DropBox Case Study Analysis: “It just Works”

  1. Opportunities seen by Houston

Despite being a late mover in a crowded space, DropBox managed to enter the market and gain customers. This was motivated by Houston’s ability to identify opportunities and move into the market confidently with the hope of succeeding in the face of intense competition. Houston realized that customers were ready to pay for storage services whether it was a physical storage or an online service. He noticed that customers understand the cost of storage, and would therefore be willing to pay for the storage of data and information. This was an opportunity for Houston to earn revenue for his business. This ability of Houston to identify opportunities reflects his entrepreneurial nature and character. This enabled him to outperform his competitors in the competitive cyberspace. Houston realized that rival services failed to transfer data across firewalls. He also knew that competitors’ services were balked with big files and large number of them; hence giving his business an opportunity to accommodate the storage needs not sufficiently covered by rivals.

Houston also realized that the available services were based on simplistic services. Therefore, he considered developing better approach by storing files locally and updating the cloud copy using bandwidth-saving optimization. The main purpose of this step was to save bandwidth and time for customers. This indicates that Houston identified customer needs and worked towards satisfying them. Customer satisfaction by businesses in a competitive market is essential for a business to survive and obtain competitive advantage. It is an opportunity that most focused entrepreneurs like Houston identifies and explore with determination and specific focus. This opportunity led Houston to develop an initial prototype which allowed Windows PC users to access files of any size through an encrypted internet connection from any web browser or other Dropbox enabled PCs.

Even with a working business model, businesses often find it hard to market their services or products. Houston saw several opportunities to make his business known and accepted by businesses in the market. After developing the prototype, Houston faced the risk of losing his initial investment on his time and resources if his business wouldn’t be successful. As a result, Houston explored opportunities to penetrate the market and get a share of the market for his services. His know-how and experience in programmes and start-ups enabled him to produce recruiting videos for his college fraternity and created a product-demo screencast which lasted for three minutes. He then uploaded the video on Hacker news.

In this case, Houston had identified the opportunity of reaching to customers through internet media such as Hacker News. His presentation showed off the features of the products. This indicates that Houston used the 4Ps of marketing mix to market his products. For instance, demonstrating the product features of his prototype indicated that he focused on his product; he wanted to give his product the best features so that it could meet customer needs (Johnson, Scholes and Whittington, 2005). Through his videos in Hacker News, Houston also got feedback from potential users of his products. This way, he learned and got more opportunities while building his prototype. Testing his product this way implies that Houston identified an opportunity to improve his business model in order to make the products reliable and effective in the market.

Before starting a business, funding is an essential requirement. Houston identified an opportunity to receive funding from Y Combinator seed fund. One of his reasons for posting his demo videos in Hawker News was to catch the attention of Paul Graham, the founder of Y Combinator Seed Fund and Incubator Program. This could enable him to acquire funds from Y Combinator after sending an application to the funding company; and he achieved that when he received $15,000 in funding from Y Combinator in 2007. The co-founders of Dropbox also identified an opportunity among individuals – both consumers and business persons. This strategy of targeting individual consumers and business users was developed by Houston when he received lessons about targeting enterprise customers while he worked at a security software start-up. The idea of targeting individual consumers and business people was to get people using the Dropbox inside companies without the permission of IT. When the Dropbox gains more demand, it will then be certified for use in the entire company.

Later, Houston developed a Beta Testing program which targeted limited group of users who registered through a simple landing page. The page contained a short description of Dropbox and requested for the email addresses of visitors who wished to participate in the beta test. The participants would receive 2 GB Dropbox for free. Houston knew that his company would manage large files of people; and it would be a big deal if it lost or ruined them. Therefore, he had to identify opportunities of enhancing and accelerating learning in order to provide effective service delivery which cannot fail clients. One of such opportunities is the beta testing which enabled Houston to determine the effectiveness of his product and accelerate learning to make it even more effective. Houston also identified an opportunity in tech enthusiasts who frequented Digg. As a result, he produced the second short demo video posted in 2008 on Digg. This was done to showcase web content that is popular by Digg’s users. The opportunity enabled Houston to communicate in an effective manner with the tech enthusiasts who visited Digg and generate demand for the beta service.

