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