Dropbox Question 2 - Price Model

The freemium model is mine so long as professionals rely on Dropbox increasingly for the company to get projects completed. IT budgets for the Fortune 500 companies is near 25%, and a paid account from Dropbox hardly puts a dent into this figure. While it is certainly difficult to charge something that has hitherto been free, normal users such as students will eventually use Dropbox when they enter the workforce, and when enough users hit a critical mass, the IT department must take notice and subscribe to the paid model to support the staff.

It would have been impossible for Dropbox to reach its current success had it not initially offered its services for free. Now that it has the momentum, it needs to find additional ways to monetize its model. One way incentivize the paid model is to guarantee additional security measures for the premium model, as well as added speed boosts. This can be critical when teams work with files that have big file sizes.

Dropbox can also secure deals with OS providers to have their services preinstalled on handsets. Since Dropbox is essentially giving their users a free 5gb of storage, it can start a bidding war between iOS and Android, or the multitude of service providers (Chunghwa, Far Eastone) for distribution deals as it proves to be a critical application.

Another avenue that has not been supported but seems to be the latest trend is to monetize through ad revenue. Users that are already "hooked" onto Dropbox will have very little to say about it, in much the same way that Gmail users can do very little of the ads that show up on the side of their inbox since they cannot afford to switch mail clients so easily.

For users that do not want to deal with the hassle of increasing their file size through referral programs, premium Dropbox can be sent as a present from someone. Imagine a parent that gives a gift of premium Dropbox to their child as they enter college. Parents can feel at ease for giving an "educational" gift, knowing where their money is going instead of wasting it on frivolous items such as iTunes gift cards etc.

The difficulty is that now that Dropbox is known for using the Freemium model, it cannot really let it go. It will have to keep providing this model to avoid losing users. Also, many people will not pay because they do not need more storage space. Therefore, I think it would be beneficial for Dropbox to charge for something else than extra storage space.

What Dropbox could do for example is providing higher transfer speeds to paying customers. At the same time, it could limit transfer speeds to paying customers to an acceptable, but slow level (maybe something like 250 kBps up/down). If they could charge a low fee for providing these higher speeds (maybe $2,50 a month or so) I think I would be really tempted to pay.

I think the pricing model of Dropbox is good. Because only they get more users, they will have a bigger opportunity to get the paying customers. But If Dropbox stop offer free service, maybe no one want to use Dropbox again!

In my opinion, Dropbox start charging by offer extra space is good way to increase their revenue. And also I think they can use different charging mechanism to these paying customers. Like simply seperate their customer to individual customers and group customers. For the individual customer, they offer extra spaces by charging fees. While for the group customers, Dropbox could offer some special service like file of grouping sharing to fit their needs. Because these group customer like the Photographic club have larger need of file space maybe would be more likely to pay for it.

The Fremium Model of Dropbox makes me recall “Wretch”- a popular blog vender in Taiwan before Facebook shows up. Wretch and Dropbox run almost the same payment model. I start from being a free user, as my friends increase, more and more pictures being uploaded; I have almost run out of the storage space. Without delete old pictures, I started to purchase space on Wretch.

Just as Ally said, “One potential is that free users now will become more attached to this service, so some of them might find paying for more space to simplify their work and life is a good deal.” In my opinion, at this point Dropbox probably should keep their quality, increase their service type, hold their customers and make Dropbox something necessary during daily life. As cloud computing keep going, each person now has more and more devices, the need for synchronized the devices also increase. In other hand, some adjustment of the prices could be considering. By lower the price of the storage, making it more purchasable for most of the people, might help Dropbox get out of the hook.

This question asks "how to do," not "how you feel about Dropbox's existing freemium pricing strategy." We have enough discussions regarding whether freemium pricing is good or bad, now we need to focus on how can Dropbox get out of the hook.

Xiaowei Wen wrote:I agree with Josephine that “uploading/downloading from Dropbox need times”, but is that the problem solely exists on Dropbox? It’s the same with hard portable drive. Though I don’t choose to pay for Dropbox today (actually I just begun to use it this semester for a class discussion), that doesn’t mean that I won’t pay it forever. If one day I need to share big file like videos with others, I will change because it’s convenient and cheap (maybe a big obstacle is not the price, but the online payment tool!)
So I don't think anything goes wrong with its price model.
Nevertheless, Dropbox should keep reminding their users that “even though you store your files on a USB you still need to pay for drive”, which some may never think about carefully.

