Dropbox Case Analysis

ELLER COLLEGE OF MANAGEMENT

UNIVERSITY OF ARIZONA

GROUP 15 CASE ANALYSIS #2- DROPBOX

MKTG 579E: MARKETING OF INNOVATIONS

Prepared for: Yong Liu

Analyzed by:

Chris Emery

Michael James Hastings

Bernardo Higuera

October 1, 2014

TO: Drew Houston and Executive Team

FROM: Group 15; Chris Emery, James Hastings, Bernardo Higuera

RE: SMB Recommendation
DATE: 10/1/2014

Purpose and Value Statement:

This analysis has been conducted to analyze Dropbox’s current position in the market, develop a growth strategy, and evaluate if Dropbox should compete in the small and medium sized business (SMB) market.

Recommendation:

We recommend that Dropbox make develop partnerships with manufacturers of cell phones, tablets, and computers to have Dropbox pre-installed onto their devices. Based on the number of users of android phones in 2010 alone, it would have exposed 15 million users to Dropbox. We also recommend Dropbox enter into the SMB market to offer its product to businesses.

Analysis and Support:

Although Dropbox was late to the cyber-storage market, the company saw the weaknesses of their competitors and capitalized on them. Competitors often failed to transfer data across firewalls and there was often a balk with big files or a large number of files. This dilemma was fixed by allowing clients to update public and private Dropbox content (without duplication) and sync their Dropbox content across numerous platforms - all within a matter of seconds. The speed in syncing was created through Houston’s innovative idea of storing files on a server locally verses thousands of miles away. Dropbox was clearly more integrated and simple compared to the handful of rivals who survived the dot com crash. Another opportunity involved a financing scheme, which helped fuel the launch of Dropbox. Houston uploaded a video to Hacker News and learned valuable information from the feedback, as well as obtained generous funding ($20,000) through being approved via their funding program. In addition, Houston did a Beta test on “Digg” and the results were phenomenal, generating a host of early adopters.

The customer value proposition of Dropbox is that members can access documents from anywhere with any device, work on a document with multiple people from any location, documents are protected from disaster, and syncing documents is faster than alternatives and eliminates duplication. The Dropbox revenue model is based on volume of storage need by the user which the user then purchases a monthly subscription based on how much storage space they would like. Start up costs consisted of living costs of founders, bandwidth, and server costs. In addition, marketing expenses involved Adwords via Analytics, applying to techcrunch50, and hiring real marketing people. When gigabyte cost dropped from $5.35 in 2005 to 0.36 in 2014, this (along with their 2 - 3% paying customers) kept Dropbox in an advantageous position financially.

Around mid 2010, Dropbox had 4 million users that produced 2.8 million direct referrals invites. According to analyst Victoria Barret from Forbes magazine, an estimated 2% to 3% of Dropbox’s users were paying the premium, which implied a $10 million to $15 million annual revenue in the mid 2010. The variable costs associated with the storage and bandwidth were calculated to be 11 cents per free user and $3.18 per paid user, based on the analysis done by Michael Woloszynowicz on published high prices for Amazon’s S3 storage system. According to the company’s website the Dropbox team was about 20 to 22 employees around April of 2010. Assuming an average salary of $150K per employee, the fixed costs associated with the staff were $3 to 3.3 million. According to equation 1, it can be safely assumed that Dropbox was profitable around mid 2010. The profit calculated was $6.1 million to $11.1 million approximately (See table 1 in the Exhibit section).

Profitability = Revenue – Costs (Variable +Fixed)                         Eq. (1)

Dropbox operates through the “freemium” model approach, where the company offers free and paid (premium) accounts identical in all features except in the amount of storage space. The company aims for the customers using the free services to refer Dropbox to others and to eventually pay for a subscription for additional storage space. Free users are usually individuals who receive 2GB of storage data, while premium users are small/medium businesses with team plans that can go up to 250GB of storage space. This “freemium” strategic approach focuses on organic customer acquisition and retention through word of mouth/viral marketing. The gross margin percentage for the “freemium” model is equal to the difference between revenue earned from users and the variable costs associated with offering free and premium accounts, all divided by the total revenue, and expressed as percentage (see equation 2). As mentioned before, in mid 2010 only 2% to 3% were paying the premium, which leaves a 97% to 98% of users using free services. Since the average data storage per user was 433MB at the end of 2009, the cost per free user was calculated to be 11 cents and $3.18 for premium users respectively. Hence, the variable costs were approximately $750,000 and the gross margin was calculated to be 93% to 95% (see table 1 in the exhibit section).