Background
Dropbox is a service that allows users to store their files on the cloud service, share, synchronise and access them with almost every PC, tablet or smartphone. The company was founded by Drew Houston who came up with the idea when waiting for a coach at South Station in Boston. He planned to work on some project on his way from Boston to New York City, however forgot a USB stick with necessary files in his apartment in Cambridge. Devastated, he started developing a product that would allow users to store and access their files via the Internet (Eisenmann, Thomas, Pao, and Barley, 2011).
The company was established in April 2007, and went public in September 2008. It now works with billions of files for several million users, two thirds of whom are from outside of the United States. The company’s product is the same for both corporate and private users, which differentiates them from competitors. By offering one version, the company saved money on “conducting formal market research” on different categories of users and their preferences (Eisenmann, Thomas, Pao, and Barley, 2011). Furthermore, creating the same version for two different categories of users saves time for the company without limiting the market. Launching early has a particular importance for startups. On the development stage, launching early can help to see if some features of the product or even the whole product would be rejected by users. The earlier mistakes are identified and fixed, the more money, time, and effort the company can save.
According to Eisenmann, Thomas, Pao, and Barley, the reason why DropBox launched a single version was a difficulty of making agreements with corporate clients without having a history. As Houston explained there are many gatekeepers in corporations, “you can’t make sales unless you are certified by IT, and you can’t get certified until you have a track record,” Houston explained in his live presentation “Customer Development Case Study: Dropbox” recorded by Justin.tv (Houston, 2010b). Understanding the issue, the startup decided to focus on individuals, and they also decided to be tricky about it. They wanted to rely on the idea that worked with Wi-FI equipments and BlackBerrys, where companies started using products after individuals working for those companies started using them. DropBox wanted to make employees of their potential corporate clients to start using the product of DropBox without permission of the IT department. “That’s been our go-to-market strategy for enterprise: personal use as a Trojan horse,” commented Houston (Eisenmann, Thomas, Pao, and Barley, 2011).
Although this method can take a long time to get to corporate clients, if the original product is good, this method can be reliable and effective. It shows companies certain track record, proves that the product is worthy, and also eliminates risks associated with switching from one software to another. For example, it is easier for a corporation to train employees to use the new product that many of them are familiar with, rather than training everybody to use something that is completely new.
Marketing Tactics
In order to promote the product, Drew Houston came up with a freemium business model proposal. Freemium is a framework, where a business offers access for its basic services for free for the majority of consumers, while charging some consumers for the access to the premium product (Teece, 2010).
The original idea of Dropbox was to give away 1 gigabyte for free and then charge additional money for more space, probably by selling 10 gigabytes for $5 a month. Then there was a beta testing. The co-founders Drew Houston and Arash Ferdowsi (Ferdowsi was invited as a cofounder by Houston to help with the project) created a simple landing page that described the product and asked for an email to participate in the beta version testing. DropBox started the beta with offering 2 GB for free and without premium version in place, decreasing amount from 10 GB initially planned (Eisenmann, Thomas, Pao, and Barley, 2011).
On the early stages of development Drew Houston tried to implement viral marketing by producing a demo video and posting it online on Digg, a news aggregating website. The video included references to Chocolate Rain, a 2007 viral YouTube video, TPS reports used in the film Office Space and other references (Eisenmann, Thomas, Pao, and Barley, 2011). In order to raise awareness about the company, Dropbox was attending a number of conferences and events. After the launch of the demo in September 2008, Dropbox presented at TechCrunch50, which is a highly selective annual competition for startups (Eisenmann, Thomas, Pao, and Barley, 2011) with many professionals from Silicon Valley attending.
When running the demo version, the company was listening to its consumers carefully, and based on wishes and requirements of clients, was implementing new features. An example of it is Mac and Linux clients, that the company introduced in the beta version after users’ requests.
In the early days, the company was also running a campaign of paid search advertising. However, early on founders realised that it was not bringing in desired results, and they decided to focus solely on the freemium model. Drew Houston said, “It’s not like the average user wakes up in the morning wishing to get rid of their USB drive. If you don’t think you have a problem, you’re not going to look for a solution. Search is great for harvesting demand, not for creating it.” (Houston, 2010a). In the case of DropBox the search engine marketing campaign was not only inefficient but also expensive, the company was spending more than $300 for a paying customer (Eisenmann, Thomas, Pao, and Barley, 2011). Exhibit 1 shows the sample of Dropbox Adwords campaign performance.
Beta testing is highly important not only for the purposes of seeing if the product works, but also for the purposes of identifying if the product fits the market. The following techniques help to identify if there is a market fit. A simple landing page and an email field can demonstrate proportions of number of people who visited the page and number of people who liked the product and were willing to participate. That data can show how much people are interested in the product. Another possible use of a user-friendly beta version is that it can be shown to a focus group. Conducting such research is effective, because entrepreneurs can watch the focus group (who are seeing the product for the first time) and see how they react to the product. The participants can be asked to clarify if the process of using the product is anyhow confusing and if there is something else that they would like to see in the product.
