Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
1
Rushil Surapaneni March 28th, 2017
UGBA 106 Assignment #3
A third risk the freemium model presents is the cost of serving free users. If Dropbox does
not consistently find the proper balance between the number of paying users to the number of free
users, it can hemorrhage the companys profitability in regards to lost money and time spent on
servicing free users. Dropboxs sole source of revenue is driven through subscriptions and if the
company fails to hit its target conversion rate, it signals that the freemium strategy is either
providing too much for free or consumers dont understand or value the premium product. In
addition, if the conversion rate is too high, then it signals to Dropbox that the free product is not
compelling to consumers, limiting the growth of potential users of the product. Failing to find the
proper balance of free-to-paying customers and not developing a favorable, target conversion rate
can cause the freemium strategy to limit Dropboxs financial growth.
To calculate how many free users a paying user can support, the following steps are taken:
Step 1: Calculate Gross Profit of 1 Paying User per Year (Assume 10 GB plan for $99/year)
$99 ($3.18*12) = $60.84
Step 2: Divide Gross Profit of 1 Paying User per Year by Cost of Free User per Year
$60.84 / $1.32 = ~ 46 (1 Paying User can support around 46 Free Users per Year)
To calculate the profit or loss Dropbox is making per year, the following steps are taken:
Step 1: Annual Revenue Run Rate COGS = Gross Profit
$10mm ~ $15mm ((204,000*$38.16) + (6,596,000*$1.32)) = ($6.49mm) ~ ($1.49mm)
Step 2: Estimated total operating expenses modeled off of Carbonites 2010 financials
4,973,000 (R&D) + 3,600,000 (G&A*) + 5,000,000 (Sales & Marketing*) = $13.57mm
* G&A = # of employees as of June 2010 (24) * Fixed cost/employee (150k) = $3.6mm
* Sales & Marketing estimate at $5mm because of shift from paid advertising methods
Step 3: Gross Profit Total Operating Expenses = Operating (Loss) / Profit
($6.49mm) ~ ($1.49mm) - $13.57mm = ($20.06mm) ~ $(15.06mm)
For Dropbox to increase CLV, it must focus on 3 separate strategies: increasing customer loyalty,
expanding margins, and increasing customer acquisitions.
Improving customer loyalty, or in other words reducing customer churn, would allow for
Dropbox to increase net new sales. To reduce customer churn, Dropbox must examine which of
their consumer segments is most likely to leave and after identifying this specific group of
customers, attempt to contact and communicate about their efforts to leave. In the case of
Dropbox, even with its easy-to-use services, the service ranked 6th in the consumer segment in a
review of 25 online back-up companies and did not rank in either the SMB or enterprise segments.
To increase customer loyalty, Dropbox must focus on educating its customers in addition to saving
those customers ready to abandon the service and recognizing those customers committed to the
product through a rewards system. Customers tend to leave because of another product or service
that has a feature that they believe their original service does not provide. Even with it simple
product, Dropbox must focus on continuing to update customers about the features that make the
Dropbox product unique and advantageous to their users. Focusing on saving customers, or
retaining their services, is also critical for Dropbox to maintain customer loyalty. To do so,
Dropbox should develop a specialized Save Team dedicated to keeping customers and having
access to better offers and incentives to help the process going. On the other end, Dropbox should
2
Rushil Surapaneni March 28th, 2017
UGBA 106 Assignment #3
look to reward and recognize customers for ongoing business. However, the company should
pursue this in a measured way to ensure that any potential loyalty program is delivering a net
customer value improvement. Through taking these measures to improve the overall customer
experience, Dropbox increases the overall appeal of its product, potentially improving customer
loyalty and conversely improving customer lifetime value.
In addition to customer loyalty, Dropbox should focus on expanding margins through
strategizing how to lower the cost to serve its customers while also seeking opportunities to upsell.
In regards to lowering the cost to serve, Dropbox ought to end marketing to low value customers.
Dropbox should take measures to ensure they are not continuing to market to customers who
cannot or will not buy more of their product and service. The ROI on its marketing campaigns is
critical to measure and Dropbox should ensure that its marketing efforts are generating increased
conversions and new customers. This cost-benefit analysis should be conducted coincidently with
marked efforts by the company to upsell its product. Dropbox should put forward a more
concerted effort in regards to understanding its customers buying behavior, preferences, and
purchasing powers to seek opportunities to upsell, or increase the value of its product, to its
customers. For this strategy to be successful, Dropbox must relay the benefits of its pricier
versions to customers and provide honest, targeted information to the customer. By pursuing this
opportunity to upsell, Dropbox increases its potential to increase average sales without having to
expend more resources into marketing expenses.
The last suggested strategy for Dropbox to utilize to build CLV is to focus on increasing
customer acquisitions through continued engagement with customers and developing partnerships
with other brands to gain exposure. In regards to engagement with users, Dropbox has already
initiated steps towards better understanding the needs and demands of their customers through the
utilization of the Votebox feature on its site. This community engagement delivers transparency to
Dropboxs customers, critical to the overall customer experience as McKinsey notes that 70% of
buying experiences are based on how the customers feels they are being treated. Dropbox should
continue this program in addition to developing programs arranging informal conversations with
existing customers and identifying opportunities to connect the companys values with its
consumers. Taking these additional steps will allow for Dropbox to develop accurate buyer
personas while also connecting the brands unique values with the needs of its customers,
providing a key element in signing up more customers for the service. Simultaneously, Dropbox
should reengage with its previous strategy of pursuing partnerships with other brands. While Drew
Houstons earlier partnership talks came to naught, the situation had evolved for Dropbox as it
now could offer millions of users and a strong reputation to potential partners. Pursuing strategic
alliances at this favorable time within Dropboxs life cycle offers opportunity to gain exposure to
new audiences, increase market share, and develop additional financial and human resources to
meet client demand. Engaging with and joining forces with like-minded brands can drive customer
acquisition for Dropbox through eliminating the need for client installation as partners could
bundle the Dropbox service into its offered product, lowering the barrier to adoption for Dropbox.
Pursuing these two strategies in building customer acquisitions, in addition to the aforementioned
strategies involving expanding both customer brand loyalty and margins, can combine to increase
the overall long-term CLV for the Dropbox service.