1. When Houston applied to Y Combinator, what hypotheses did he hold about the key elements of Dropbox’s business model?
The first key elements were the simplicity and accessibility of the product. To underline this aspect he asked every VC who interviewed him whether or not they were using any other product of that sort, considering that, by that time, there were some other solutions in the market already. The product worked automatically and dealt with complex operations in a simple way.
Another key element was the high quality of service that DB provided. Quality was defined by Houston in terms of safety of the documents and information and quickness of the process. He had also built the program to operate with some innovative technological concepts that updated only the changes and kept the main file stored locally.
Regarding the target customers and its strategy of customer acquisition, he made the observation at the time, that potential users were technically adept, (e.g. college students downloading music P2P) but that due to the simplicity of the product and expansion of the internet it could rapidly grow. Another key element was the release of a single version for all users, targeted specifically at individuals. This allowed the company to expand by a “Trojan horse” strategy of targeting users to then enter into the B2B market automatically. This strategy could also have been supported by AdWords and partnerships with big distribution channels (to sell the product already installed)
From the revenue generation aspect, the company relied on a Freemium model in which, for example, 1GB was given for free and the other 10GB for 5$ month (team plans from 20$ month)
As of June 2012, which of these
hypotheses have been confirmed, and which have been discarded?
Drew Houston had a quite clear and defined idea of the final product when he asked for the first Venture Capital, therefore the business model of Dropbox relied on certain key elements that are still at the center of what the product is today. Even if the initial elements of a business plan are considered hypothetical, in this case most of them turned out to be quite correct.
Nevertheless there were certain adaptations and corrections to the original business idea. One of them was from the distribution point of view, were strategy was revised to limit the budget spent on AdWords and other traditional marketing tools. DB then decided to rely on a customer-to-customer distribution. Partnerships with the large distribution channels was first abandoned but recently the company has started signing agreements of this type (HTC distributes Dropbox on Android phones).
The freemium model has mostly kept all of its characteristics but the prices and GB offered have been adapted to the market requests. (2GB free, extra 500MB for recommendations, teams packages of 1TB for 795$/year, pack-rat...)
2. Can you recognize any MVP they have used to validate their assumptions?
A MVP, “minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort.” It can be seen as a product-prototype, which is evaluated by visionary clients in order to improve the test version before going to market. Doing this, features with no value to the customer can be eliminated and missing features can be added. A MVP increases the chance of the final product to be successful in the market.
The Dropbox-prototype was only accessible for a restricted number of users, who needed to register in order to test the 2GB version. To recruit test users, Houston and his team came up with a three-minute video explaining their service, which was posted beforehand on a famous website for developers (Hacker News). Doing this, Houston wanted to check the demand for the product, ensure that the Dropbox-IT-system worked and also get feedback and learn from the users.
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