Josephine wrote:I think it is hard for the individual pay for this kind of services since 2GB is enough for individual use. But small company may pay for collaborative storage, so Dropbox should be target on the small enterprise.
Also it is not a good way to put a very large file on Dropbox and download it afterward because uploading/downloading need times and people may use hard portable drive instead.
I think simple value-added services should be added in Dropbox and make it as a services with difficulty shift like Facebook and hotmail, people is used to using it and have difficulty to change to another similar services. But now Dropbox is just a very simple services and people get ease to change to another similar services, so Dropbox may need to have some more creative use and keep the original user.

Based on the experience of Xiaowei, i think part of potential business could be for dropbox in academy and school. Academic field and school both have high demand to share lots of files with high frequency. Even though some of they have already got some systems (like as CEIBA system in NTU), but dropbox can offer a more flexible and affordable price for teachers and researchers. Besides, the cost for most of professors is just a piece of cake to pay for dropbox space......

(1) Dropbox's technical differentiator
I think I slightly disagree with Josephine in that "But now Dropbox is just a very simple services and people get ease to change to another similar services" The reverse of this statement can also be true, "Since it's easy to use Dropbox, people are reluctant to change to other services"
Also, I think a little differently than Rio and Sebastien's comment that Drobpox is not differentiating itself enough. The statement, to some extent, has an assumaption that Dropbox's cloud storage business is easy to copy, so Drobpox is just lucky to be the first mover. In fact, as simple as Dropbox may seem to its users, the storing,syncing, and networking techniques behind it is very sophisticated in order to make the service work smoothly. To me, Dropbox's differentiator is not an superfical one, but a very technical one. In my opinion, it's not easy for new competitors to follow. Take the syncing performance of Evernote(another cloud notebook thing) as an example, the speed of syncing is much slower than Dropbox.(Especially after you consider that Dropbox is synced automatically whenever a new version of file is flush to the hard disk, and Evernote is only synced manually after you click the button, which means the updating frequency is less than Dropbox users.) I believe the time that Dropbox has invested in the technology and branding is invaluable, and even cashable in the future if they stay focus and lean.
Nevertheless,I definitely agree with you all that Dropbox has to bring more innovative offers on the table.

(2) Drobpox's revenue spreadsheet
Thanks Holger for providing the actual numbers. If I understood it correctly, it shows that Dropbox is making money with current 2% paying users, and just adding a little paying customers (4% customers pay $2) can substantially increased the margin by 500%, not to mention an even bigger increase if they offer enterprise edition. I think this is a great example of leveraging public cloud computing: Drobpox has no upfront capital investment, so it relies on Amazon's economics of scale to provide service as their users grow. After building a sustainable business model, every little tweak in pricing scheme is quite feasible, since they won't affect the cost structure too much. Little money from such huge base of customers is a significant amount.

(3) Dropbox's locked-in by Amazon?
There's one interesting question I just thought of: Will Dropbox ever get to the scale that hosting the service internally become more efficient and costs less? e.g. stop using Amazon's cloud service . I bet they're still trying hard to optimize within the Amazon cloud architecture to fit their workload, but with such specific workload, it might get to a point that Dropbox will need its own architecture to support and improve the current service level (just as how Google support its search) However, the slower they make this strategic move, the more they're locked-in by Amazon

I agree with you Rio, Dropbox had no choice but fremium. Since they have discovered that word of mouth was actually the most successful way to attract more customers. "Tryability" is indeed very important on the internet, and this is the type of marketing that is the most observable for comparable business models.

maybe, if they want to increase their market shares they will have to find ways to diversification,to find innovative options and possibilities to attract new customers profiles

I agree with Josephine that “uploading/downloading from Dropbox need times”, but is that the problem solely exists on Dropbox? It’s the same with hard portable drive. Though I don’t choose to pay for Dropbox today (actually I just begun to use it this semester for a class discussion), that doesn’t mean that I won’t pay it forever. If one day I need to share big file like videos with others, I will change because it’s convenient and cheap (maybe a big obstacle is not the price, but the online payment tool!)
So I don't think anything goes wrong with its price model.
Nevertheless, Dropbox should keep reminding their users that “even though you store your files on a USB you still need to pay for drive”, which some may never think about carefully.

Josephine wrote:I think it is hard for the individual pay for this kind of services since 2GB is enough for individual use. But small company may pay for collaborative storage, so Dropbox should be target on the small enterprise.
Also it is not a good way to put a very large file on Dropbox and download it afterward because uploading/downloading need times and people may use hard portable drive instead.
I think simple value-added services should be added in Dropbox and make it as a services with difficulty shift like Facebook and hotmail, people is used to using it and have difficulty to change to another similar services. But now Dropbox is just a very simple services and people get ease to change to another similar services, so Dropbox may need to have some more creative use and keep the original user.

