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Lessons from the Dropbox Business Model

Dropbox provides cloud storage and file transfer options that help to link computers to other computers around the world. A user uploads a file to Dropbox and then receives a direct link to that file. This link can be shared with anyone so that the information in the file can be accessed. This makes it possible to transfer very large amounts of data in a rather short amount of time.

The only problem with this structure is that Amazon and Google have entered the cloud storage space and are driving prices downward because they are large enough to still make money by doing so. If Dropbox allowed that to happen, then eventually all of their services would need to be offered for free to stay competitive.

In the Dropbox business model, full free services just isn’t an option because there wouldn’t be any way to generate profits. That means this company has had to learn some lessons about staying competitive against some internet giants the hard way. Here are some of the lessons that have been learned.

1. You’ve Got to Stand Out.

Dropbox learned that they had to make their services be able to stand out in some way in the land of internet giants. Since cloud storage services on their own provide a fairly consistent user experience no matter who is running the operation, Dropbox had to look for differentiation in another way. Eventually they decided that creating a product that was easier to use than any other similar product and keeping the experience focused on the consumer would help to keep them competitive.

2. Free Works As Long As It Is Limited.

Most Dropbox customers actually don’t pay anything for the services that they use. The company offers people the chance to access 2 GB of storage monthly. That’s enough space for about 1,000 ebooks, but it only provides enough space for 7 minutes of HQ video data. Users who subscribe to the service and get 100 GB of data per month for $10.

3. If You Can’t Beat Them, Then Join Them.

Dropbox realized that they wouldn’t be able to stay 100% independent of the internet giants, so they looked for the best ways to be able to join them. The new user today will find part of the Dropbox system inside of Amazon Web Services. By focusing on the specific ways consumers need to use cloud storage and offering a reasonable solution that finds its own niche, Dropbox is able to provide resources for upwards of 300 million people every month and still be able to find a path toward profitability.

4. Supplemental Products Can Provide More Leverage.

With storage prices being driven down as low as 2.75 cents per GB of data that is used [and $0.01 for simple storage needs without regular access], the Dropbox business model isn’t going to survive on data storage alone. Think about it: as late as 1980, it would have cost almost $125,000 to store 1 GB of data. Amazon is thinking about saying that in 2015 and beyond, it should cost a consumer just $0.12 instead.

This means Dropbox has to look for complimentary options to their services in order to find profitability. They can offer unlimited data storage to bring customers in with a freemium type of model and then offer enhancements for a specific price.

5. Be Industry Specific.

The internet giants are going to be mass marketing their cloud storage solutions, which means Dropbox has the opportunity to stay in business by being niche specific. Although Amazon, Google, or even Microsoft could pursue specific industries, like health care, for example, the odds aren’t high that they will. For the giant companies, the best revenue opportunities come from generalized services. That means the best revenue opportunities for Dropbox could be to focus on providing niche services for just one sector of the industry.

6. Impose Limits, But Remove Them Without Complaint.

The Dropbox business model has already approached the unlimited data storage component of reaching out to customers, but they are doing so while still imposing limits. They offer a 1 TB business solution for commercial services, but customers can upgrade their accounts from there for what appears to be a no or low fee option.

Dropbox has also imposed user limits for commercial accounts that may also help to bring in revenues in the future. For $15 per month, commercial accounts allow up to 5 people to access the account and there are unlimited version histories that are allowed. They may be averaging $125 per year per paying customer, but with $10 billion in valuation and about $200 million per year in estimated revenues, Dropbox proves that a young company can still stay competitive.

7. Use the Experience of Others.

In the past, Dropbox has raised over $500 million from some highly intelligent investors in this industry. Accel Partners, Goldman Sachs, and Greylock Partners are just a few names that have seen the potential in the Dropbox business model. By using the experience of these capital investors, as well as others who have jumped on board, this business has created the opportunity to set itself apart by using the knowledge of its partners.

An often ignored fact is that different businesses, even within the same industry, have different experiences that can benefit one another. By forming a network of investors and/or advisers, it becomes possible to create a competitive stance that can be set apart from the giants of the industry today.

8. Be Flexible.

The business world is always changing, evolving, and updating. This creates a need for flexibility within every business model. For the Dropbox business model, they’ve adapted this flexibility by allowing the 5 licenses to access a business account to be assigned to any number of people at any given time. Not all of the licenses have to be used right away and if someone leaves the company, the license can be reused as well.

That flexibility must go into other aspects of the business as well. Some customers may have specific needs that internet giants may not want to meet because they are too specific. If a niche business is flexible enough to meet those needs instead, then they’ll have a customer that sticks around for awhile.

The Dropbox business model is going to survive. Although the freemium model has 300 million users, but low revenues from paid subscribers, their focus on providing quality niche services at quality prices will help them stay competitive. With it easy to upgrade accounts at any time, Dropbox has carved out their own little space on the internet and with these lessons, so can any other business.

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