Dropbox: “It Just Works”

Nicole Talerman
I&E 352
3/22/16
 Dropbox: Qualitative Analysis
 Customer Value Proposition: new, integrated solution for syncing & sharing files between personal computers
 Competitive advantage: combines sync, backup, and publishing tools, for average users, “it just works”
 MVP: prototype of Dropbox system, limited beta testing little feedback users struggled in usability test
 A/B testing and “Votebox”- more effective: pivot to decrease free storage, add Pack-Rat

 Go-to-Market Plan: target individual users, not enterprises (avoid IT permission), freemium business model
 Effective Pivots: from paid search advertising to organic growth, introducing referral program and shared
folders effective: 2.8 M direct referrals in 2010, 20% new users from shared folders
 Breakthrough: 2010- iPad/Android apps pre-installed on devices: customer acquisition

 Technology and Operations Management:

 Qualified engineering team to build proprietary product, but struggle to find product managers and VP of
business development  slow development, bad PR, unpredictable growth
 Breakthrough: hire analytics engineer to track conversion funnel pivot in advertising/strategy
 Amazon S3 cloud storage: avoid infrastructure investments/helps scale (G-Drive struggles here)

 Main Consideration: Continue offering a single product for all users or segment diverse and growing user base
 Launched one product to all users without much formal market research  users want new features that violate
company’s commitment to a simple product- bad “build it and they will come” strategy
 Other Problems: fear of competitors creating similar products (Google would move everything to cloud
services/web making Dropbox’s engineering efforts for PC platforms irrelevant) get big fast/lock in users
 Quantitative Analysis
 Freemium approach: Free 2GB accounts, paid 50 GB and 100GB options monthly and yearly
 2-3% of Dropbox users were paying customers $10-$15 million annual revenue run rate in 2010
 Monthly spending for storage and bandwidth was $0.11 per free user and $3.18 per paid user
 Dropbox in 2010 had over 6.8 million users, making over 204,000 paid users:
 COGS= 204,000 (3.18) * 6,596,000(.11)= $1,374,280 Gross Profit~ $8,625,730- $13,625,730

 Dropbox eliminated many costs that contributed to Carbonite’s operating losses in 2010:
 60% of Carbonite’s total cost of revenue ($7,449) included costs for data storage servers that Dropbox does
not incur because of its partnership with Amazon
 Carbonite’s marketing expenses in 2010 were $16,464, much of which Dropbox does not spend because it
shifted from using paid advertising methods
 Dropbox’s fixed costs: (modeled off of Carbonite’s 2010 financials): R&D (4,973,000)+ G&A (2,033,000)
+Sales and Marketing (much less than Carbonites ~estimate at 5,000,000)= $12,006,000
 Fixed costs per month (1/6)= $2,001,000

 Breakeven: for 50 GB monthly plan- price: $9.99, cost of storage/bandwidth= $3.18, Margin= 68%- Breakeven
volume in units= $2,001,000 (Fixed costs)/ 68%= 2,942,647 units  unrealistic with 2-3% paying users
 Customer Life (SYNC):= 1/(1- .83 [CR])= 5.88 years
 Average conversion costs (SYNC): 2,333.11 (cost of campaign)/12 (conversions)= $194.43

 Dropbox has annual gross profits between $8,625,730- $13,625,730 and estimated annual operating costs of
$12,006,000, showing that it is most likely not profitable by June 2010. As only 2-3% of users are paying and
there is continuous market growth, I am optimistic about its prospects need to pivot to take in more revenue and
offset fixed costs
 Recommendations
PIVOT: Begin product segmentation and introduce version for SMB customers
 Many ways that Dropbox could segment user base:
 2 dimensions of users: share files with others, use application for business lots of each type
 Offer at least 2 different services for individual customers where one is easier-to-use, and one
has more advanced technologies (i.e. letting users sync folders outside of the My Dropbox
folder)
 Keep freemium strategy with the different options on individual services- working well
 Consider offering other languages (over 67% of users are international)
 Users constantly asking for improvements that violate Dropbox’s initial simplistic strategy
many competitors in the space and new start-ups threatening Dropbox’s distinct offerings
 If they don’t satisfy these customers, someone else will- ex: startups such as SugarSync
 Need to lock down customers and grow big fast
 Even with its easy-to-use services, Dropbox ranked 6th in consumer segment in a review of 25
and did not rank in either the SMB or enterprise segments need to enter that space by
offering services for business people
 Follow rivals and offer a version specifically designed for small businesses bring in more
revenues with rates ranging from $10/month-$250/month depending on volume of data storage
 Businesses are willing to pay more- already pay for these services

 Dropbox already has cash, but will need to secure more funding from investors to
provide these features and expand marketing efforts now that they have credibility