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Dropbox: Does Freemium Work?

Dropbox is unquestionably one of the most popular cloud based drives in the U.S. boasting over 200 million users. Although it fulfills a fundamental need in the digital market, Dropbox has struggled to make money on its large user base.

Photo of Kenneth Salas
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Dropbox is unquestionably one of the most popular cloud based drives in the U.S. boasting over 200 million users. Although it fulfills a fundamental need in the digital market, Dropbox has struggled to make money on its large user base.

For late technology adopters like myself, cloud computing was something I read in the Wall Street Journal until Dropbox became the norm. Dropbox was not the first file sharing and cloud-based drive to enter the consumer market. One of the features that differentiated Dropbox with incumbents was the seamless syncing capabilities of its cloud drive with each user’s desktop. Also, the setup process continues to be quick and simple. You create an account online, download the desktop program and you’re all set. All files saved in a user’s Dropbox folder are immediately saved in the cloud and can be easily shared with other users.

To lure in new users, Dropbox became one of the pioneers of the freemium pricing model in which it allowed users to create an account and have up to 2 GB of cloud memory free of charge. Dropbox allows users to use the cloud indefinitely up to the memory limit and then charges $99 a year for users to access up to 1 TB (1,000 GB) of space. To boost its user base, Dropbox gave incremental memory to users that successfully recruited new users. This marketing tactic enabled Dropbox to become one of the leading consumer cloud systems without spending on marketing.

Despite its user growth, Dropbox has had a tough time monetizing its users with less than 10% of all users paying for service. Dropbox can’t lower the free memory its offers as competitors such as Google Drive are offering up to 15 GB for free. The switching cost for users are very low as it’s very easy to sync files saved on your computer with another cloud. Furthermore, there is a cost to storing files on the web. Although Dropbox has avoided spending money on marketing, it has not found a way to fully monetize its platform.

So does the freemium model work for Dropbox? In my opinion, the verdict is still out. One thing is for sure, Dropbox can’t only rely only on incremental cloud memory to incentivize users to pay. With the increasing popularity of cloud computing, cloud memory has become highly commoditized and digital giants such as Google are willing to give it out for free in order to monetize other products in their ecosystem. Dropbox needs to develop other enticing features that enable users to better access, interact and share their files. Recently, Dropbox launched a mobile feature allowing users to edit their Office documents with their mobile devices. Now this is something I’d pay for! I believe the increase utility of mobile devices will give Dropbox the opportunity to create new features that will hopefully entice users to stop freeriding.

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Photo of Sylvia

Great blogpost! I agree with your views. The trends seems to go towards offering more and more storage for personal use for free. I therefore don't think it will be sustainable in the future to capture value from user payment when it comes to storage. Dropbox should start focusing more towards the professional and enterprise marked, maybe partnering up with complementary players, as well as figuring out some kind of "killer app" which give the users more utility than just storage, and like that create the willingness to pay for additional services.

Photo of Jillian

Really interesting blog! I think about this problem often as the "Your DropBox is full" post pops up onto my desktop often, yet I don't quite put in my credit card information for the upgrade. In addition, your DropBox account is linked to a specific email, so all a user needs to do is simply set up another free email and sync whatever remaining data you want to add to the Cloud.

I don't think Freemium cloud storage is what will allow Dropbox to capture significant value. I do feel however that there are other ways from Dropbox to cash in on the significant network value it has created. Almost everyone I know has a DropBox account, and as you mentioned, if they find a way to offer us a more compelling service that we might be willing to pay for other than simply storage space, then DropBox can translate their network and large user base into committed paying customers.

Photo of Marco

Great post and great thread! Thanks for all the awesome contributions. Dropbox is rapidly becoming THE classic freemium case with all its strengths and weaknesses. I am personally skeptical of their sustainability, in the face of substantial investment and significant competition! Thanks for the contributions!

Photo of Yuliana

Ever since Dropbox came out with its personal cloud-based storage offering, I was already skeptical about its business model. I honestly don’t think selling to enterprise customers will be Dropbox's silver bullet.

Look at Box, Dropbox’s direct competitor that went IPO this year and has been touted to have more enterprise-y customers than Dropbox has. Assuming a stock price is a good indicator of the company’s performance. Post-IPO, Box’s stock price was down five percent as the analysts were no longer positive on the stock. I can see their rationales.

Not only cloud storage service is a commodity business with a very thin margin, but it also requires sizeable sales and marketing expenses to win over new customers. In 2014, Box’s revenue rose about 57% from the year earlier while the company posted 168M net loss. SG&A expenses alone grew almost 70% annually, going from $125M to $211M (a).

Not to mention, Box or other cloud storage providers have to compete and win against big competitors like Google, Microsoft, Amazon, Apple in the enterprise space that have offered cloud-based storage at increasingly lower prices. It’s also worth noting that cloud-based storage is a pure economy-of-scale driven business.

In the end, I think it will be very challenging for Box or other cloud-based storage providers to turn profitable as its expenses surge, and it loses pricing power and market share.

Source:
a. Google Finance