LaaS in Singapore is a relatively new concept. It has been successfully used in Japan for more than a decade and has enabled companies to hit environmental targets and provide cost and energy savings.
The Lighting-as-as-service idea is simple. Instead of buying light fittings upfront using CapEx, you subscribe to a monthly contract. New lighting is supplied and installed, which should provide at least 60% energy savings. The 60% savings will not only cover the cost of the monthly fee but also provide positive cash flow to the business.
This article looks into the variables which set the monthly fee so you know what you‘re paying for.
Centropi manufactures investment-grade light fittings, which can be purchased directly or supplied using the LaaS in Singapore. Whichever procurement route suits you, we want to provide easily understood information so you can make informed purchasing decisions
Every lighting project is different, but the same 4 variables are used to calculate the monthly LaaS fee. Cost of product, installation, maintenance, and capital.
This is probably the most obvious part of the monthly fee. You are being supplied with new light fittings. These fittings are supplied and manufactured to you at no upfront cost. Therefore when you pay the monthly fee, you are, in essence, repaying the LaaS provider for the light fittings throughout the contract.
The risk and capital exposure, therefore, sit with the provider. To your benefit and to significantly reduce risk, the provider should provide investment-grade lighting fittings. You will see the benefits of these light fittings in your monthly energy bills, but they are more costly to produce.
To reduce the provider's exposure, they elect for high-end components which guarantee both longevity and energy efficiency. Investment-grade light fittings include:
Using the highest quality versions of these two components makes the light too costly for typical commercial markets. But it’s necessary to manufacture them to this high standard to safeguard the LaaS investment.
Why would the LaaS provider shoot themselves in the foot by supplying low-quality inefficient fittings requiring more maintenance, replacements, and poor savings for the client? In this instance, the model would fall apart.
As part of LaaS, the provider will install all your new fittings. Again this allows them to protect their investment by using trusted installers, thus avoiding poor installation and product handling.
LaaS works at scale. We are not talking about tens of fittings; LaaS is dealing with supplying and installing thousands of fittings in large complex spaces. Electrical contractors who routinely execute these large, complex lighting projects come at a premium because they bring:
The provider protects investments of S$1,000,000s, so no shortcuts are taken to supply you with the best possible service and monthly savings.
The replacement rate is reduced to nearly zero by providing investment-grade light fittings. However, LaaS provides maintenance coverage for the duration of the contract.
What does this mean? If a light fitting fails (colour shift, flicker, and drop in brightness of 30%), it gets replaced by the provider free of charge within 24 hours. After all, this is a service! If your internet went down, you would expect quick action from your provider. This situation with LaaS is no different.
The provider pays for the manufacturing of the light fittings by raising low-cost capital. But as you can probably appreciate, capital has an associated cost in interest paid. As such, the ability of the supplier to raise low-cost capital is a key component of the LaaS model.
With rising interest rates, this does translate to higher fees to the customer. However, the risk remains low, assuming investment-grade lighting is involved. So suppliers can partner with stable, long-term investors and lenders who benefit from stable and consistent returns.
LaaS is not set up to make quick bucks. It‘s a solid business model that only works for providers investing in high-quality products.
Providers who take private equity investments cannot afford to maximise their customers' ROI. They must maximise their returns first and foremost because their investors demand outsized returns. So always question your supplier's source of funds.
So how are the 4 components above combined to create the monthly fee? Well here are two methods.
The common price structure in LaaS is to "share" the customer's savings. The service provider sets their fee according to how much they save the customer. A 70/30 split (provider/customer) is common.
This appears to be a fair deal but is not in the customer's best interest. Why? As we set out above, the provider's cost is not based on savings. So shared savings is just a way to maximise the provider's revenue.
The second method maximises the customer's ROI while generating attractive, stable returns for our investors.
This works by using the pricing formula of total provider cost + minimal return on investment.
total provider costs + minimal return on investment
The cost of capital can be kept low by providing investment-grade lighting, and risk has been engineered out of the model. This results in lower fees. This translates to the highest ROI possible for customers and stable long-term growth for the provider.
It is clear which of these methods is more beneficial for the client and sustainable for the provider, and this is the reason for this article. Question your provider. Consider it a red flag if they mention a model based on a percentage of your savings and not specifically the 4 items above.
So how does this work specifically for Centropi? What do we do which further safeguards our business but still provides you with the best returns?
High-quality investment-grade light fittings are provided as a part of the LaaS model but the impact on the monthly fee is minimised by providing products direct from the factory to the customer.
Typically the number of commercial layers between the factory and the customer directly impacts the end price. Commercial models have a traditional factory-distributor-dealer model that is necessary for mass-marketed products, with each layer taking a profit between 20% to 50%.
Our LaaS investment model flattens the supply chain and delivers products from the factory to customers. This results in dramatically lower costs which we pass on to the customer through low service fees.
The quantity of maintenance required on a project can be directly correlated to the quality of the light fittings.
Traditionally lighting maintenance costs can exceed the cost of the light itself. While LED lights require far less-frequent replacements than traditional lights, commercial LED lights require too many replacements to make LaaS profitable.
This is why the primary design goal of investment-grade lighting is to eliminate replacements. Zero replacements are not yet attainable, but a historic replacement rate of 1 in 1,000 practically eliminates our maintenance risk. This translates into lower service fees to the customer and a significantly reduced risk for us.
Why are we telling you about our pricing model? Because without this, how can you judge if LaaS and Centropi are right for you?
We hope you find this article useful, and if you want to find out more, continue reading other articles and contact us with your questions.
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