ENT 270 – Millsap Dropbox Case Questions 9.29.15 Student: Mariana de Carvalho Pereira
Question 1: What are the key elements of Dropbox’s business model. In particular, what is Dropsbox’s (a) customer value proposition (how does it differentiate itself from the competition, who are its target customers); (b) what is its approach to technology & operations of the company; (c) what is its Go to Market Plan; and (d) what is its pricing strategy (be sure to explain the “freemium” model)
In my opinion, Dropbox’s key elements of their business model are their pricing strategy such as free and premium accounts, support forums, partnerships, and organic growth marketing. The idea was to provide a downloadable application that allowed users to easily share, sync, and store files across personal computers and smartphones. According with Houston’s experience, Dropbox targeted to individual users. It allowed them to avoid the IT’s permission issue at the beginning. After targeted their market customers, Houston focused at the customers’ feedback at the same time when they were programming the software. He uploaded a product demo to Hacker News which could gave him at the same time a beta recruits users, feedback and the connection with Paul Graham, who was the site founder and also Y Combinator. After some negotiations, Dropbox received $15,000 in funding from Y Combinator as well as mentoring, workspace, advisors and investors during a 3 months period. This step allowed them to approach technology and operation to the company. The idea of “Learning when you are building” was successful because they gained many insights into their customer’s likes and dislikes which allowed them to create a quality product. Another key was the work team. Houston hired six MIT computer science program and focused on the quality of Dropbox. They have also been successful by abandoning paid advertising that was costing them a good amount of money, but was not targeting their real customers. Following their market, Houston focused on organic growth/ word of mouth. About the pricing strategy, firstly they started with a free account (1G per user), and a premium account (10G per user for $5 per month). They hoped that users would use their storage to upgrade to the premium subscription. And in September 2008, Dropbox launched its Windows and Mac clients, and added a Linux version in response to beta user request. The company offered for premium subscriptions a 50GB Dropbox for $9.99 a month or $99 a year, a 100GB option for $19.00 per month/$199.00 per year. And for free subscriptions a 2GB at no cost. It is important for Dropbox has the two options subscriptions. Users can test the program, and even if they do not change their free account to a premium one, they still helping Dropbox with the free ads that could bring more users to them.
Question 2: Using the estimated information from the case, perform a back of the envelope analysis of the current profitability of Dropbox . Use the information on pages 8 & 9 to estimate the revenue and number of uses (be sure to differentiate between paying and non-‐paying), assume each employee makes $120,000/yr, and use case facts to determine the variable cost of data storage. Document your calculations (this is a good spot to work in a team!)
I have never taken any accounting class, and I am not good at calculations at all! I was searching for things that could help me out with that, and I found out something about Dropbox calculation: Dropbox uses Amazon Web Services S3 on the backend to store data and its pricing starts from $0.095/GB/month and goes down to $0.055/GB/month for large users. For their plan, Dropbox works to $0.10/GB/month. How could DropBox make money with the large amount of free subscriptions? In the late 2009, Dropbox had a estimated # millions of users storing 1.3 GB data, a total of 1300 TB which works out for the 433 MB data on average. Dropbox had 175 million users in July 2013. Multiplying 175 million users with 0.433 GB per user, we get a total storage size of 75 million GB or 75,000 TB. With this amount of storage, Dropbox can avail the most discounted S3 pricing of $0.055/Gb/month.
Source: http://blog.p3infotech.in/2013/understanding-‐the-‐economics-‐of-‐the-‐ dropbox-‐pricing-‐model/ Question 3: Evaluate, over the life of the company as provided in the case, Houston’s use of Lean Start-‐up principles. What were his early hypotheses, and how did he test them? Which turned out to be right, which turned out to be wrong? Did he, at any point, have to pivot his strategy (remember, lean start-‐up principals are not only about product, they can be about marketing and acquisition of customers)? What is an example of a MVP that Houston used early to acquire customers? Did he always follow the “launch early and often” principle? Why/Why not?
Their principal was “keep it small”, and in my point of view, that worked well. The idea of “launch early and often” could have affected the quality of the product. Both in the begging and in the Beta Testing, they keep it small and they were working with forums and costumer’s feedback. It allowed them to build a product the users needed. About the marketing segment, the idea of adverting using AdWords did not work. The cost per new user was around $300 for a $99 annual subscription. Learning from this experience, they focused at viral ads, word of mouth, and organic growth. Which was succeed, in 2010 4 millions users produced 2.8 millions invites (35% referral program and 20% from shared folders). 