I believe, service like dropbox had no choice but to start with freemium. Since it's been already standard to avail so many services for free, which individual wants to pay money from very first time? And so far, according to the article, I guess they are not losing money. Well, I am not sure if current pricing model is the most profitable or not. At least, their pricing model is not wrong.

Well, however, as Charles mentioned, I think it is not enough to differentiate from other competitors.
Since it is simple to use for users, users don't have to get used to use dropbox. (what do you call this? usability loyalty?) If other company can achieve similar usefulness with bigger storage for free, I don't hesitate to change. As of this moment, I don't even search for alternatives since storage capacity is enough for myself. Probably if by any chance I will need more storage, I may look for available new service that match my needs.

Thank you for your valuable comments. Seems to be, that you are evenly split up between dropbox believers and not believers. I have prepared a small calculation, of how much the storage costs are and what dropbox earns from its customers. The cases of enterprise users and smaller prices were considered. You are free to copy the table and play around with the numbers.

https://docs.google.com/spreadsheet/ccc?key=0AtQZh1SpdyLSdGF0S2kxb3dadkE5dVA0aVhuTWUySUE

Please comment on the results of the calculation and whether you think this supports your previous positions.

It's not attractive for me about paying to buy more storage space. First, I don't have such need, second, if I need more spaces, I have other free storage choices than buying more Dropbox spaces.
But maybe it's convenient for enterprise customers that sometimes they need to uploaded huge files at a time and think Dropbox is a good place to put their files, then they might willing to pay buying spaces.

In my opinion, Dropbox is getting into a phasis of development when it has to develop more revenue streams.

As we know, one of the key success factors for internet based companies is the number of using customers. A company has to make sure it provides an attractive offer at the lauch of its products in order to enhance a larger customer base.

In the case of Dropbox, this customer base has already been successfuly developed and the brand image is a big asset.

In my opinion, Dropbox could charge differently corporations and private users. To implement this policy, they could offer various levels of data protection. The more advanced would probably be used by companies and would be more pricy.

Second, the premium version could allow customers to update their Dropbox more times per week. A freemium user could only upload 5 files per week while a premium one could upload unlimited. This is an alternative to storage.

I think it is hard for the individual pay for this kind of services since 2GB is enough for individual use. But small company may pay for collaborative storage, so Dropbox should be target on the small enterprise.
Also it is not a good way to put a very large file on Dropbox and download it afterward because uploading/downloading need times and people may use hard portable drive instead.
I think simple value-added services should be added in Dropbox and make it as a services with difficulty shift like Facebook and hotmail, people is used to using it and have difficulty to change to another similar services. But now Dropbox is just a very simple services and people get ease to change to another similar services, so Dropbox may need to have some more creative use and keep the original user.

Hi guys

I agree with Christelle and Chaa, the freemium offer based on datastorage is not differentiating enough and bear the risk of "commoditization" of the Gigabytes. One song requires 3 Million Bytes, it has been the case for probably 10 years and a lot of compressing software can reduce the size of the file. On the contrary storage capacity is increasing a lot (first generation USB key could barely support 20 songs). Hence the storage requirement per person will increase but at a slower pace that storage capacity which make this freemium offer unsustainable to me.
The pricing model is as a result bound to change which doesn't mean Drop box will disappear.

As Kai and Ally stated new services can be easily priced by the player.
Keeping history of deleted documents, compatibility with everyday more sophisticated Firewalls, using userbase to generate additionnal revenue.
This would require a preemium version including more sophisticated features not only increased data storage

Ch

In order for Dropbox to gain momentum in the first place and hence create network externalities I think a freemium model was necessary. Dropbox has already managed to established itself as a well know brand with a large customer base which will help them fight off competition. I do not think consumers want several cloud services for file sharing and since Dropbox has so many users already it will be difficult for the competition to persuade them to switch. Whether the users are willing to pay remains to be seen, but as it is mentioned data consumption is on the rise and if Dropbox can be integrated into other services this might be the case.

CQUILAN wrote:Indeed, I do not believe the strategy is good.
Maybe a parallel with Skype could be relevant. Skype was born 4 years earlier than Dropbox and works about the same way: one free version, high-quality version, and other versions that you need to pay for. Despite their 170 million users, Skype is losing money (7 million dollars in 2010), because it has been struggling to change its users into paying customers (roughly a tenth of the users pay for Skype currently).
Skype and Dropbox are very useful tools, and are very popular! But given the quality of the free version, I see no point I paying for a (said) better service.
On the other hand, if we consider enterprises, I guess they would prefer to pay for a comprehensive service than for the sole dropbox…

As you can see, I am quite skeptical about Dropbox’s opportunity to gain more paying users... Maybe it would eventually be bought by a giant IT company just as Skype was a few weeks ago.

