Dropbox Innovation Strategy

Dropbox, one of today’s most famous file storing and sharing services, is a company

founded in 2007 by Drew Houston, a graduate of MIT (Massachusetts Institute of

Technology). The idea of Dropbox arose when by chance Drew Houston forgot his

flash drive while traveling on a bus and needed it for a business presentation. Frustrated

with the loss, Drew began to write a code without any attempt that in the future it would

be called Dropbox.

The company was launched in September 2008, marketing a simple innovation: users

could upload their files to the cloud, and then synch their files with others computers. It

only had a single product version to both consumers and business users. They avoided

making people to go through a complicated change and kept the drag-and-drop system

with a Dropbox folder. The service offer was simple and easy, and together with the

company marketing and pricing strategy, Dropbox was able to grow very quickly: by

the year of 2009 it already had two million users (Barley, Eisenmann & Pao, 2011: 8).

In this paper we are going to analyse the innovation strategy of Dropbox by using

Economics of Innovation concepts and theories. Additional we are going to describe

how Dropbox’s strategy has impacted the competitiveness of the company in the market

place. We chose to analyse this innovation due to its great success since it was launched

and as it is considered a model of an innovative company. They managed to create a

simple and yet very useful product with relative advantages to other innovations

(hardwares and USB). People could have their documents constantly updated in a safe

place, and they could reach wherever they where. Not less important to the company’s
success was the pricing strategy adopted: the freemium strategy, which offered a free

and paid version of the product. At last, the network effect that the service generated for

itself is also important to understand why such rapid growth occurred – mostly due the

method of providing 250 MB of free storage to users that invite others to use the service

and also to the users that accepted those invitations, making people “spread the word”.

First of all, it is fundamental to understand what innovation is. One of the greatest

exponents in innovation matter is Schumpeter who describes innovation as “Introducing

new commodities or qualitatively better versions of existing ones; finding new markets;

new method of production and distribution; or new sources of production for existing

commodities; or introducing new forms of economic organization” (1992:83). But when

we talk about innovation, we must also analyse the different types of innovation. An

important concept to understand is the difference between product and process

innovation. As said by Peter Swann (2009), product innovation creates a new or

improved product, without any change in the production process, while pure process

innovation changes the way in which products and services are created, without

changing the product itself. From the point of view of the company, Dropbox is a

product innovation because as Houston commented in the “April 2007 Y Combination

Application” it was the first service that integrates the sync, backup and web

uploading/publishing features that already existed in other softwares, giving a solution

to the main three problems that small teams have. This are: they need their stuff to be

protected, to be accessible everywhere and that allow them to work in the last version.

(Barley et al, 2011: 14). However, from the perspective of the user, Dropbox is a

process innovation because it changes the way people carry, store and share their files.

For example, now a day people don’t have to meet in the same place to write a

document. Dropbox allow them to work in different places at the same time and have
access to the latest version, in an easier, simpler and faster way than using emails to

share files. Therefore, Dropbox managed to fill the gap in the file synchronization and

backup services market, which permits it to enter a market full of competitor.

Incremental innovations of Dropbox are also very important to the company’s

innovative strategy. It increases the differentiation of the product in the market mainly

as a consequence of consumer’s feedback. Consequently, Dropbox is a clear example

that innovation is no longer seen as the linear model describe by Swann (2009). A

model based in four stages: Research & Creativity, Invention, Design & Development,

and Innovation. Feedback by users is an essential stage in the evolution of the product,

“Since launch, Dropbox’s team had continuously upgraded their product’s ease-of-use

and features, often in response to users’ requests. The list of additional functionality

desired by users continued to grow, for example, offering the service in languages other

than English” (Barley et al, 2011: 9). This have had a huge impact in the

competitiveness of the company in the market, because they continuously improve the

product according to what users expect, and not by what the company think they want.

In technologic businesses it is highly important to understand the consumer the firm is

going to focus on. This is mainly because with Internet technology is accessible to

almost every type of person. In this case and based on Alfred Marshall’s studies on

consumers, Dropbox focuses mainly on the users of the same name, as he states that this

type of consumer “desires not merely larger quantities of the things he has been

accustomed to consume, but better qualities of those things; he desires a greater choice

of things, and things that will satisfy new wants growing up in him” (1920: 86).

To grab the attention of this type of consumer in an innovation as Dropbox, the concept

of “Innovative Pricing” is pivotal. This idea is defined as “the activity of creating a new
pricing or tariff structure” (Swann, 2009: 67) and, in particular, the one used by the

company is called freemium, a business model that “offers the same kind of service in

both a free version and a paid version; the paid version provides more features or more

content to its subscribers” (Marketing on the internet, 2012). Applying this idea to the

company, when they launched to the public in 2008 they offered two different products

that differ in their features. Today’s characteristics of them are a 2 GB storage size

account and another premium account called Dropbox Basic plus with 1000 GB of

space, additional sharing controls and remote wipe for a price of 7.99 pounds per month

(Dropbox, 2014).

The freemium strategy adopted by Dropbox impacted the company’s competitive

environment first by helping the firm attract consumers in a highly competitive market,

so the company couldn’t charge for a product where customers had alternatives. In fact,

in July 2007, only four months after the company was founded, MashableUK published

a list with more than 80 file hosting and sharing sites (Aune, 2007). Second, this price

innovation made them realize that a series of product optimizations were needed, for

example a decrease in the amount of free space given, hence improving Dropbox’s

economics and making it a more efficient and competitive. Third, this is a product that

people don’t know they need, as Houston commented in Barley, Pao and Eisenman’s

Harvard Business Study Case, “You’re not looking for it. You’re happy when you have

it, but if you don’t have it life’s goes on” (2011:4), therefore, freemium model helped

Dropbox to create a new need among people by offering a free version of the product.

