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Dropbox It Just Works Case Solution
Initially, the idea of Dropbox came to Houston’s mind when he was traveling to Manhattan by bus and planning to work on a programming project during such long travel, but he eventually found that he forgets to bring his USB flash drive with him. This incident made him realized that it must be difficult and inconvenient for other people as well to keep a flash drive with them everywhere. At that time, Houston was also in constant search for new and technically challenging opportunities while he was working at Bit9 and SAT prep start up. So, he decided to exploit such an opportunity by working on Dropbox to design a service that would not contain issues related to large files, internet latency, and bugs and through which files could be easily and instantly shared and synced between PCs via the internet (Eisenmann, Pao and Barley, 2014).
Following questions are answered in this case study solution
Dropbox is a late mover in a crowded space. What opportunity did Houston see? Specifically, what are the key elements of Dropbox’s current business model?
Is Dropbox profitable as of June 2010? Are you optimistic about its prospects? How does your estimate of Dropbox’s current profitability influence your evaluation of the venture’s prospects?
When he applied to Y-Combinator (Exhibit 2), what hypotheses did Houston hold about key elements of Dropbox’ s business model? As of June 2010, which of these hypotheses have been confirmed, and which have been discarded? What is your assessment of the approach Houston used to test hypotheses? Did he waste time/resources or make notable mistakes? Can you imagine better ways to test key hypotheses?
Imagine that at the same time Dropbox was founded, Google decided to target the opportunity that Houston had identified. How would Google’s approach to pursuing “GDrive” have differed from the approach that Dropbox’s team followed?
What should Houston do about the decision posed at the end of the case, i.e., creating a separate version for small and medium-sized business customers? What process should he use to make this decision?
Case Analysis for Dropbox It Just Works
Although Dropbox was a late entrant, Houston realized an opportunity and found a niche in the fiercely competitive online backup and storage services space because other cloud backup companies were unable to offer fast, easy-to-use and fluent synchronization services. Their users face difficulty in moving data across firewalls and syncing a big or vast number of files because earlier business model contained several complexities- users’ files were stored over the internet rather than computer’s hard drive, and computers were sometimes got freeze when users tend to browse a directory while working in remote spaces. Houston saw an opportunity to adopt an entirely different model, which was based on- local storing of files and bringing different bandwidth and time-saving optimizations to update cloud copies (Ries, 2011).
There are several key elements of Dropbox’s business model. One key element is the product’s simplicity and accessibility as users are able to access and store a file of any size or type through an encrypted Internet connection from any web browser, and Dropbox enabled personal computers. Also, Dropbox client software can track changes in real-time to any files located in users’ local Dropbox folders. Another key element is high quality as innovative technology was used in product design to ensure the reliability of the product, the safety of documents, and the quick speed of the synchronization process. Moreover, the freemium model is adopted for revenue generation as users are given free and premium (paid subscription) accounts. In the free account, users are given 2 GB for free, and in the premium account, users are charged for additional storage and up-gradation (individuals- $5/month for 10GB storage, team plans- $20/month). The freemium pricing strategy, along with user-friendly product experience, has facilitated both referral marketing and product adoption (Eisenmann et al. 2014).
One key element is the outsourcing of storage service to Amazon’s S3 cloud storage platform to avoid infrastructure costs and accelerate the company’s growth. Other important elements are- single product policy based on releasing a single product version for individuals (consumers and business users) and a go-to-market (Trojan horse) strategy to automatically enter into the B2B market without designing another customized version and taking IT’s permission. For customer acquisition, the company has specifically targeted technically adept users with multiple personal computers and handheld devices (including college students who download music via P2P file-sharing services) and relied on paid search advertising and guerrilla marketing in the beginning and word-of-mouth and viral marketing strategies in the later (Ries, 2011).