Hi, all
I agree with CQUILAN.
In my opinion, the situation for Dropbox is even more worse than Skype.
I think Skype is much more competitive than Dropbox
because Skype developed their own Skype-protocol which still remained close-source to compete with other companies. (from http://en.wikipedia.org/wiki/Skype_protocol)
Even with this great IT techinques in VoIP, Skype still lost money because of their business model.

For Dropbox, there are more and more cloud-storage software getting into this market.
like Box.net, iCloud , SugarSync, Ubuntu One, Windows Live SkyDrive,Wuala and ZumoDrive. (from http://en.wikipedia.org/wiki/Dropbox_%28service%29)
With so many competitors, the market become a Perfect competition because almost all companies provide the homogeneous services..

If Dropbox doesn't change their price model,I don't think Dropbox could still keep their competitive advantages for a long time.

Ally Feng wrote:I think Dropbox's pricing model is quite appropriate because it not only has monetary gains of lowering the acquisition costs of customers, but also hasintangible benefits, such as build the brand and network externality of the service. The intangible part will keep building the momentum for their buesiness.

If the cross-subsidizing works now for them to survive, the demand for Dropbox will only be growing. One potential is that free users now will become more attached to this service, so some of them might find paying for more space to simplify their work and life is a good deal. The trend toward mobile computing and
cloud computing also means that in the future, people are likely to have multiple devices for different occassions to seamless streamline and sync their work. People who are heavy users of those computing features, are also likely to be more comfortable for paying the Dropbox data storage/syncing service.

Given that Dropbox is truly a good service that provide value for almost all computer users, all it has to do is to watch the costs, and try to penetrate more and more people to find high value customers. In conclusion, I see Dropbox as a promising and profitable business.

As Ally already explained I also think that the prize model of dropbox is convincing and econimically reasonable. If I am talking about my own experience with dropbox I have to admit that I am certainly willing to pay for the service. I mean you very quickly spend all the free storage and afterwards you have no choice than to pay for more storage. Especially if we see how fast digital data grow in size as movies with 3D content, high-quality music or high-definition pictures it is predictable that the group of paying customer will increase. In the same time you can see that with a higher demand of storage you have to improve the speed of down-/upload. I think that dropbox might be able to charge additional fee for this kind of service.

I think Dropbox's pricing model is quite appropriate because it not only has monetary gains of lowering the acquisition costs of customers, but also hasintangible benefits, such as build the brand and network externality of the service. The intangible part will keep building the momentum for their buesiness.

If the cross-subsidizing works now for them to survive, the demand for Dropbox will only be growing. One potential is that free users now will become more attached to this service, so some of them might find paying for more space to simplify their work and life is a good deal. The trend toward mobile computing and
cloud computing also means that in the future, people are likely to have multiple devices for different occassions to seamless streamline and sync their work. People who are heavy users of those computing features, are also likely to be more comfortable for paying the Dropbox data storage/syncing service.

Given that Dropbox is truly a good service that provide value for almost all computer users, all it has to do is to watch the costs, and try to penetrate more and more people to find high value customers. In conclusion, I see Dropbox as a promising and profitable business.

Indeed, I do not believe the strategy is good.
Maybe a parallel with Skype could be relevant. Skype was born 4 years earlier than Dropbox and works about the same way: one free version, high-quality version, and other versions that you need to pay for. Despite their 170 million users, Skype is losing money (7 million dollars in 2010), because it has been struggling to change its users into paying customers (roughly a tenth of the users pay for Skype currently).
Skype and Dropbox are very useful tools, and are very popular! But given the quality of the free version, I see no point I paying for a (said) better service.
On the other hand, if we consider enterprises, I guess they would prefer to pay for a comprehensive service than for the sole dropbox…

As you can see, I am quite skeptical about Dropbox’s opportunity to gain more paying users... Maybe it would eventually be bought by a giant IT company just as Skype was a few weeks ago.

Only 2 to 3 % of Dropbox users are paying customers. How could Dropbox increase the number of paying users? Is their pricing model wrong? Consider your personal purchase behavior, would you be willing to pay for Dropbox’s service?

You can also use the S3 calculater from Amazon to make calculations:
http://calculator.s3.amazonaws.com/calc5.html