While building his company Houston decided to device mechanisms of marketing his product after testing and learning that his product was effective. In this attempt, Houston identified various marketing opportunities mainly from the internet. He specifically observed what most web companies do in order to develop an effective marketing plan. Houston also identified opportunities of optimizing marketing messages and pricing through his feemium strategy. Investment in customer acquisition efforts was also an essential element of the company’s success.

  1. Key elements of Dropbox’s current business model
    • Meeting customer’s expectations

The main strategies in the company’s business model are in line with the motto of Y Combinator – making what people want. Through its beta testing, the company got an opportunity to learn the needs of customers and developed its products to meet those needs. This led to the launching of Windows and Mac Clients, and addition of a Linux version. The company also offered a 50 GB Dropbox for $99 annually or $9.9 monthly, and a 100 GB option for $199 annually or $19.99 annually. This pricing is evidently an appropriate one in a competitive market. Apart from the services being affordable, they also indicate a psychological testing which is a marketing approach. The low prices have been enhanced by the company’s cost management which pursues cost effective strategies such as lowering customer acquisition strategies. These strategies will be examined in the section of marketing elements of the business model.

Apart from providing low prices, Houston also attempted to meet customer needs and expectations by enhancing quality and working hard to make something good for the customers. In this element, the company relied upon the efforts of Houston and his co-founder Ferdowsi to drive the company’s product roadmap. In this case, Houston’s main focus was to do things well for the benefit of customers. Houston suggested that as a “poet”, the company’s product manager would listen to the voice of the company’s customers. This indicates that the company focused on a differentiation and customization strategies which require businesses to produce products that are specifically demanded by customers, and which are differentiated from products produced by other rivals in the market. However, the problem with this element of Dropbox’s business model is that it focused on doing a few things well to satisfy customers and left a lot of other things behind. For instance; the company lacked sufficient business people, it was unable to get mainstream PR, and it ran fast and loose. This is against recommendable organizational culture and integrated systems which require that business organisations should enhance synergy of various departments and functional units within the company.

  • Marketing strategies

The first step in the company’s marketing strategy is to determine what companies do. This enabled the company to determine the needs of the customers and devise appropriate marketing plan to target the needs of the customers. The first strategy of acquiring new customers using paid search advertising did not work because it cost the company $300 to acquire a paying customer. This was not economical considering the fact that the price of an annual subscription for 50GB service was $99. As a way of reducing the marketing cost, the company tweaked its sign-up process in order to increase the conversion rate from a free user to paying user. Dropbox also attempted to hide the visitors’ free service option, especially for visitors who accessed the service through ads. These strategies led to a reduction of the company’s average acquisition cost per paying customer from thousands of dollars to hundreds.

  • Use of an analytic engineer to enhance growth

Analytic engineers were used by Dropbox to track metrics concerning the acquisition of landing page visitors. These engineers also determine the metrics which activate such visitors into users; retain users, refer new visitors by satisfied users; and revenue earned metrics. Through various test results, analytics engineers enabled Dropbox to reduce the amount of free storage given to users. The use of analytic engineers to identify various cost effective operations in the company was indeed an important mechanism of growth for the company. This indicates that a successful company should make use of skilled human resources in order to identify opportunities of growth within the company. For instance, the Freemium strategy was used by analytic engineers to improve conversion rates of free to paying customers and decrease the cost of serving a customer. As a result, this resulted in increased profitability of the company.

  • Dropbox’s organic growth

As earlier noted in this analysis paper, the company improved through the efforts of analytic engineers. However, the company’s growth was mainly through word-of-mouth referrals and viral marketing efforts. Paid advertising did not achieve as much growth as these marketing efforts. These marketing strategies led to acquisition of 200,000 thousand years within the first ten days after the company was launched and one million users by June 2009.  Another key element that drove organic growth in the company was ease of use and reliability of the company’s services. This encouraged users to welcome friends and relatives to try Dropbox. In 2009, the company abandoned the paid search advertising strategy completely and adopted the organic customer acquisition strategy. This even produced better results as the company registered 2 million users by October 2009. Indeed, the company’s management worked on successful strategies to make the company grow. The ease and reliability which the company focused on indicated a good way of meeting customer’s needs and outdoing competitors in the competitive market (Daft, 2010). This attracted a lot of customers, making the company to enjoy a lot of customers by 2010.

