-as-a-service suitable for small businesses? It can be, for durable equipment with clear service needs, but the cash flow change is significant. Start small and plan finance carefully.
How do we price a performance offer? Start from the total lifetime cost of providing the outcome, including asset finance, maintenance, energy where you carry it, recovery and residual value, then test what customers would pay for the outcome compared with owning.
Questions to ask
- Do our customers want the product, or the outcome it delivers?
- Which of our products keep enough value to justify recovery or stewardship?
- What would we design differently if we kept responsibility for the whole life?
- Who captures the value in our circular offer, and who carries the burden?
- Do our channel and sales incentives support or undermine circular offers?
- Can we finance the move from sales revenue to recurring revenue?
Bringing it together
Circularity becomes commercially powerful when it changes who carries the economic consequences of product life. Recovering products is the technical half. The commercial half is designing ownership, incentives, channel economics, decision rights and cash flow so that preserving value is more profitable than replacing it. Start with one product, map who gains and who pays, align incentives, build the capabilities needed and pilot before scaling. The question is not only whether the business can recycle more, but whether its model can make lasting products pay.
Source: KEVOS notes, drawing on Walter R. Stahel’s 2016 commentary on the circular economy in Nature and research by Zhao and colleagues (2017) on marketing remanufactured products. Examples and figures in this article are illustrations.
