Shifting to a leasing ownership model

buyer and supplier shaking hands

Leasing, in which a person rents rather than buys a product from a company, has been heralded as a new circular ownership model with the potential to extend products’ useful lifetime, improve resource efficiency, reduce virgin resource intake, and reduce value and material losses to the economy.

That all sounds great for the environment and the economy, but what about the costs of setting up and maintaining a model of sales that requires complex contract and production coordination, maintenance costs, and recovery methods? What benefit does leasing rather than selling products bring to a business? And is renting rather than owning something that customers want?

The short answer to all these questions is that, while a leasing program is a more costly model to set up and more complex to maintain, the advantages it brings to both business and consumer considerably outweigh these costs. The long answer to these questions is what we will elaborate on in this article.

Benefits to the supplier

The supplier certainly has more operations to coordinate when offering their product as a rented service – such as maintenance of leased products and retrieving the product from the user at the end of the lease period – and in addition there are the increased costs associated to these operations. However, financial performance is actually higher in companies that have leasing as their revenue model. The study revealed that despite certain increased costs, leasing schemes do not squeeze companies financially but rather increase their economic performance, both in terms of return on sales and in terms of investors’ faith in the company.

Additionally, though some companies will initially experience higher production costs as a natural result of needing to produce more durable products using higher quality materials and methods, money will be actually be saved on production once the leasing system is in motion. This occurs once the company has begun to recover their end-of-lease products for refurbishment or upgrade and re-lease, or for gathering their materials and components for use in creating new products. The supplier is able to save money because there’s significantly fewer production costs that go into fixing up an existing product or generating a new product out of old components than the costs that go into sourcing virgin materials and producing new products from scratch.

Leasing also decouples growth from natural resource consumption, meaning that suppliers will be less dependent on new natural resources to maintain and grow their production capacity. In an age when virgin natural resources are becoming increasingly scarce, it is in companies’ best interests to reduce their reliance on them.

And finally, a relationship-based business model retains customers better than a single-transaction model, as customers prefer a supplier that takes responsibility for the performance and maintenance of a product throughout its entire life span rather than only at the point of sale.

Benefits to the buyer

For the buyer, leasing is also the more financially attractive ownership model. When a product is leased rather than purchased, the buyer pays a lower up-front cost for the item. When renting a dress, the buyer must pay the seller a lower fee to loan it out for a period of time than they would to purchase it outright from the store. For big-ticket purchases, such as a washing machine, the costs are spread out over time as the buyer pays in instalments rather than a high up-front cost at purchase.

The buyer also can enjoy that the provider is responsible for delivery, maintenance, and take-back of the product, which guarantees them a product that works, is repaired when it breaks, and upgraded when it’s outdated. This allows the customer to easily stay current with the latest innovations in their technology, which is swapped out in place of their outdated technology as a part of their leasing agreement.

Furthermore, leasing allows the customer flexibility. The duration of the leasing contract can be negotiated to fit the customer’s needs, meaning that no buyer is left with a product they no longer need and must dispose of on their own – they only rent for as long as needed, and once its usefulness has expired, they just send it back to the leasing company.

All of the above ultimately reduces the risk of making large purchases, such as a car or washing machine, for the buyer. This, coupled with the better customer care they receive in a relationship-based business model, makes leasing an attractive ownership model for buyers.

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