  • Product Segmentation

Dropbox also segmented its diverse and growing user base and tailored separate products and add-on features for those segments. In 2010, data storage services and the online back-up remained fragmented and highly competitive. Segmentation is one of the best marketing strategies that enable a company to increase its product usage and gain competitive advantage.

  1. Profitability of the company

Despite various risks involved in the company such as being a late mover, functionality problems, competition risks and risks of losing customers; the company kept itself in a strategic position to meet the needs of its customers and bolster growth within the company. The company’s main focus of widening its products’ user-base through and referrals, ease of use of products, and viral marketing efforts led to increased customers, reduced costs of customer acquisition and increased profitability (Grundy, 2006). As of June 2010 the company was not only profitable, but also cost minimizing. Profitability of a company is enhanced through increased sales and minimization of costs. This is what Dropbox achieved in order to make high profits as of June 2010.

At first, the profitability of the company was very low because there were high costs of acquiring customers and low revenue during the business startup years. This was due to the fact that the company offered free accounts in which firms and individual customers stored up to 2GB of data for free. However, the company later phased out the paid advertisements of acquiring new customers, and used other cost-effective marketing strategies as described in earlier sections of this paper. This reduced the company’s total costs, and increased the company’s profitability. Dropbox did not provide its financial results as of June 2010 but a rough calculation of its costs and revenues indicate that the company is possibly making profits and could perhaps have a prospect of improving its profitability in future. According to the estimations of analysts, 2 to 3 percent of the company’s users were paid users.

In June 2010, the company’s users were 4 million in number. Using the $9.9 monthly and $199 annual subscription, the total annual revenue estimates of the company by June 2010 ranged between $10 million and $15 million. By late 2009, the company reported data storage of 433 MB per user. Assuming that this was the average amount of data stored by Dropbox for non-paying users and the average amount of data stored for paying customers is 25 GB, analytic monthly spending of Dropbox for storage and bandwidth would be $0.11 per free user and $3.18 per paid user. This estimate is based on Amazon’s published prices for its high volume S3 customers.

In this regard, the total costs of the company using the 4 million total customer estimate would amount to $4.6 million for paid customers and $6.4 million for free users. This would equal to $11 million total costs. Given that the company earns $10 million to $15 million revenue, then the company can be considered profitable. Assuming the company’s real revenue is $(10+15)/2 = $12.5, then the annual profits of the company as of June 2010 would be approximately $1.5 million.

This profitability level of the company comes as the company faces risk of supporting too many free users. In fact, the company’s 2%-3% paid customers amount to only 120,000 paid users compared to the total 4 million users of Dropbox recorded in June 2010. However, with the company’s strategies and constant improvement of its services, there is high optimism for the company’s prospects. This is due to the fact that the company’s improvements such as hiding free accounts and other strategies can lead to reduced number of free accounts and increased number of paid accounts. This will lead to increased revenue in the future. Improvements and appropriate strategies in the company also lead to reduced costs (Worthington and Britton, 2003). Increased revenue and reduced costs will finally lead to increased profitability of the company.

The growth of the global market for synchronization and backup system also gives the company an opportunity to increase its growth and capture a larger share of the market. IDC estimates that the global market is growing at 28% per annum. The growth depicted an increase of total revenue of the market from $724 million in 2009 to $2.5 billion in 2014. The industry is also estimated to have recorded reduced costs as of 2010. IDC suggests that the cost per gigabyte for enterprise-grade storage equipment decreased from $5.35 in 2005 to $1.23 in 2010. This is estimated to decrease even further to$0.36 in 2014. The megabit cost per second for high bandwidth internet data delivery is also estimated to have reduced from $75 in 2005 to $5 in 2010, and is forecasted to reduce further to $0.94 in 2014. These prospects of reduced costs and increased revenue in the overall market is more relevant to a growing company like Dropbox which increased its user base by 2 million within one year from 2009 to 2010. With the company’s product and marketing strategies, Dropbox can make use of this growth potential of the market to accelerate its growth and achieve high profitability. The current costs of $11 million per year will decrease due to the overall cost decrease in the global market, and the revenues will increase as the company grows in the growing global market. As a result, the company’s profitability will increase in future.