The video that Drew Houston launched on Digg shows the capabilities of online communities in terms of marketing. The references the Dropbox’s CEO made in the video helped it to go viral on the Internet “generating hundreds of thousands of views within a few days”. When the campaign was launched, it increased the number of users who signed up for the beta version from 5,000 to 75,000 (Eisenmann, Thomas, Pao, and Barley, 2011).
If executed right, viral marketing can be of great help to entrepreneurs, who are willing to reach large audiences in a short period of time. It is usually cheaper than the most of traditional marketing methods and techniques, and it also can yield a great return on investment, because the production costs are the same as for the traditional advertising, and the element of virality helps to spread a word either for free, or for relatively little money. Furthermore, if the campaign actually goes viral, it can generate outstanding results. An example is American airline WestJet creating a Christmas campaign where they asked for wishes of passengers and then presented them with gifts when they landed. The video was published on December 8 and since then was watched more than 44 million times (WestJet, 2013).
Participating in competitions that would be attended by an industry’s gurus and would be heavily covered is another good way for a startup to get noticed. There is a number of events for startups around the world, and they can involve pitching competitions, meetups, hackathons and so on. Dropbox did a great job attending TechCrunch50 in 2008. Although, there is no public information available on the networking results of the event, many important meetings and arrangements for Dropbox could happen there.
Another important practice Dropbox had and was very successful at was managing users feedback. On early stages in particular, startups should carefully listen to feedbacks users make. Users often can recommend features they would love to see, and of what the company might have not thought about. This is also is one of the main concepts of trending lean startup framework, which encourages entrepreneurs to constantly confirm with the market hypotheses they have. The model suggests that the risk of someone stealing an idea is less important, compared to the risk of spending money and time on developing a product that no one needs (Blank, 2013).
Although, search engine advertising is often beneficial for many technology companies, the cost of attaining user for Dropbox was very high. The startup’s decision to cancel the campaign was sound from the economic point of view, because, although, the campaign was bringing clients, startups should be extremely cautious about their cash burn rate. Search engine advertising works perfectly for products that users have a need for and are searching for. However, when a product that is advertised is not obviously needed, the campaign might not be successful.
In such situations, a company should consider finding cheaper options for marketing. Even with a good funding, a fast burnout rate can be of a great danger to a startup. If the company spends too much money before revenues are substantial enough to cover the expenses, even having a great idea might not save the company, and it can die before it gets enough exposure. The DropBox founders were clever enough to realise it early, and decided to shift their focus solely to the freemium model.
However, just implementing a new model is not sufficient for the success of a business. Managers should know what should be given away for free and how much, otherwise the company might either give away too much and discourage users from purchasing premium, or it may not give enough and fail in motivating users to subscribe in the first place. An example for the last one is a website asking for a user’s credit card number to participate in the free trial period. After the expiration of the trial, the user should go through a cancellation process if they want to withdraw from the program, otherwise money would be automatically charged.
Understanding
DropBox directed 30% of their engineering resources to work on the metrics to understand how much data people use, in order to understand what the optimal offer for them would be. They analysed how the conversion funnel worked and figured out that gigabytes were not the best measure for a free offering of their product. Houston said, “We had all kinds of people paying us for DropBox but not even bumping against their quota.” (Houston 11). Relying on that information, they decided to decrease the amount of free data given away. But again, freemium model should also be somehow promoted so that more people could somehow learn about it. DropBox decided to use a great idea that was before implemented by PayPal, where the company was giving a part of their product for bringing new users to the platform. And the company decided to encourage users to share the product with others in exchange of extra free storage space provided. The created a referral program where a user would receive 250 megabytes extra for a bringing a new one, and a new user would receive the same amount after they sign up (Eisenmann, Thomas, Pao, and Barley).
This is a great example of motivating two sides to participate. Often companies use just one sided communication, where they ask already existing users to tell their friends about the company via email, social media and so on. And that approach usually does not motivate either of the sides, hence people are not likely to share the information about the company. The offer of the DropBox, while not exactly free for the startup, attracted users at a low cost. And the results yielded: in April 2010 4 million users of DropBox sent 2.8 million invitations (Eisenmann, Thomas, Pao, and Barley).
Teece, D. J. (2010). Business models, business strategy and innovation. Long Range Planning, 43(2-3), 172-194.
Blank, Steve. “Why the Lean Start-Up Changes Everything.” Harvard Business Review. N.p., 01 May 2013. Web. 03 May 2016.
WestJet. “WestJet Christmas Miracle: Real-time Giving.” YouTube. YouTube, 08 Dec. 2013. Web. 19 Apr. 2016.
Eisenmann, Thomas R., Michael Pao, and Lauren Barley. “Dropbox: ‘It Just Works’.” Harvard Business School Case 811-065, January 2011. (Revised October 2014.)
Customer Development Case Study: Dropbox – 1 / 2. Dir. Gpssal. YouTube. YouTube, 01 Jan. 2011. Web. 10 Apr. 2016.
Drew Houston, “Customer Development Case Study: Dropbox,” April 23, 2010b, video file, Justin.tv, http://www.justin.tv/startuplessonslearned/b/26267250
Drew Houston, “Drew Houston: Freemium for Consumer Internet Businesses, Part 1,” April 16, 2010a, video file, YouTube, http://www.youtube.com/watch?v=TBTyjBQ9Eq4.