Creates secure backup of documents on the system
Ability to keep track of the older versions of uploaded data files
Ease of use, reliable, fast, and automatic synchronization service
2. Is Dropbox profitable as of June 2010? Are you optimistic about its prospects? How does your estimate of Dropbox’s current profitability influence your evaluation of the venture’s prospects?
As per the following profit calculation, it can be said that Dropbox is profitable as of June 2010.
Dropbox users (2010) = 4 Mn + 2.8 Mn (referrals) = 6.8 Mn
According to industry analysts’ estimate, 2%-3% are paying users, which implies to $ 10 Mn to $ 15 Mn annual revenue (mid-2010) and monthly spending for bandwidth and storage= $ 0.11/free user and $ 3.18/paid user.
Assumption 1: 2% (minimum) of a total of 6.8 Mn are paying users
Total paying users = 2/100*6.8 Mn = 136,000
Assumption 2: Total revenue (minimum) = $ 10 Mn
Total variable cost = 0.11 * 6,664,000 + 3.18 * 136,000 = 733,040 + 432,480 = $ 1,165,520
Assumption 3: Total fixed cost (including salary of 25-person team) = $ 2 Mn
Total profit = revenue – cost (fixed + variable) = $ 10,000,000 – ($ 2,000,000 + $ 1,165,520) = $ 6,834,480
So, total profit (minimum) for the year 2010 is calculated as $ 6.8 Mn approx. The estimated profitability shows the good economic position and financial health of Dropbox. I am optimistic about the company’s prospects as well because of its substantial marketing efforts and effective product and business development approaches. Moreover, according to IDC, the cloud storage industry is projected to grow by 28 percent, i.e., it would rise from $ 724 Mn (2009) to $ 2.5 Bn (2014). There might be several possible factors behind such growth, for instance- decreasing the cost of storage and bandwidth and increasing customers’ demand. IDC further projected that cost (per GB) for enterprise-level storage equipment decreased from $ 5.35 (2005) to $ 1.23 (2010) and would fall further to $ 0.36 in the year 2014. Similarly, as per DIC (DrPeering International Consultancy) estimate, the average monthly cost (per MB/second) of high bandwidth internet data delivery declined from $ 75 (2005) to $ 5 (2010) and would further decrease to $ 0.94 in the year 2014. These projections suggest that the industry has high growth potential, so Dropbox can have a significant advantage over it in upcoming years (Eisenmann et al. 2014).
Other than that, Dropbox has successfully developed unique organizational capabilities that can also help it in the achievement of growth objectives. For instance, one of its valuable capabilities is to successfully launch new products through the adoption of an effective minimum viable product approach. Previously, Dropbox’s cofounders adopted the same approach as they created a product-prototype (private beta program), which was accessible for a restricted number of users and offered them a free 2GB Dropbox version in return for their active participation in the beta test. This approach played an important role in the company’s growth prospects because it not only ensured the proper functioning of Dropbox software but also enhanced validated learning via users’ evaluations. By pursuing a similar strategy, DropBox can successfully introduce new product lines to grow in existing and/or new markets (Cooper and Vlaskovits, 2013).
Guerrilla marketing is another key organizational competence that can play a major role in the achievement of future growth prospects. The success of guerrilla marketing tactics could be proven by taking an example from recent company history. In order to generate demand and expand the potential user base for beta service, a guerrilla marketing tactic was employed by Dropbox management. A short demo video containing jokes, international hidden messages, video game, or other exciting content) was posted on Digg that generated a lot of views within a few days. The number of private beta users eventually jumped from five thousand to seventy-five thousand. Beta testing increased success chances for the finished product and ultimately contributed to Dropbox’s current profitability (2010). Other than guerrilla marketing, Dropbox management’s customer acquisition capability also holds significant importance and is expected to play a major role in accelerating the growth and increasing profitability prospects. Recently, Dropbox employed the A/B testing approach to optimize its customer acquisition efforts. This approach was based on tracking metrics- conversion, acquisition, activation, retention, referral, and revenue to modify policies and fine-tune content and page design (Ertemel, 2019).
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