  1. Hypotheses testing

There are various hypotheses made by Houston in his application to the Y Combinator. First, he hypothesized that the main function of Dropbox will be to synchronize files across the computers of its users, which is much better than email or uploading because it is automatic and integrated into windows. There would also be a web interface, and files would be backed up to Amazon S3 securely. Secondly, Dropbox was also expected to solve individual needs of clients without the need of configuration or babysitting – without the need of burning CDs or carrying USBs around which could get lost or damaged.

In this respect, Dropbox’s key technology was focused to be a continuous efficient sync with compression and binary diffs. Houston also hypothesized on how to make money or earn income for his company. This was mainly based on the freemium strategy whereby the company gives away 1GB accounts for free and charges additional storage. Houston acknowledged the fact that it is difficult to induce customers to pay for services, but small/medium businesses already paid for solutions which form part of what Dropbox offers. Dropbox also aimed at using tier pricing in order to earn money for the business. Houston also observed that Carbonite, Mozy, Google and Microsoft were potential competitors of Dropbox. Carbonite and Mozy already offered hassle-free backup and would possibly launch sync. Furthermore, Google is anticipating GDrive which could possibly come out and fostegoor competitiveness in the market at some point. Another hypothesis of the company is that large companies such as Google and Microsoft could possibly buy Dropbox, and Houston could be willing to sell the company at a minimum of $1 million after tax for six months of work.

As of June 2010, some of the above hypotheses had been confirmed while others had been discarded. For instance, the success of the company through freemium strategy was confirmed in 2010 when the company’s conversion rates improved, number of users increased, and costs of serving a customer decreased; hence increasing the profitability of the company. Furthermore, the synchronization and backup function of the company was confirmed in 2010 when the company had millions of users who used these services in the company. Further improvements also led Houston to improve shared folders and engage public folders which provided a link for customers to share their files, making the file accessible to anyone who can access the internet. In terms of earnings, the company confirmed its hypothesis of making money through paid services in the freemium strategy. It is estimated that the company made about $10 million -$15million revenue mainly from the paid customers. This indicates that the freemium strategy hypothesized by Houston resulted in good earnings of the company. However, there are some hypotheses which are yet to be confirmed by the company. For instance, the hypothesis that there would be increased competition from Google which is expected to lauch GDrive was not confirmed because the company did not launch the GDrive after all. Part of the hypotheses was also discarded. For example, the marketing hypothesis of paid search advertisements was discarded and new mechanisms of referrals and improved viral features.

Houston used an effective key hypothesis testing which involved an innovative approach of testing demand. This approach involved a sample of users who accessed Hawkers News. He used his know-how from college to create a three-minute screencast to demonstrate the functionality of Dropbox services. This was meant to ensure that the company’s code was 100% reliable. However, any hypothesis testing does not produce 100% results. Houston would have provided for 95-98 % confidence level as required by statistical theories. The screencast used a prototype which showed-off the product’s key features. It was used to recruit beta users and solicit feedback on features. This enabled Houston to learn and improve on features which are not liked by users. The second hypothesis testing method used by Houston was Beta testing whereby a limited group of users were used to test the functions of Dropbox. In this case, a short description of Dropbox was provided in a landing page created specifically for use by the test group of users. The page also requested the email address of visitors who participated in the testing process. These two hypotheses testing mechanisms are not enough. There are better ways of carrying out hypotheses testing such as statistical hypotheses testing methods which involve mathematical and statistical formulas.

