Unlocking Circularity: The Role of Digital Product Passports in Enabling a Sustainable Economy

TL;DR:

• Circular services, including resale, rental, and repair, are experiencing significant growth driven by consumer demand, with the secondhand market expected to nearly double by 2027.
• Brands face challenges in fully embracing circular services due to high operational costs, concerns about brand image control, and conflicts of interest with resale platforms.
• Blockchain-based Digital Product Passports offer potential solutions by providing transparency, seamless experience, and trust for consumers; cost-effective data integration and inventory management for marketplaces; and opportunities for customer engagement and new revenue streams for brands.

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Are you ready for a major closet confession? Surprisingly, we only wear 20% of our clothes, 80% of the time! This highlights a concerning trend: much of what we purchase often goes unworn, contributing to the substantial waste generated by the fashion industry.

However, there is encouraging news. In recent years, there has been a surge in customer participation in resale activities, driven by various factors such as economic necessity, environmental consciousness, or a desire for unique items. According to ThredUP's 2023 Resale Report, the global secondhand market is projected to nearly double by 2027, reaching a value of $350 billion. What's more, the global secondhand apparel market is expected to expand at a rate three times faster than the overall global apparel market.

It’s not just resale that is gaining traction; other forms of circular services are on the rise. In the rental market, demand is not a problem. Valued at $6.2 billion globally in 2023, this market has experienced robust growth, more than doubling in size since 2016. This expansion is primarily fueled by the increasing favor towards access-based models and cost-effective consumption patterns. 

Beyond the realm of fashion and luxury, there's more positive news to be found. The worldwide consumer electronics repair and maintenance sector yielded $15.3 billion in revenue during 2021 and is expected to reach $21.6 billion by 2031. Growth in digitization, heightened usage of consumer electronic products, and the adoption of predictive maintenance mechanisms are key drivers propelling the expansion of the global consumer electronics repair and maintenance market.

What’s stopping brands from tapping in?

With a demand so pronounced in circular services, especially resale, why aren’t brands taking more control?

For a closer look at the numbers, consider TheRealReal, one of the world’s largest marketplace for resale of luxury goods. In 2022, it sold 91% of listed items. Despite the impressive figure, the company losses were over $196M in the same year. What’s happening here?

The uniqueness of circular businesses is that they have to process billions of one-of-a-kind items. This drives significant costs, including labor for shipping, sorting, authenticating, tagging, describing, photographing each item. Worst of all, despite being one of the important cost centers, authentication also represents a significant risk due to counterfeits and the lack of a trusted intermediary.

In addition, brands are often hesitant to collaborate with resale marketplaces due to conflicts of interest. These platforms may compromise brand image control, cannibalize sales of new products, raise concerns about quality control, and potentially erode brand loyalty. 

Despite the presence of a thriving market, brands are unable to fully capitalize on its potential. They lack access to data regarding their secondhand products and their owners. Meanwhile, they continue to allocate a growing portion of their advertising budgets towards attracting new customers. Over the past eight years, customer acquisition costs have surged by as much as 222%.

For many people, the first entry into brands is increasingly through second-hand purchases. Research from BCG revealed that 71% of those buying second-hand tend to opt for brands they wouldn't be able to afford new. Can brands devise strategies to tap into this growing segment of secondhand buyers while mitigating the escalating costs associated with customer acquisition?

What if we add blockchain-based Digital Product Passports to the equation?

At the intersection of a product, its owner, and the brand lies a unique opportunity for the retail sector: the Digital Product Passport. Essentially, it can offer a paradigm shift wherein product data isn't solely associated with the item itself but extends to its owner.

Retailers are looking to integrate Digital Product Passports into their offerings, furnishing consumers with comprehensive insights into a product's environmental impact. These passports are envisioned as tools for transparency, empowering consumers to make informed decisions and engage in responsible actions such as recycling.

Yet, the true potential of Digital Product Passports for businesses lies in their capacity to forge connections between the brand and its consumers. Leveraging blockchain and tokenization, brands can link a product’s data to its owner, enabling them to transfer this data when reselling the product. Consequently, brands can foster enduring relationships with consumers across generations, regardless of the product's acquisition path. 

