How Dropbox messed up conversion rates but had a secret weapon

 

Many people are intrigued as to what makes a software product or service go viral and get total control of its market, while other similar competitors are left with nothing but the scraps. In this article I will tell you about the secret weapon that Dropbox used in order to beat giants like Microsoft, Google, Apple & Amazon and take the jackpot in the “personal cloud storage” market.

So first thing first, Dropbox was founded in 2007 by Drew Houston and Arash Ferdowsi, two MIT students who were tired of emailing files to themselves in order to work from more than one computer. In the beginning, there was only a web interface, so Dropbox actually wasn’t much better than emailing files to yourself. However, all this changed when the game changing desktop application was introduced and re-invented the way we sync, backup and share our files. Dropbox had a winner in their hands, but there was a long way to go and many users to attract, before they could dominate the market.

When a new user would open a Dropbox account, he only got 2GB of storage space, which would usually fill up pretty fast. The business model was simple: invite your friends for an extra 250MB per registered user (later changed to 500MB), or pay a monthly subscription fee to get 50GB or more.

The subscription fee model had a huge flaw. They offered a Package with 50GB, but they never thought of the psychology behind their offering. Users had to give up their hard earned referral bonus storage if they were going to upgrade their package. People don’t like giving up something they worked hard for, and they especially don’t like paying to give it up. The psychological term for this is cognitive dissonance – the conflict of two cognitions. I don’t know what the conversion rates for this offer were, but I can assure you that they were not good at all.

(The dropbox “upgrade” page fail – at about 2010)

It would take over a year before Dropbox understood their multi-million dollar mistake, and decide not to discard the bonus storage space when upgrading (instead- they doubled it!). Small changes have great effects. I can only assume their conversion rates increased dramatically.

(The dropbox “upgrade” page after the fix – screenshot taken on May 2012 – since then they’ve improved more and probably done some A/B testing to find their winning offers.)

By the way, I also think Dropbox should have offered “Lifetime storage space for a one-time fee” (example: buy another 2GB for life for $10). According to Moore’s law – which states that storage space doubles every 18 months, 2GB become insignificant as time passes by. This is exactly what happened when Microsoft started offering 20GB of storage for free, and later on Google entered the game with 5GB. The increase in the free storage space size was foreseen, so Dropbox may as well have sold the storage space instead of giving it out for free later on to match their competitors. Also, paying customers (even if all they paid is $10) are less likely to leave for a competitor than free customers because they are already “invested” in the product.

The failure to offer attractive paid packages led to a disaster that no Saas company wants. Users were paying to get more storage space on Dropbox… They just weren’t paying Dropbox! That’s right. People were (and still are) trading Dropbox referrals for money. Needless to say that these are junk referrals (done by automated bots) and not real new users, eating away at the Dropbox’s computing power. This is very bad for business.

(An example offer from fiverr.com that offers a new account with 18GB for $5 thanks to 32 Junk referrals. Dozens of these offers are competing there.)

So how did Dropbox manage to thrive and take control of the market, even after making critical mistakes that could have ended the business? They had a secret weapon that nobody else had at the time! The secret weapon was that they were responsive to customer engagement. Dropbox did not treat all customers the same. They had (and still have) sophisticated offerings based on what each user was actually doing with their account. When the system saw that a user wasn’t using features A, B, C – it sent an email explaining about their benefits. When the system saw that a user was going to run out of space – it sent an email offering to invite more friends and get more space or upgrade. This may seem trivial, but the fact is that even today, most companies don’t take the time to plan this, and have “stupid” automated campaigns in which all users get the exact same emails at the same time intervals.

(an example email from Dropbox that is being sent in-context to the account status, and not just asking the user to upgrade out of thin air)

Listening to their customer’s engagement and acting upon it to deliver super-relevant content, was what helped Dropbox significantly increase the adoption of the product and make it go viral so rapidly, differentiating it from other competitors. It also helped prevent abandonment when Microsoft offered a similar product with 10X storage space. Ultimately, the big mistakes in conversion rate optimization that I described earlier didn’t kill the business because its engagement management strategy was advanced way ahead of its time, giving the company a huge advantage in other fields.

(Sending an “upgrade offer” to Corey would be useless because she doesn’t use her Dropbox.
Instead, they try to get her to re-engage)

Dropbox were first movers to using customer engagement. Though it paid off big-time, developing the engagement system from scratch in-house did still cost them a great deal of time and effort, simply because there was no other option available on the market.

Today, Totango is a ready-made solution for SaaS businesses that want to use customer engagement to their benefit like Dropbox does. You can get the same customer engagement functionality that took Dropbox 2 years and $5 million to build right off-the-shelf from Totango. What used to be a competitive differentiator for Dropbox – the technology and know-how of how to do excellent customer engagement is now commonplace and a commodity and if you don’t adopt it, you are lagging behind because competitors already are!

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  • http://www.annexcore.com/ AnnexCore

    Never realized that, but referral credit is a significant consideration.

    • http://twitter.com/Shai_Alon Shai Alon

      It is.
      Many companies abuse this resource and damage themselves.
      I think the fact that Dropbox actually understood their mistake and doubled referral credit for paid users lifted conversion rates significantly.
      I still don’t know how and why they would allow people to “trade” fake referrals -> should be a pretty easy fix.