  1. Creating a separate version for small and medium-sized business (SMB) customers

The decision to create a separate version for small and medium sized businesses is crucial for the future of Dropbox. In order to make the decision successful, Houston should consider the risks and benefits of the new version. The company’s competitor Carbonite which uses this version made a loss of $14.2 million in mid 2010. Therefore, Houston needs to device mechanisms that can be used to identify potential risks of the new strategy and how to deal with such risks in order to enjoy the benefits of the project. Houston should set aside funds to implement the project. This is because acquisition of new small and medium businesses comes with a cost. Appropriate product and marketing strategies should be devised in order to enhance a wide base of customers. The company should use the same mechanisms of their first Sync and Backup business whereby it used referrals to attract new customers. It should also pursue other cost-effective operations in order to avoid making losses.

The process of implementing this decision should start with the formation of a team to establish the logistics and carry out project management in order to ensure that the project runs successfully. The implementation team should then gather all resources necessary for the implementation process (Neelankavil, 2007). A landing page should then be creating for testing. Houston should also prepare a video to demonstrate the services offered for SMBs through the new version. The demo should then be made available in websites which are easily accessible by Small and Medium-sized Businesses. The next step is for Houston to receive all feedbacks concerning the test version and make appropriate improvements to make sure that the product is in line with the needs of customers. Once the product is found to be effective in the market, it is launched and made available through the freemium strategy whereby customers enjoy a small amount of free storage space and paid customers pay for large amount of data.

  1. Risks Facing Dropbox

Like any other business, Dropbox is faced with several risks in its business. In regards to the new version, the risks are even more because starting a new project involves higher risks than carrying on with an existing project. One of the risks faced by the company is financial risk. Given the fact that the freemium strategy involves customers who pay and those who don’t pay, the company is bound to suffer financially if the paying customers reduce and the free users increase. Any business requires funds in order to operate successfully, grow and compete fairly against rivals in the market. With the costs of acquiring customers being inevitable, revenue should be earned in order to cover such costs and enhance profitability (Kew and Stredwick, 2005).  However, if the customers are not willing to pay and only enjoy the free accounts, then the company will not earn enough funds to finance their operations. The new version also requires a lot of funds to start. In order to achieve this, the company can borrow funds or use its revenue from the existing business. If the new business then fails, the company will lose the money it gathered for the project. This may lead to the collapse of the business.

The second class of risks faced by the company is competition risks. There are many competitors in the market which offer substitute products in the market. If the company does not gain competitive advantage over such firms, it will lose its customers to them and it may eventually make losses. For instance, the new version of product to be offered by the company to SMBs is already pursued by Carbonite which is a major competitor of Dropbox. Google is also expected to launch a GDrive product which will also take away many customers of Dropbox. Such competitors are well established in the market and have sufficient resources to use in the acquisition of customers. This will be a blow to a growing company like Dropbox.

Other risks faced by the company include operational risks, natural and economic risks and legal risks. In terms of operational risks, the company may fail in providing its services. The new product may fail to meet the needs of customers as a result of operational failures. For instance, the new version may face technical difficulties and the customers may fail to access their stored data. This will fail the customers and make them to lose trust in the company. Natural and economic risks may include those risks beyond the control of the company. For instance, climate change or natural calamities such as floods may cause economic problems to the customers who may not be able to pay for the services of the company.

In this case, the company will not earn enough revenue to cover its costs and make profits. Natural calamities such as fires, floods and earthquakes may also destroy facilities of the company which may make the recovery of customers’ data expensive for the company. Financial crisis and inflation may also make the customers unable to pay for the products and services of the company; hence reducing the profitability of the company. Finally, legal risks may include law suits and cases filed against the company in courts. This may cause financial problems for the company as it seeks to follow the suits and clear its name.

Dropbox should take these problems into account by preparing itself. This can be done by setting aside precautionary funds for the occurrence of such uncertain events as natural calamities, customer loss, financial losses and operational failures. The company should also insure its business against natural occurrences such as fires. Furthermore, the company should develop strategies of minimizing risks using a risk management approach that is able to assess risks and minimize their chances of occurrence. This will enable the company to reduce the losses that could be incurred through the occurrence of risky events.

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