Consumer demand for sustainable products is rising, and businesses worldwide are pressured to adopt more circular models to meet this demand. While there is no shortage of discussion among policymakers and analysts about the high-level frameworks needed to achieve a more circular economy, there remains a significant gap in the practical guidance available to individual businesses seeking to make the transition.
The challenges are significant, from navigating complex supply chains to changing consumer behavior, but the opportunities are equally massive. In fact, businesses that embrace circularity stand to gain profitable, and possibly even more profitable, revenue streams.
With the right strategies and a willingness to innovate, companies can quickly launch circular business models and gain a competitive edge in the market. The transformation to a circular economy is inevitable, and businesses that act now will be better positioned for success in the long run.
Most of the global economy today is optimized for a linear business model, where raw materials are extracted from the earth and used to produce goods; the goods are consumed and, finally, discarded as waste. A linear economy drives over-consumption as it promotes the constant production of new products and the disposal of used ones, leading to the continuous depletion of resources and increased waste and pollution. According to the United Nations Environment Programme (UNEP), manufacturing products and goods accounts for approximately one-third of global greenhouse gas emissions. This includes emissions from the extraction of raw materials, production, transportation, and end-of-life disposal.
The solution is moving to circular economy business models, where resources are kept in use for as long as possible, extracting the maximum value from them while in use, and then recovering and regenerating products and materials at the end of each service life. It aims to reduce waste and pollution and promote sustainable economic growth by keeping resources in use for as long as possible. This is no longer just theoretical, as many great circular economy examples from different industries already exist.
In the Twice Talks video series, Håkan Nordqvist, former Head of Sustainability and Innovation at Ikea, lists several reasons why the timing is now perfect for brands and retailers to look at circular business models.
From the perspective of global commerce, in the linear model, value chains are optimized for the most cost-effective extraction of raw materials and low production and logistics costs. This enables low retail prices while maintaining margins for manufacturers and retailers. However, this model ignores the fact that raw materials are not infinite, and as we consume them at an accelerating rate, it becomes more expensive to produce new goods, which is reflected in the price of the final product. This is not sustainable in the long run, as Håkan explains in the video above.
In circular economy business models, the traditional make-and-sell system is replaced by other forms of commerce such as sales and buybacks, leasing, renting, subscriptions, and other circular business models. While a product's sales price is lower, it's sold several times, so the lifetime value of a single product is bigger. Therefore, the emphasis in product design and manufacturing shifts away from unit costs and more towards durability.
Only a tiny portion of the global economy today is circular. A report from the Ellen MacArthur Foundation states that the global economy is only 9% circular. A vast majority of resources are used once and then discarded, resulting in significant waste and emissions. However, major policy changes and consumer demand are speeding up the transformation of global commerce from linear to circular systems.
Governments worldwide are taking action to tackle the urgent challenge of climate change. The business world is not immune and will need to act in response. In the European Union alone, within the EU Green Deal, a series of new regulations is poised to transform the way we manufacture and consume goods to be more aligned with the circular economy, forcing a change in business and operating models. Key elements of upcoming or planned regulation include:
The US is following suit with several existing and proposed regulations related to the circular economy, such as:
Consumer demand is increasingly pushing businesses to offer more new business models. This is partly due to growing concerns about the environmental and social impacts of over-consumption and waste. Consumers are becoming more aware of these issues and actively seeking products and services produced and consumed more sustainably. Recent data from Nielsen IQ found that 46% of consumers are looking to brands to take the lead on creating sustainable change.
In addition, consumers are also starting to demand more transparency and accountability from companies about their environmental and social practices. A study by Deloitte found that 28% of millennials and Gen Z have started or deepened their relationships with businesses whose products and services benefit the environment. This has led to increased eco-labeling and certifications that help consumers make more informed purchasing decisions.
For example, Patagonia, a well-known outdoor clothing brand, has been a leader in promoting transparency and sustainability. Already in 2011, the company launched its Footprint Chronicles, a website that shows the environmental and social impact of its products. The company also encourages customers to repair and reuse its products and has taken a strong stance on environmental issues such as protecting public lands.
Furthermore, there is a growing trend towards the sharing economy and collaborative consumption, where consumers are more willing to share products or use them more flexibly and temporarily. According to a report by PwC, the global sharing economy is expected to grow from $15 billion in 2013 to $335 billion in 2025. A study by Nielsen found that 68% of global respondents were willing to share or rent their assets for financial gain. All of these changes in consumer demand are leading to the rise of circular business models such as rental, leasing, and subscription services that offer consumers more affordable and sustainable alternatives to traditional ownership models.
According to a report by the Ellen MacArthur Foundation, adopting circular economy principles could reduce carbon emissions by 45% by 2030. It could contribute up to 20% of the total emission reductions needed to limit global warming to 1.5 degrees Celsius above pre-industrial levels. This report also highlights the potential of circular economy approaches in sectors such as food, mobility, and the built environment, among others, to achieve these emissions reductions.
The circular economy has a crucial role to play in combating the climate crisis. By promoting reusable materials, the circular economy reduces the need to extract virgin materials and the associated carbon footprint from producing and transporting those valuable materials. By transitioning to circular business models, companies can keep driving economic growth, decoupled from environmental degradation and resource depletion.
Circular business models present a massive business opportunity, but the public discourse often misses this point. While there is no shortage of high-level policy talk on frameworks and the circular economy concept, there is a lack of emphasis on profitability and real business implications.
