Designing for a high second-hand value – the key to profitability in circular business

The second-hand market for consumer goods is growing rapidly. For example, the global market for second-hand clothing is estimated to be worth over 350 billion dollars by 2028.

However, not all products retain the same value on the second-hand market. A market analysis by the RE:Source innovation programme, led by RISE, shows that residual value — the value of a product when it is resold by the first owner — varies dramatically between different types of product. For example, a pram retains 63 per cent of its original price, whereas party wear is virtually worthless after one owner.

‘The pattern was clear. Products that retain their functional value and have clear demand on the second-hand market hold their value very well,” says Alexander Wahlberg, Head of Innovation at RISE.

Product design for high resale value.

So, how can manufacturers lay the groundwork for a higher residual value right from the product development stage, regardless of whether they have a strong brand or not? Products that retain over 50 per cent of their original price tend to have a number of design-driven characteristics in common. These include being made from durable, hard-wearing materials; featuring simple mechanics that allow for the replacement of parts; and having a timeless aesthetic.

‘The key concept to bear in mind is “future-adaptive design”. It's about making products more robust and flexible so they can be upgraded and adapted to new requirements in the future,” says Thomas Nyström, a researcher at RISE.

In collaboration with companies from various sectors, RISE has investigated how future-adaptive design can facilitate the transition of businesses to circular models. These insights have been distilled into practical guides and tools to help manufacturing companies design and maintain their products to retain their value more effectively over time.

The most important thing is to understand how the product changes once it leaves the factory and is put to use. Wear and tear begins almost immediately, so as a manufacturer, you need to take this into account. Expected residual value is a parameter that should be factored in just as much as the cost of materials," says Thomas Nyström.

In the case of the pram, the manufacturer needs to establish what causes the drop in value and why 63 per cent of the original price is retained. If the upholstery is found to be the main reason for the decline in resale value, designing more durable, removable and washable upholstery would be a way of enhancing its long-term value.

Digital product passports ensure that information accompanies the product.

The manufacturer also needs to consider what information should accompany the product throughout its life cycle. This is because this information affects the product's value on the second-hand market.

‘Much of what drives down the resale value comes down to uncertainty, such as the buyer not knowing enough about the product’s history,’ says Alexander Wahlberg.

Providing clear information on materials, sustainability performance, origin, warranty and repairs reduces uncertainty, thus becoming a selling point in the second-hand market. The EU’s Digital Product Passport (DPP) is one tool for ensuring that this information accompanies the product. The DPP's purpose is precisely to make this type of information available.

‘Product passports will benefit both businesses and consumers,’ he says.

The payback period for circular models is different to that for linear ones.

If a linear business model is to become circular, product design is not the only aspect that needs to be reviewed. The way in which the product is brought to market also matters. In recent years, more and more people have started exploring rental, subscription and similar models. This allows the same product to be used by several customers while enabling the manufacturer to retain control over the second-hand market.

‘A circular model does not have the same payback period as a linear model. Often, the investment horizon becomes much longer when, rather than receiving revenue from each sale, you receive smaller 'drops' of revenue under a rental or subscription model,” says Thomas Nyström.

For most products, particularly those that are used frequently and for a long time, it is still cheapest for the consumer to buy them. Circular models incur costs that traditional sales do not. This is precisely why resale value is key: it shows where a circular business can be viable,' says Alexander Wahlberg.

For example, offering a pram subscription involves costs relating to logistics, insurance and reconditioning. In this case, a 'buy-back' solution may be more attractive to the manufacturer, whereby they buy the pram back from the first owner and carry out various measures to enable it to be resold at a different price.

'If you’ve worked with future-adaptive design before, the process becomes smoother,' adds Thomas Nyström.

The IKEA Circular Hub (also known as the Circular Shop) and the Apple Certified Refurbished scheme are two examples of how companies can sell products to new customers. Such schemes can generate additional revenue and provide companies with valuable insights into the wear and tear of their products.

‘To run a successful buy-back scheme, you need to find products that retain their value well and are inexpensive to refurbish for the next buyer,’ says Thomas Nyström.

It is also important to bear in mind that the same product may appeal to different types of customer at different stages of its life cycle. Some customers are only willing to pay for products in new condition, while others are happy to accept a certain amount of wear and tear as long as the product remains functional. This needs to be taken into account during product and business development,' says Alexander Wahlberg.

Complex issues require role models and in-depth expertise.

Of course, there are challenges involved in developing future-adaptive products and then finding a profitable business model for them. One factor that reduces residual value is fashion sensitivity, i.e. if a product is perceived as outdated because it follows a passing trend. The degree to which a product is personalised also impacts its resale value. A strong brand also influences a product’s resale value. While few people would pay for a stained or damaged jumper, if the garment is from the 'right' brand, it retains a certain value despite visible wear and tear.

Another factor is the conflict between the production department, which seeks to improve cost-efficiency for new sales, and the rest of the company, which seeks to capture the value of resale and reuse. The key here is to bring both sides together and find a way forward that works for everyone.

We mustn’t forget that these are highly complex issues with many different aspects and parameters that need to be considered. That’s why it’s valuable to have in-depth, research-based expertise to fall back on. RISE is a bit like a huge library, and we who work here are like librarians, guiding people in the right direction. We can direct them to the right experts and to other companies that have tackled similar challenges,” says Thomas Nyström.