Lighting as a Service
By offering razors to customers who agreed to sign up for regular replenishments, the Dollar Shave Club was one of the first direct-to-consumer startups that successfully worked through a subscription model. With the likes of Netflix, Spotify and Office 365, subscription-based services are swiftly taking over all facets of our economy – including the built environment.
From grooming products to vegetables, entertainment to cars: providing services and products by subscription is a shift in the way organisations are building long-term relationships with their consumers, and lighting is next in line. With so much emphasis on subscription-based services, it's no surprise lighting organisations have followed in the footsteps of Apple and Spotify. Lighting as a Service (commonly referred to as LaaS) means customers pay a monthly fee for the lighting service to upgrade their lights, rather than a significant one-time capital investment. Similarly to their Amazon, gym membership or car lease subscription, LaaS gives consumers continual access to the goods and services which LEDs provide – essentially, using the light when they want it.
As the Subscription Economy marches into new industries, LaaS is proving to be more prevalent in commercial and citywide installations of LED fittings, particularly in retrofitting buildings and outdoor facilities. LaaS aims to reduce the installation and maintenance costs and facilitate the growth of the LED market – and in doing so, manufacturers and service providers are offering new financial structures which address the pain points of their customers.
Craig DiLouie, education director for the Lighting Controls Association, confirms that LaaS allows the lighting upgrade to be accounted for as an operating expense and can be paid as a monthly fee that is ideally less than the energy cost savings, generating instant positive cash flow. He explores the benefits of this new business model in the industry, “LaaS addresses two major barriers to installing LED lighting in existing buildings: the initial cost of purchasing a new lighting system and fear that any technology installed today will be eclipsed by future tech,” he explains.
Craig reiterates that the first barrier is addressed by paying for new lighting as a monthly fee offset by energy savings. The second is addressed by either including upgrades in the contract or replacing the old system at the contract end date without being tied to it. “By reducing risk and simplifying financing, LaaS can facilitate a lighting upgrade that might otherwise be delayed or not gain approval,” Craig reports.
Growing implementation of the Internet of Things (IoT) with lighting services is expected to increase the adoption of this service worldwide, with an expected growth rate of 46.3 per cent over the next five years. LaaS is well suited to the adoption of more advanced, premium system options such as intelligent control, connectivity, and data collection considered an entry point to implementing Internet of Things capabilities. Craig confirms that these benefits are driving adoption to what Navigant Research predicts may be a $2.6 billion global market by 2026, experiencing a compound annual growth rate of 16.6 per cent.
But like anything, LaaS comes with its downsides. Craig establishes the first disadvantage being that the owner is tied to the contract and its terms while it’s in effect. Second is that subscription programs typically impose a higher overall cost than if the owner paid a lump sum upfront. So, like any payment program, the interest and fees associated with breaking the total cost into monthly fees would end up costing more, resulting in a loss.
LaaS has some similarities with other industry financing models, including leasing and performance contracting. With leasing, the owner pays an ongoing fee for the use of lighting equipment. Craig explores this method; “The owner or a third party owns the lighting, there are no guarantees of energy savings, and additional services such as upgrades or maintenance may or may not be included in the contract,” he states. With a performance contract, Craig says that a third party such as Energy Services Co. provides the lighting, which the owner pays for from energy savings. “From there, the contract may or may not include upgrades and maintenance.”
Craig confirms that as a relatively new and evolving financing model, LaaS approaches vary in the market, ranging from simple financing to financing-plus-turnkey services such as audit, design, installation, upgrades, maintenance, and even data collection and location-based services. According to Navigant Research, a shift from financing-only to financing-plus-full service is a trend in LaaS.
In one example, LEDs are provided by a third party on a subscription based three to seven year contract that includes maintenance and full warranty. In some cases, services such as control system onsite support and training may be packaged and sold without financing being included in the agreement, producing another variation. Across the models, Craig says the owner may take ownership of the system at the end of the contract. “Upgrades may occur during the contract, or the owner can upgrade to new technology at the end of the contract.”
In some instances, lighting manufacturers offer programs which offer a turnkey service with financing. These companies are now looking into adding services related to human-centric lighting and data as demand grows with an awareness of these trends. In another instance, a manufacturer combined a turnkey service with a financing approach in which the owner pays for the equipment out of shared energy cost savings and then takes ownership at the end of the contract. “To further reduce owner risk, the organisation guarantees a minimum level of savings," Craig comments.
The European market for LaaS is expected to witness the fastest growth rate between now and 2025, with this growth attributed to an increase in demand for energy-efficient lighting systems. The global LaaS market is witnessing growth steadily with the market anticipated to have an increase due to collaborations between manufacturers and distributors.
The opportunity to capture significant energy savings sooner is a huge benefit to businesses with LaaS. Craig says that while LaaS may not be singularly transformative, but as a potentially strong trend, it may facilitate the adoption of LED lighting, particularly intelligent lighting, by offering an option to defray upfront capital investment. With the increasing demand for LaaS and its applications, companies have the opportunity to expand their services in the market through different strategic approaches.
Despite the obvious benefits of LaaS, businesses that want to succeed in this service need to orient themselves around customers, rather than lighting products. The key, like any other subscription-based service, is to understand how services are being used and, based on this insight, create a compelling customer experience. Lighting is evolving at a rapid pace, meaning LaaS requires new models of thinking and new flexible systems to evolve with these trends.