23 October, 2012
Understanding the distinction between project-based versus platform-based business model is extremely crucial for tech entrepreneurs. These are two different paths that can lead to different kinds of companies and different results when it comes to start-up success.
Project-based business model focuses on fulfilling the custom requirements of individual customers, whatever it is they want. More often than not, requirements are so different that companies cannot leverage what they do for one customer to fulfill the requirement of another customer.
Thus, each project is a start-over in terms of development efforts. From the point of view of risk, this is a risky investment. Even if the company is doing well this year, there is no guarantee that they can get projects and revenues next year, because it's always a start-over once a project is done.
Many companies that take the project approach fall into a cycle trap. In order to get projects done, they need to hire more people. Once they have more people, they need to get more projects to pay the salaries, and so on.
The good thing about this project-based model is the fact that the companies can rest assured they are developing something that someone wants, because they are being told exactly that. Most system integrators and development houses use this model to run their businesses.
Platform-based business model, on the other hand, focuses on building a platform that can be used to serve many customers with similar needs without much custom development. Development efforts focus mostly on adding more features and capabilities to the system, not so much on fulfilling custom requirements of individual customers like project-based model.
In this model, revenues come from finding customers whose needs are met by the platform that has been built already. As more features get developed, more needs can be met, and companies can sell to more customers and derive more revenues.
The challenge of this method is in finding the right platform to build, especially at the early stage of the development. The companies need to engage with potential customers to find out what they need, even before they can give any kind of commitment. It might even be possible that things that get built cannot sell at all. Even if the customers end up buying, the companies usually need to pay for all development efforts for an extended period of time, long before the first batch of revenue arrives.
Balance and timing, the end goal of start-ups should be to have some sort of platform they can leverage and generate revenues. Projects are not bad, as long as we take them towards the goal of building a platform. We should take projects that are close enough to what we are doing in order to get some income and to validate the platform. We should also take on projects for the first set of customers to polish the platform in such a way that minimal custom work is needed to deliver to the future customers. The key always lies in balance and timing.
Article on The Nation