Problems with the marketing of remanufactured products in mainstream consumer markets seem to be related to 3 major issues:
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I.
people seem unwilling to pay more for the fact that a remanufactured product is ‘greener’ than the original product [21, 38]
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II.
people perceive a quality risk related to remanufactured products [13, 21], [7]
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III.
people like to have the latest available functional features, and the newest designs (often the reason that people sell their product to buy a new one), so the market value of earlier product types is inherently lower
In the following 3 sections these 3 issues I, II and III are analysed, and consequences for business strategies are explored.
People do not pay more for green products
People do not pay higher prices (max 2–4%) for green products [13, 21], [38]. However, green brands have a competitive edge in attracting more buyers. This section describes this complex issue.
Ottman [25] was the first who described the opportunities and the pitfalls in green marketing. She introduced the notion of what we call the ‘double benefit’ for the buyer. Ottman distinguishes between the ‘personal benefit’ (e.g. comfort, looks, quality/price ratio) and the ‘environmental benefit’. Ottman realised that most of the buyers regard the environment as important in the long term, however, they buy products at the point of sale on the basis of the personal benefit in the short term.
The environmental benefit seems to be more suitable to support the brand loyalty (creates ‘repeat buyers’). The issue is that products must be marketed with a ‘double benefit’: a personal benefit as well as an environmental benefit. The marketing of German cars is an example of the use of this double benefit, e.g. BlueEFFICIENCY of Mercedes (efficiency is personal benefit, blue is environmental benefit), and EfficientDynamics of BMW (“environmentally friendly mobility and driving pleasure are anything but mutually exclusive”)
This double benefit marketing is in line with the logic of two experiments at the Delft University of Technology.
In the first experiment, the buying behaviour of 3 small groups of people (business managers, consumers and environmentalists), was analysed. The group of consumers and the group of business managers appeared to select their products on the basis of quality and price. Only when there is no preference on the basis of quality and price, environmental issues become important as a final decision criterion. This phenomenon is called the ‘double filter model’ [40]. The conclusion of this experiment is that the environmental benefit does not support the price, but supports the market volume.
In the second experiment in 2012, a comprehensive questionnaire on buying behaviour of shoes, was sent to 600 s year bachelor students of the faculty of Industrial Design Engineering, of which 200 responded. This enquiry, which tested 8 variations in advertisements, revealed that a green (environmental benefit) product within a green brand, triggered a much lower buying intention than a product in a brand which were both not green, but both advertised personal benefit only [38]. This result was in line with other experiments with students, that revealed that 50% of the students have a negative connotation of ‘green’ with regard to the personal benefit: these students presume that a product is either more expensive or has less quality when it is green, or do not believe the green claims of the manufacturer. However, [38] reveals also that a product advertisement, with an accent on quality (personal benefit), within a green brand (environmental benefit), scores the highest buying intention: a double benefit strategy scores the best, see Table 3.
Table 3 Buying intention for shoes on a 5-point Likert scale [38]
It is not expected that this pattern of buying intention of shoes will differ much from the buying intention of other consumer products with a strong correlation with the identity of the buyer, such as garments, smart phones, watches, and even cars. The conclusion for remanufactured products in consumer markets is that the high quality (personal benefit) of these products must be emphazised, to counteract the perceived risk of low quality [24]. Marketing in a green brand (environmental benefit) can support the competitive edge, to attract a maximum market share.
The perceived quality risk
The position of remanufactured products relative to the position of new products is depicted in Fig. 4. Although the value of a remanufactured product is higher than a second hand product (the buyer has less risk and gets a better quality), its perceived value (in consumer markets) is considerable lower than the perceived value of a new product.
The eco-costs, however, are considerably lower because of lowered use of primary raw materials.
The way to get the remanufactured product from quadrant 3 to quadrant 4 is to emphasise the high physical quality and add a PSS to the business model in order to:
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Shift ownership to the manufacturer, so that user does not have the risk of unexpected repair costs and/or a low second hand price (leasing)
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take away the inconvenience of a repair by excellent service
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build-in warranties and insurance
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enhance image by social media to build a strong brand
This list is obviously fully in line with the list of Section 2.2. It should be the basis of the new circular business models.
A typical example of the combined analysis of eco-costs and perceived quality/cost ratio is shown in Fig. 5, the market of refurbished laptops in Europe.
Companies tend to depreciate the laptops they bought for their staff in 4 years to zero, hence the book value of a laptop is 25% after the third year. As an example we take the Macbook Pro 15 in. (Retina), price 2100 Euro new, so it is 525 Euro after 3 years. The battery life is 1000 cycles, or 4 years of 250 cycles per year (daily use of the laptop). For companies it is attractive to sell these laptops to a refurbishing company for 525 euro, and give their staff new laptops. For the refurbishing companies it is attractive as well, if they can find buyers for a higher price.
The second hand price of such 3 year old laptops in the C2C market is, however, 30–35% percent, so there is a low margin (105–210 euro per laptop). When a higher price is proposed they lose potential buyers in the market, since the customer surplus value is reduced, see Fig. 2. When they offer built-in warranties, offer a good after sales service, and build a strong brand, they can enhance the market value (WTP in Fig. 2) to 55% to even 70% of the price when new (Based on prices in March 2017 from Leapp, Forza, and iUsed, all specialised in refurbishing of Apple products in the Netherlands), resulting in a margin of 630 Euro for laptops with scratches, up to 945 Euro for the laptops which appear ‘new’. Note that higher margins are required here for the service, the guarantees and the image.