As Håkan explains in the below video, the best business opportunities are normally found in the areas where there's a huge customer need or where there's a massive deficiency on a system level that needs to be addressed. And climate ticks both of these boxes.
Circular business models can be more profitable than linear models. By selling products as a service, offering rentals, subscriptions, or buyback and resell models, businesses can recover a product's entire retail sales price after a few service cycles.
In our experience supporting merchants running circular business models, we've observed full retail price recovery in 2-6 service cycles, depending on the product category and whether the product is offered for short or long-term use. Once the initial price is recovered, every additional customer transaction adds to the product's profitability. The economics are across all circular business models, such as subscription models or buyback and resell models.
Of course, some expenses are associated with these circular products' sale-return cycles, such as logistics and maintenance. However, these costs are generally low for durable goods manufacturers and retailers.
Circular business models can help businesses expand their customer base. By decreasing the price point and making products more affordable, companies can reach a consumer segment that might not be in the market to buy a product. Instead of producing more goods and creating waste, more customers can benefit from the same output in a production process through better product utilization across the product's lifecycle.
Circular business models also inherently drive more return customers; every time customers return products, a new opportunity to engage with the business is created. With circular business models, brands stand to have long-term relationships with customers and can build ongoing dialogues between customers and their products.
Several European apparel brands are currently experimenting with buyback programs where a product return is exchanged for store credit. This, in turn, drives brand loyalty and customer value.
A complete transformation to the circular economy may feel like a massive task. It is indeed a significant economic, infrastructural, and commercial transformation impacting all parts of the value chain. However, it will be necessary, and those players who act now will have an advantage in the long term.
Starting with a small-scale commercial pilot, using third-party platforms is a cost- and time-effective way to get started quickly and begin collecting learnings to use on the path to circularity.
Transforming a business to a circular model requires changes across all value chain aspects, including supply chains, product design, manufacturing, sales, marketing, and support functions.
In order to support disassembly and material flows optimized for reuse, products need to be designed and manufactured with circularity in mind. Integrating the flow of returned products into remanufacturing or recycling materials will take time but will ultimately cut manufacturing costs in the long term.
The organizational implications of the transition to circularity are also significant. Supply chain and product development teams will need to adapt to new opportunities. Retailers must be on board and willing to embrace new sales models. Finance teams will need to shift investment strategies to support circular business models that prioritize cash flow over buying and selling.
While each step of the transition process may be a massive undertaking, the good news is that circular business models can be implemented quickly in the short term. By capturing opportunities for rentals, subscriptions, buybacks, and other circular business models, businesses can start earning revenue while larger-scale transformations take place over the course of several years. Beginning the process today is crucial for companies to remain competitive in the long term.
The transformation towards circular business models will become increasingly crucial in the long term as depleting natural resources drive up raw material costs. The OECD predicts that global resource consumption will double by 2060, while a study by McKinsey & Company suggests that commodity prices are likely to remain elevated due to rising demand and supply constraints. As a result, manufacturers who can extend product lifetimes by controlling their value chains will have an edge through lower input costs and better control of profitability.
Vertically integrated players, such as OEMs and retailers who own their value chains, will have an advantage over pure retailers as they can control the quality and durability of their products. They can also better optimize material flows, product design, and manufacturing processes to support circularity.
In contrast, retailers who rely on other companies' products may take longer to achieve a transformation. As more brands transition to circular commerce, the economics of retail will have to change to consider this. Retailers who rely on low-cost supply chains may need to rethink their approach to remain competitive.
Although circular business models require significant investment, companies can start capturing revenue streams in the short term while larger-scale transformations take place over the course of several years. In our experience helping multinational brands start circular commerce businesses, we have witnessed companies with still nascent, single-digit percentage shares of their revenues generated through circular business models already achieve double-digit shares of their total profits.
Starting a circular business model may seem daunting, but getting started with a quick pilot is possible. The benefits of starting with a pilot are numerous. For one, it's a fast way to collect valuable data and feedback on customer preferences, enabling you to design products and services that better meet consumer demand.
It also allows you to identify operational implications of circularity, such as limitations to product durability, opportunities for product redesign, and mapping out repair, refurbishment, maintenance, and logistics networks.
Moreover, a circular business model can generate income from circular flows immediately, helping cover the potential more extensive changes in the supply chain and raw material flow in the future. As you begin piloting, you can take the best learnings, create wins for your organization, and integrate what works into your existing business as you start seeing growth.
Launching with an external platform is a good way to start a circular journey. This allows you to quickly launch on selected categories and start gathering learnings from data and customer behavior without having to develop your own commerce infrastructure.
You can collect data on operations such as product durability, length of service cycles, and how often products are returned, along with financial measures such as product lifetime value. Customer feedback and satisfaction are paramount too.
As said, going from zero to a small circular revenue stream can be done relatively quickly by leveraging an external platform and creating a simple offering focused on the experiences customers are most predicted to be seeking.
These steps will get you quickly on the way to success:
Following these steps enables building a circular revenue stream quickly and cost-effectively, learning from customer feedback and behavior, and optimizing the program accordingly. This will help you scale further and create more circular business models in the future.
In conclusion, implementing a circular business model may require some investment and changes to your organization, but piloting it is relatively easy and can generate immediate benefits.
By starting small, learning from customer feedback and behavior, and optimizing the program accordingly, you can gradually implement circularity into your company profitably and create a more sustainable business for the future.