Time Preference: Why Circular Economy Business Models Win in the Long Run—but Challenge Immediate Rewards

In Chapter 9 of my book, Circular Economy: Opportunities and Pathways for Manufacturers – Manufacturing Renewed, I highlight how circular economy business models represent a fundamental shift in value creation, capturing, and delivery, much like the digital revolution. At the core of the transition to a circular economy lies the concept of Time Preference—the tendency for individuals and businesses to prefer immediate gains over larger, delayed rewards.

This edition of Circular Bytes explores why circular economy models, although initially challenging immediate revenue expectations, provide greater long-term economic and environmental value. We'll specifically focus on the critical role of Time Preference and how manufacturers can effectively manage it to maximize circular potential.

For a clear overview, you can watch the Circular Excellence video or join the deeper discussion in the Circular Excellence podcast, which features insightful dialogues between my AI-powered avatars and me.

Understanding Time Preference in Circular Transitions

When asked whether they prefer €100 today or €50 now and €150 one year from now, most people instinctively choose the immediate €100. Behavioral economists refer to this phenomenon as Time Preference, or delay discounting: We inherently value immediate rewards more highly than future ones, even if future rewards are significantly greater.

This tendency poses a distinct challenge for circular business models. Unlike linear models, which emphasize immediate, one-time revenue streams, circular models distribute revenues over a product’s entire lifecycle. Thus, initial revenues can appear less appealing, presenting obstacles for OEMs, suppliers, distributors, resellers, and sales representatives accustomed to immediate financial gratification.

Why Circular Business Models Outperform Linear Models

Despite initial resistance due to Time Preference, circular models offer substantial, ongoing benefits:

Reduced Costs and Increased Profit Margins

Circular models reduce material and production costs through refurbishing, recycling, remanufacturing, and modular designs. Reusing existing materials protects businesses from raw material price volatility, stabilizing costs over the long term.

Continuous Revenue Streams

Circular economy practices such as repair, redistribution, and remanufacturing create multiple revenue cycles from one production cycle, guaranteeing consistent and predictable income far beyond the initial sale.

Enhanced Customer Engagement

Circular strategies foster deeper, ongoing relationships. Service-based models (e.g., Product-as-a-Service, repair, and recommerce) encourage continual customer interaction, enabling businesses to better understand consumer needs and cultivate lasting loyalty.

Greater Supply Chain Resilience

Circularity decreases dependence on external raw material sources, shielding manufacturers from global supply chain disruptions and geopolitical uncertainties.

Accelerated Production Cycles

Remanufacturing or refurbishing existing products is generally faster than producing new ones, enabling quicker market responses and improved agility.

Sustainability and Brand Reputation

Circular models reduce environmental impacts, appeal to environmentally conscious consumers, and strengthen brand image and market positioning.

Addressing the Challenge of Time Preference and Deferred Revenue

Given the clear advantages of circular business models, let's focus on the critical challenge—managing time preference and deferred income. The instinctual preference for immediate revenue can disrupt transitions to circular approaches, especially in the early phases. Traditional sales incentives and financial structures often reinforce short-term gains over long-term benefits, causing internal and external resistance.

Stakeholders throughout the value chain—from OEMs and suppliers to resellers and sales representatives—may struggle with this shift, as their incentives and expectations have traditionally centered on immediate sales and revenue.

How Manufacturers Can Mitigate Time Preference Challenges

Manufacturers can actively manage and mitigate time preference challenges by implementing strategic solutions:

Hybrid Revenue Models

Combine upfront product sales with subscription services or long-term service contracts. This ensures immediate cash flow while transitioning to more sustainable, lifecycle-oriented revenue streams.

Realigned Sales Incentives

Adjust compensation structures to reward sales teams for long-term contracts, recurring revenue, and customer retention. This aligns immediate sales objectives with longer-term circular economy goals.

Financial and Investment Solutions

Partner with financial institutions or leverage sustainability-focused investment mechanisms (e.g., green loans and sustainable bonds) to address the initial revenue gap. Seeking external funding can provide stability during transition phases.

Transparent Communication and Stakeholder Education

Communicate the long-term financial and environmental benefits to all stakeholders. Educational initiatives can illustrate lifecycle profitability and change perceptions about deferred rewards.

Focused Customer Segmentation

Initially, target customers are inclined towards sustainable, long-term product solutions, which build initial revenue stability and provide successful case studies to encourage broader market adoption.

The Circular Economy Is the Long-Term Winning Strategy

Managing Time Preferences effectively is critical for successfully transitioning to circular economy business models. Although it requires overcoming ingrained preferences for immediate financial gratification, the rewards—greater profitability, improved resilience, environmental benefits, and stronger customer relationships—far outweigh the short-term challenges.

Explore these ideas further by viewing my Circular Excellence video overview for Chapter 9 or listening to my detailed podcast discussion, where my AI-powered avatars and I unpack the strategic nuances of circularity’s shift in value creation, capturing, and delivery.

Embrace the long-term rewards of circularity. The future of business is circular—let’s make the transition together!

Buy my book here

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