Considering the eco-burden, it is a win-win situation as well. The eco-costs of a Macbook pro 15 in. is 144 Euro, applying all Eco-costs midpoints of Fig. 1, except from the 5 midpoints for the s-Eco-costs. This 144 Euro is calculated with the LCA-method, applying tables of the Idemat database of the Delft University of Technology (see www.ecocostsvalue.com and/or the data of the Idemat Materials Selection Database, available in the App Store and the Google Play store). Applying ‘economic allocation’, the remaining eco-costs after 3 years is 144/4 = 36 euro. The eco-costs of a new battery is 14 euro (referring the Idemat database), resulting in 36 + 14 = 50 euro for a refurbished laptop which will last for at least another 4 years
To summarise; the new Macbook starts in quadrant 2 of Fig. 4 (price 2100 Euro, Eco-costs 144 Euro); it moves, as ‘second hand’ to quadrant 3 (price 630–735 Euro, Eco-costs 36 Euro), and after refurbishment to quadrant 4 (price 1155–1470 Euro, Eco-costs 50 Euro). The refurbishing step is characterised by a relative small increase in Eco-costs (the Eco-costs are still low in comparison to new), and a big increase in price (WTP), caused by the business model which is used.
The low intrinsic market value
An important reason that an old product has a considerable lower price than new product is that people like to have the latest available gadgets, and the newest designs (often the reason that people sell their product to buy a new one). In modern consumer markets (contrary to B2B markets) products are thrown away or sold because of obsolescence in terms of ‘emotional value’, rather than that they no longer function. This is the reason that, for the time being, it can be expected that the price of a remanufactured consumer product cannot be the same as the price of the new product.
This issue is explained, for the case of smartphones, by Fig. 6, which combines the theory of diffusion of innovation [30] with the costs, price, value model of Fig. 2.
Rogers has studied the life cycle of product creations. According to Rogers, there is a small group of people (2–3%) who buy new innovations immediately upon market introduction. This group of people are proud to own the newest and ‘hottest’ products, and are prepared to pay more. As time goes by, they are followed by the early adaptors (12–13%), who analyse first and buy then. These early adopters have ‘respect’ in society, and are followed by the early majority (35%), and then by the late majority (35%). At last a group of laggards (15%) will buy the product when it is cheap, which is the moment sales will decline and the product will be taken out of the market.
Smart phones, laptops and other small electronic devices and toys, have a product type lifespan of 4–5 years [44]. Household appliances have a product type lifespan of 7–14 years. Costs are high in the early phase of the lifespan (allocation of R&D costs and high marketing costs), and get gradually lower (economies of scale). It is the nature of remanufacturing that these products come in rather late during the lifespan of the product type.
Looking at Fig. 6 it does not make sense to market the remanufactured product under the original brand name, since the market niche of the remanufactured product (functional buyers who value low costs above an expensive brand name) is totally different from the market niche of the original product (wealthier technology freaks). The branding that is required for these two markets is incompatible, which has two consequences for the OEM:
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It seems to be logical that the remanufacturing is done by third parties, selling their product under a different brand
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It seems unlikely that the OEM suffers from cannibalism of its main brand
The remanufactured smartphones should be branded as “it was perfect yesterday, it will suit you for another 4 years, since you do not need all the newest features of new phones”. The functional buyer will appreciate the lower price. For the remanufacturer the lower price still accommodates a reasonable profit margin, since a high R&D and marketing budget (more than 100% additional to the manufacturing costs of an iPhone) is not needed.
Note that this situation is totally different for the B2B market of Heavy Duty and Off Road (HDOR) equipment (Table 1). In this market, it makes sense that Caterpillar, with its durable, longer life products, remanufactures (i.e. reconditions the heavy parts and replaces the light parts) under his own brand name. In this way Caterpillar underpins the robustness of its equipment, which is a key attribute in the marketing of its new products. Moreover, when Caterpillar can sell these older products at a lower price with a good profit margin, they expand, rather than cannibalise, their own markets.
This suggests that the strategy of marketing remanufactured products depends on a combination of the characteristics of the product type and the product itself. For the product itself, the list of 8 characteristics of Section 1.1 is important. For the product type two characteristics are important: the lifespan, and the quality brand (high, medium, low).
In general, the non-food fast-moving consumer goods (e.g. garments, plastic toys, cheap gadgets in electronics) are not suitable at all for remanufacturing. A product type must last for at least 4–5 years, like smartphones and laptops. The longer the type lifespan, the more suitable the product type is for remanufacturing.
High quality branded products are more suitable for remanufacturing than low cost brands. The simple reason for this is the profit margin of the remanufacturer. High quality brands have high R&D costs and high marketing costs, whereas the remanufacturer has not. Furthermore the remanufacturer benefits from the fact that the OEM applies components with a high technical quality. Last but not least, the buyer regards the OEM product as desirable, so is inclined to buy the remanufactured product, which is affordable. All this leads to a business case with enough profit margin.
For low costs branded products the situation is different: R&D and marketing budgets are low, the quality of components is doubtful, and the level of desire of the buyer of such a remanufactured product is low, which leaves no viable profit margin for the remanufacturer.
The strategic choices of the aforementioned aspects are summarised in Table 4.
Table 4 The viability of remanufacturing as a circular business model in consumer markets
For the “no viable remanufacturing business” cases in Table 4, the only viable circular business model is to separate the still working used products and export them to developing economies, in order to give them a second life. Products which are damaged and therefore could be unreliable, must be recycled. This strategy applies to smartphones and laptops which can be shredded/melted down to recover a fraction of the metals in it (e.g. the process of Umicore). This approach applies to many other consumer products.