Fourth, this price innovation worked as a strategy to get certified by the Information

Technology (IT), which allows them to sell the product inside the companies, as

Houston stated “The idea is to get people using it inside companies without IT’s
permission. Once IT sees that Dropbox is in heavy demand and that it works reliably,

we’ll get certified for use across the country” (ibid).

As a consequence of this last idea, the company offers one more premium account

called Dropbox for Business, a new version of the 2011 Dropbox for Teams, with

specific business features such as unlimited version history for 11 pounds per month

(Dropbox, 2014). This last product is in some way an example of Dropbox attempt to

apply the concept of third degree price discrimination were “a producer sells a product

in several different markets (for example different regions) and charges a different price

in each” (Swann, 2009: 71). Here the company is segmenting their customers in

business and private users, but it is interesting to point out that the clients of the free

accounts do not pay anything for using the product. Therefore, this contradicts the

fundamental characteristic of third price discrimination about charging different prices

to the customers and the fact that the producer should try to make them pay the most

they are willing to, even though it is not guaranteed (ibid). This helps the company to

increase the number of users and their revenues. In fact, in November 2013 they had

200 million users, which 4 millions of them were business clients (Constine, 2013).

Probably the most important factor in technological innovations is the network effect.

Dropbox reach customers in a similar way as social networks do. Dropbox itself is a

very useful tool, but its main purpose and feature is the sharing capacity it has. As most

of the technological firms, it can only survive with a large number of users. For the

respected economist Peter Swann:

“When network effects are important in consumption, we say that the value of

consumption is not only a function of the intrinsic characteristic of the product

 itself but depends also on the number of others who consume the same product

or service” (2009: 82).

One of the main reasons why the network effect is so important to Dropbox is because

it is its main way of keeping afloat. Let’s not forget that Dropbox works based on a

freemium business model. This means that users can sign up for a free 2 GB storage size

account or pay for subscription to a more safe account with more capacity. In most

cases the number of users that use the service for free is considerably higher than the

number of users that actually pays for it.

It is very important to distinguish between a direct and indirect network effect. In direct

network effects, the user benefits when the network is large. In this case the larger the

network the better for the user, basically because it makes it easier for him to share

documents especially in a working environment where many people must be connected.

On the other hand, an indirect network effects is when users do not benefit directly from

other users but there are a lot of supporting products that users can make use of. In

Dropbox’s case, what it makes it so reachable by users is its integration with mostly all

platforms such as smartphone, tablets, PC and Mac, and its connection with the most

popular apps. Dropbox has created a dynamic sharing system with other companies and

more softwares have compatibility with it.

To understand better how network affects the business model of Dropbox, it is very

important to understand how its network is structured. In this case we can speak of a

two-sided structure, which according to Eisenmann, Parker & Van Alstyne “…the

platform’s value to any given user largely depends on the number of users on the

network’s other side. Value grows as the platform matches demand from both sides”

(2006). This means that there is a dynamic behaviour between two distinctive groups
with different willingness to pay. Both, the user and the person invited are benefit with

this extra storage space. On one hand we have users that don’t pay for the service, and

in the other hand we have users that pay a certain amount. But what it is important is

that there is a mutual interest on usage, they are interested in more people joining

because the more people using Dropbox, the server is better.

In a highly competitive market as is the technologic one, a very important issue to take

in consideration are the switching costs. This are the costs people would have to incur in

order to switch from one product or service to another. With more than 300 million

users (Dropbox Blog) Dropbox is the second largest cloud service with 17% of the

market, only exceeded by Apple’s iCloud with 27% of the market (Michael Endler,

2013). So the question is, how much are customers willing to invest in order to switch

to another cloud storage service? Especially when all cloud services are so similar. Even

though Dropbox’s switching costs are relatively low, it will also depend on the type of

user we are talking about. Probably for home users, switching to Google Drive will only

imply time in moving the files from one folder to another but for an office user who

shares files with other co-workers, switching could mean not only time but also

resources in case it is a paid service. Make a group of people who are familiarized with

a certain system switch to another can be very difficult and probably not necessary

enough.

As a conclusion, we can agree that the innovation strategy adopted my Dropbox had a

positive impact on the competitiveness of the company in the market place. The first

smart step that Dropbox made was start it’s business with a freemium model. The only

way to be competitive enough to survive is with a big base of users, and that is exactly

how Dropbox started. However, context plays an important role on the success or

failure of a firm. In this case it clearly affected on Dropbox’s creation basically because
it was a moment where the solutions for file storage were very inefficient and it was a

necessity that wasn’t being satisfied.

Ways of saving and sharing files existed before Dropbox was launched, but the

company managed to develop a product that can be seen as both product and process

innovation, where people could do the same thing that were used to but in an easier,

simpler, faster, and more effective way. Therefore, being innovative as a later entrant is

fundamental for capturing new users, especially to persuade them to change from their

old alternative services.

The fact that it was a two-sided effect helped Dropbox to grow as a company and

become a worldwide company. It was not only the way users interact to benefit each

other in a network way but also the compatibility Dropbox managed to develop with all

the platforms and applications. Its partnerships with big enterprises took Dropbox to a

whole new level where only a few companies can actually compete. That doesn’t mean

that Dropbox’s path is clear, a constant innovation is fundamental for its prosperity and

growth.
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