Dropbox Case Analysis

Situation

In April 2007, Dropbox was founded by Drew Houston who wanted to design a service that would sync and share files between personal computers over the Internet. Even though there were already existing cloud backup companies in the market similar to what he wanted, Houston found that all of them suffered problems with Internet latency, large files, bugs or complication of use. In light of these problems, he found an opportunity for Dropbox, which would offer a simple, user-friendly and fast service in comparison to other cloud backup companies.

Houston was confident his product could succeed because of its strengths in being simplistic, easy-to-use, automatic and fast, which would eventually create the mold for the company’s motto, “It just works.” [Appendix 2] However, Dropbox was a late entrant into this extremely competitive industry with high rivalry and moderate threat to entry. [Appendix 1] Due to Dropbox’s late entry into the industry, they needed to test demand. After uploading a three-minute screencast of the product prototype demo to Hacker News, Dropbox received interest and was able to get funding from Y Combinator, affirming the need for a service like theirs. Beta testing was then carried out and promoted through some guerilla marketing, which additionally resulted in the findings that there was a huge demand for a service such as Dropbox.

Thereafter, however, Dropbox encountered a hurdle when it came to marketing strategies. Because their specific industry was already somewhat saturated, paying for search advertising was very expensive; cost per click for obvious search keywords was already high from other competitors bidding up the costs. Dropbox was paying three times the amount of their most expensive service just to acquire one customer. The company continued to struggle with their marketing strategies despite improvements through analytics. However, after realizing that most of their customer acquisition came from word-of-mouth and viral marketing campaigns, Dropbox switched its marketing focus to hone in on organic customer acquisition. This change in their marketing focus produced 2.8 million referrals.

Following other competitors in this industry, Dropbox was running on a freemium business model that offered both free and premium accounts. They gave away 1 GB accounts for free and charged for additional storage. Therefore, it was estimated that only 2-3% of Dropbox’s users were paying customers.

Complication

Dropbox’s main problem is that they do not know how to properly position themselves amongst all the other new entrants and current players in this market that presents high growth and rapid expansion opportunity, projected to have a 28% annual growth. [Appendix 2] While it seems as if Dropbox’s current business model is profitable, with an annual run rate of $10-15 million