Moreover, blockchain technology ensures a trustworthy record of the product's history. Its verifiable, interoperable, and permissionless nature can make the entire experience transparent and seamless for all stakeholders: users, brands, and marketplaces.

Digital Product Passports based on blockchain have the potential to catalyze new circular business models by fundamentally transforming operations. Here are various ways in which they could serve as a key driver for circularity:

For consumers 

Trust

Remember when you had to earn the blue checkmark on Twitter, Instagram, and most other social platforms? Our brain instantly goes to the word "verified" or "authentic" on seeing them. Let's apply the same concept to products. With this logic, listed products could be labeled with a checkmark on marketplaces for the benefit of both sellers and buyers. As a blockchain-based digital passport follows a product throughout its lifecycle, a potential buyer could always access the product service history to find out how well it was taken care of. This could bring confidence in the purchase and thus increase the value for the item. 

Seamless listing experience

Giving connectivity to a product for information purposes is one step, but the true empowerment of consumers comes from enabling them to truly own this data (whether within their client account, digital wallet, or virtual wardrobe). It's only when users permanently own this data and have it easily accessible on their devices that they can conduct transactions seamlessly in an online setting, just as they can with a physical item. 

Today, when we want to list a pre-loved item for resale or renting, we have to go through a tedious process of finding a good marketplace, filling out product details, and proving our rightful ownership of the product. Our vision should be to enable consumers to start this process right from the product, through the tokenized Digital Product Passport, using its content to ease the listing process. 

Conversion

As a product becomes seamlessly listed on resale platforms that can read tokenized Digital Passports, it gets more exposure. As a result, the seller could potentially enjoy a much higher conversion rate. In the future the seller could also choose the platform that offers the highest bid to access its inventory. 

Do you recall effortlessly receiving an offer for the NFT you acquired during the bull market, without needing to list it, and promptly accepting it with just a click? Consider the possibility of such seamless transactions for cars, watches, appliances, fashion items, and more.

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For second-hand marketplaces

Cost-effective & scalable data integration

Thanks to the decentralized nature of blockchain-based digital passports, marketplaces could have access to product information without any integration with brand databases. Integration is one-off: once a marketplace can handle blockchain-based passports, it can work with all brands using this product data infrastructure. 

Inventory

One of the biggest challenges for marketplaces is inventory, i.e. how to get people to list items on my website. The lower the acquisition cost is, the better. Traditionally, luxury brands were reluctant to collaborate with marketplaces due to conflict of interest. With blockchain-based digital passports, however, we can totally imagine a future where marketplaces reward brands or users directly for listing products on their website. This would motivate brands to integrate this resale-as-a-service within their website, driving traffic for marketplaces and lowering acquisition costs. 

Increase trust

Trust is critical in second-hand transactions. With blockchain-based digital passports, marketplaces could provide proof of authenticity and product transparency, thus increasing trust and improving conversions. 

For brands

Customer relationship

Since a Digital Product Passport can be transferred from one owner to the next, it opens a unique opportunity for brands to be in touch with second-hand buyers. Brands can send personalized messages to users directly through the marketplace's environment, without sharing personal data between players due to the technology's inherently private design.

New business model from royalties

A major benefit of blockchain-based infrastructure is that it could ultimately allow brands to integrate royalties. Leveraging blockchain smart contracts, brands could include terms that entitle them to automatically receive a certain percentage of the resale price every time a product is resold. 

Brand loyalty

Since whoever makes a purchase on a marketplace is now a client of yours, you can come up with reward schemes (e.g. vouchers) to bring them to your store for a first-hand product and foster brand loyalty. Brands can also incentivize recycling with take-back initiatives.

Up next

In the forthcoming articles, we will explore:

• The business intelligence that a Digital Product Passport can offer to brands.
• A solution designed to enhance the seamless transfer of Digital Product Passports via third-party channels. This solution entails utilizing Arianee's Transfer Permit to engage with stakeholders in the market.

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