Innovation sparks industry transformation. The two main kinds of innovation that can alter consumption behavior are technology and type of ownership. Disruptive technologies — automobiles, digital signals and the like — lead to shifts in what consumers buy. New methods of ownership — leasing in markets where buying is the de facto means of ownership — lead to shifts in how consumers buy. And market shares migrate in hordes to companies that can effectively combine both tactics.
Witness the movie rental market. Companies such as Blockbuster and West Coast Video "leased" physical video tapes to consumers to watch for a few days. Today companies like Netflix that distribute copies of movies online are putting Blockbuster and the like out of business. Netflix succeeded by combining a disruptive technology (digital signals) with a new ownership model (rent-as-much-as-you-like monthly subscriptions).
Sustainability is sparking creative thinking in the methods of ownership category of innovation. Such action could lower consumption’s environmental impact with limited financial investment. Recently Best Buy introduced a Buy Back option whereby consumers can buy the right to return, at a future date, a product at 10-50 percent of the product’s value. This model could reduce the amount of waste sent to landfill and the amount of new, so-called virgin, materials needed to meet our growing consumption hunger. Best Buy’s initiative shows how sustainability, when thought about holistically, can lead to innovation and, potentially, enhanced profitability.
What other markets are ripe for this shift to a pseudo leasing arrangement? Let’s focus on U.S. consumption of physical goods (it’s hard to return a "used" service). According to the U.S. Census Bureau, consumers spent $55 billion on drugs and health aids (the highest category of individual consumer expenditures outside automobiles), $23 billion on computer hardware and software, and $12 billion on furniture. Clearly these markets are big enough to justify exploration of a leased instead of owned consumption model.
Drugs and health aids won’t be leased anytime soon. Computers are often leased in the business-to-business market, but the method has failed at least once (remember PeoplePC?) in the individual consumer market. Furniture can and is leased.
Could pseudo leasing arrangements succeed in other individual consumer markets, such as the clothing, sporting goods or books markets? Possibly, but it’s important to remember that the leasing model’s success is based on the retail company’s ability to earn a profit on the arrangement.
Profit from lease-like arrangements can be earned in at least three ways. The first is increasing the number of times an item can be sold at an incremental profit. College textbooks, which tend to be quite expensive, are beginning to be leased. A student can lease a textbook at a lower price than the outright purchase price. Upon return, the textbook leasing company can lease the book again, and so on throughout the book’s useful life. Chegg.com is one example of such a company.
The second way is by leasing an item to a consumer at a price that is greater than the reduction in the value of the product at the end of the lease arrangement. This model has worked for years in the auto industry. But when was the last time you leased, say, an item of clothing? Probably for a wedding or once-in-a-lifetime event. After all in the clothing market, the leasing model works for high-end items, such as tuxedos and wedding dresses. But such an arrangement doesn’t work for a casual pair of jeans, let alone a t-shirt or socks.
Such prima facie evidence suggests that an item has to be priced high enough for businesses to make money on leasing instead of outright selling. A $20 item is unlikely to be leasable at a price that returns a meaningful profit. Then is society doomed to a future of overpopulated landfills as a means to ensure companies are profitable? Perhaps not, as the Best Buy example suggests.
Best Buy can resell or recycle (and potentially resell the materials to manufacturers) the item to garner such an additional revenue stream. The key is to find an additional way for the retailer to be paid. This is where selling used materials back to manufacturers, the third approach to profitability in the leasing model, links sustainability with economics. This approach’s success is based on the used material being more affordable to source and use than virgin materials.
If materials’ prices continue to rise, the used material as sourced material approach will become more economically attractive to companies and potentially consumers alike. The companies that explore and perfect this model in markets where buy is the only option might have an opportunity to grow and capture market share. At worst the global pursuit of sustainability will be the main beneficiary.
Netflix envelopes - CC license by Urthstripe (Flickr)