When Houston applied to Y Combinator, what hypotheses did he hold about the key elements of Dropbox’s business model? The first key elements were the simplicity and accessibility of the product. To underline this aspect he asked every VC who interviewed him whether or not they were using any other product of that sort, considering that, by that time, there were some other solutions in the market already. The product worked automatically and dealt with complex operations in a simple way. Another key element was the high quality of service that DB provided.
Quality was defined by Houston in terms of safety of the documents and information and quickness of the process. He had also built the program to operate with some innovative technological concepts that updated only the changes and kept the main file stored locally. Regarding the target customers and its strategy of customer acquisition, he made the observation at the time, that potential users were technically adept, (e. g. college students downloading music P2P) but that due to the simplicity of the product and expansion of the internet it could rapidly grow.
Another key element was the release of a single version for all users, targeted specifically at individuals. This allowed the company to expand by a “Trojan horse” strategy of targeting users to then enter into the B2B market automatically. This strategy could also have been supported by AdWords and partnerships with big distribution channels (to sell the product already installed) From the revenue generation aspect, the company relied on a Freemium model in which, for example, 1GB was given for free and the other 10GB for 5$ month (team plans from 20$ month)
As of June 2012, which of these hypotheses have been confirmed, and which have been discarded? Drew Houston had a quite clear and defined idea of the final product when he asked for the first Venture Capital, therefore the business model of Dropbox relied on certain key elements that are still at the center of what the product is today. Even if the initial elements of a business plan are considered hypothetical, in this case most of them turned out to be quite correct. Nevertheless there were certain adaptations and corrections to the original business idea.
One of them was from the distribution point of view, were strategy was revised to limit the budget spent on AdWords and other traditional marketing tools. DB then decided to rely on a customer-to-customer distribution. Partnerships with the large distribution channels was first abandoned but recently the company has started signing agreements of this type (HTC distributes Dropbox on Android phones). The freemium model has mostly kept all of its characteristics but the prices and GB offered have been adapted to the market requests. 2GB free, extra 500MB for recommendations, teams packages of 1TB for 795$/year, pack-rat… ) 2. Can you recognize any MVP they have used to validate their assumptions? A MVP, “minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort. ”[1] It can be seen as a product-prototype, which is evaluated by visionary clients in order to improve the test version before going to market. Doing this, features with no value to the customer can be eliminated and missing features can be added.
A MVP increases the chance of the final product to be successful in the market. The Dropbox-prototype was only accessible for a restricted number of users, who needed to register in order to test the 2GB version. To recruit test users, Houston and his team came up with a three-minute video explaining their service, which was posted beforehand on a famous website for developers (Hacker News). Doing this, Houston wanted to check the demand for the product, ensure that the Dropbox-IT-system worked and also get feedback and learn from the users.
In order to improve the product after the public launch, Dropbox used Votebox (tool for customers to suggest new features and to evaluate them), support forums, A/B testing and usability tests (e. g showed a lot of flaws, which led to the change of 70 things) in order to gain further insights regarding needs and desires of their customers. [1] Ries, Eric. August 3 (2009), Minimum Viable Product: A guide. http://www. startuplessonslearned. com/2009/08/minimum-viable-product-guide. html How has the product been evolving?
At the very beginning, after the public launch in September 2008, Dropbox offered a 2GB free storage space to customers. Storage space above 2GB had to be payed. After doing some analytical research, the “Rat Pack” was added; a space where users received unlimited undo history for an extra charge of 39 Dollars per year. In October 2009, Dropbox introduced its iPhone app. Later, users were getting the chance to increase their free storage space by recommending Dropbox to friends and family through email invitations (250 MB more storage space for each person who hasn’t been invited before).
Furthermore, the system was adapted in order to save private folders with passwords and share selected ones with other users. Another improvement of Dropbox was the introduction of other service languages different from English. In May 2010 an iPad application, as well as an Android application were introduced. There have been quite a few changes in the product through time, though the core value proposition of Dropbox is respected and meant to stay the same; being an easy to handle, safe and quick service. 3.
Comment on the Dropbox marketing strategy and costs At the time Dropbox was launched, market research predicted promising growths on the market for online backups. Although there was a lot of competitors who offer nearly the same kind of service that Dropbox, Houston used to argue that his business would be different from the others, because they “handle all kind of obstacles… “. The first marketing campaign, was a test “test demand”. DB Team posted a screencast video, which showed a demo of the product, in a specialized forum called Hacker News.
As a result, Houston could earn his first funding; U$ 15. 000,00 from Y Combinator. Later on, with a product that was already tested on its demo version, Dropbox raised U$ 1. 2 MM more. Dropbox team later produced another innovative video, which reached hundreds of thousands of views and bumped up the number of dropbox users within few days (5. 000 to 75. 000) After defining its business model, Dropbox started an aggressive online marketing campaign, which wasn’t” so effective. For instance, “it cost more than U$ 300 to acquire a new customer”.
Even with more money being raised from different funds, Dropbox wasn’t able to decrease this cost/new user. Trying to change the strategy to acquire new customers, Dropbox experimented different movements, as partnering with big companies, new ways of ads, etc. But they perceived that the most effective marketing was the word-of-mouth referrals and viral marketing, rather than paid advertisements. Other important feature implemented by Dropbox is the Vote Box, which makes the user to feel “part of the business”, i. e. , sense of belonging.
In our opinion the smartest move was the grant of extra storage space to customers who brung new users to the Dropbox; up to 16GB. This way they could incentive the diffusion of Dropbox service all around. As for the costs, they are basically regarding the Storage Space (Amazon 3S – cloud storing) and also costs related to HR. 4. What is your assessment of the approach Houston used to test hypotheses? Can you point to any of the insights that Houston had? To test their hypothesis, Houston and Ferdowsi tested through an innovative pproach their working prototype: uploading recruiting videos into Hacker News, a popular online developer forum. From our point of view, they took a good decision waiting to launch their product and testing it with experimented people who gave them a lot of feedback, which allowed them to learn and build a better product. This all implied a risk; showing off the best features of the product to other developers. Finally, it also helped to make contact with the founder of a prestigious and selective seed fund and incubator program, who helped develop their business.
Furthermore, the plan of building a single version of Dropbox came of the experience of Houston working in a security software startup. There, he realized that targeting enterprise customers involved a lot of gatekeepers, and it would be more difficult to have a high quality of an easy-to-use product. Once they validated and they optimized the structure of the new business with the feedback of the recruiting videos, they started to test the product with a free version to a limited group of users (restricting risk issues).
Having a good experience, people from the beta service would help them generate demand, especially with the communication on the Digg web page. Houston thought that they should be patient and be sure of their hypothesis, particularly making sure to have an easy-to-use product with a high service quality. This case can represent a situation where it is better to try to listen your potential customers and to get solutions from within their opinions instead of creating a technologically centered value proposition.
