The Dropbox peace-of-mind – MBA Learnings

If I had to summarize my learning on pricing from my Microeconomics classes, it would be -> avoid price competition like the plague. And, to do that – differentiate, differentiate, differentiate.

We discussed Dropbox’s move in August last year to lower prices to compete with Google, Apple, Microsoft and Amazon. The big question was whether this was going to be a race to the bottom in a future where storage would inevitably be free?

Now, Dropbox is one of my favorite products. I have been a user since the early days when they used to be hosted on “” and their brand has nothing but positive associations. All my working files sit on my Dropbox folder and, ever since I did that 3 years ago, I’ve never had to fret about whether my working files will ever be lost.

So, I thought I’d put together 2 recommendations for Dropbox based on what I’ve learnt in Marketing and Microeconomics in the past few months. These recommendations are based on the principal that differentiation matters. If we make the argument (and we can) that most storage providers inherently offer a similar product, the game-changer will be Dropbox’s ability to horizontally differentiate, i.e., inspire great brand loyalty among its users. That, then, leads us to a marketing question – how can they do that? My line of thinking is to think around the traditional 4 P’s – product, price, promotion and place. And, my 2 recommendations are going to be based on promotion and price –

1. Target the peace-of-mind business. The question is – what can Dropbox do to differentiate? That leads me to – what is the market? The first answer seems to be storage. But, is it really storage? Or, put differently, do we want it to be storage?

When I look at why customers use Dropbox, collaboration is obviously a massive reason and is at the core of why they do what they do. They have understandably worked really hard at making collaboration easy. My recommendation would be to also target the peace-of-mind business. Every user who collaborates via Dropbox likely has many important files on it. Why not just move them all onto Dropbox and make it a full set?

I pay Crashplan a yearly fee to back up my photos. That could easily be Dropbox. I think Crashplan works fine but I don’t love Crashplan the same way and would be more than happy to pay a bit of a premium for that love and trust.

In short, I think the customer problem that Dropbox could look to solve is to remove the worry about files not being backed up. This needs an investment into customer education and a few tweaks into the way it is marketed. But, if done well, I think this could be a huge win.

2. Get creative with pricing. The current “band” approach to pricing from the storage providers is staid. The problem with bands is that it only feels like a good deal if you are near the edge of the next band. Why pay $10 for 1 terabyte if all you have is a 100 GB worth of content to store.

An approach that could be really impactful is Amazon Web Services-style “you-pay-for-what-you-use.” This could work well for 2 reasons –
1. Foot-in-the-door. Even if I’ve not fully made up my mind, I could put in 10 extra GB into my Dropbox folder and try it out for a month. Once I’m in and experience the peace of mind, it’ll be hard to get out.
2. Customer’s use will expand with time. It is much easier to get a customer paying $6 to pay $10 vs. one paying $0. This use expansion is part of the reason behind the fact that Dropbox and Netflix still use AWS for storage.

Dropbox has a strong edge when it comes to differentiation because its brand associations are all linked to storage. Amazon, for example, has begun offering photo back up for free for Amazon Prime members but I still haven’t checked it out because I don’t associate Amazon with photo storage (yet). It’ll be interesting to see how the storage wars play out. Good luck, Dropbox!

The Sandwich Strategy – MBA Learnings

Federal Express or FedEx was created to compete an overnight delivery with the United States Postal Service or USPS. Responding to FedEx’s entry and early success, USPS created a product called Express Mail priced at $8.95 as compared to FedEx’s $12.

FedEx, had it been like most companies, would have reduced price and gone to war with the USPS. But, price is not just a number. It is a way of signaling value and FedEx understood that. So, they responded by redefining their market.

FedEx’s existing Overnight Delivery” did not specify what time the delivery would arrive. So, FedEx introduced precision not only in terms of the delivery day, but also in terms of the delivery time. They then included two deliveries – one in the morning and the other in the afternoon. They then labeled the service as “Priority” and “Standard”. For firms dealing with customers, “Priority” sent a powerful message about how they valued their customer’s business. Firms like Goldman Sachs and JP Morgan Chase were happy to pay for this service distinction. Besides, if a mail marked “priority” showed up tomorrow morning with a dozen other envelopes, what do you think a person picked up to read?

FedEx sandwich

And, the kicker – FedEx increased the price of its Priority service to $13. It kept the lower end Standard service at $9 effectively “sandwich”-ing USPS between its premium and value offerings. In one move, it changed the nature of the competition from one on price to one on brand and value. It also backed the decision with technology investment in tracking parcels that provided additional benefit for customers.

The lesson? When faced with adversity, don’t just react with what comes intuitively. Take some time off and think about how you could respond by doing what’s counter intuitive. And, if you’re feeling stuck or hopeless, remember the time FedEx raised its prices when being attacked by a huge competitor.

 Pricing Amazon Web Services – The 200 words project

Here’s this week’s 200 word idea from The Everything Store by Brad Stone.

Amazon Web Services (AWS) allows entrepreneurs to plug into Amazons Servers and use it’s computing infrastructure. The AWS team wanted to price it with a traditional monthly/yearly rental system.

 But, CEO Jeff Bezos shifted the focus completely –

1. He decided to create an electric grid model where you pay 10c/hour of use. This was ridiculously cheap but he knew companies like Microsoft and Google wouldn’t want to play this game as it would constrict their generally high profit margins

2. He thus played to Amazon’s greatest strength – building large scale low margin businesses that attracted customers. He actively avoided what he considered Steve Jobs’ biggest mistake – making the iPhone so fantastically profitable that it attracted so much competition that ended up eating its market share. He believed high margins attracted competition while low margins attracted customers.

 When moving into a new territory/project, let’s channel Bezos and remember to play to our strengths.

 PS: The graph below illustrates this beautifully. Despite increasing revenues, has almost never made a profit – intentionally.

(If you look very closely, you can see that in 2010 the company accidentally made a profit. )
Source and thanks to: Benedict Evans’ blog

 ‘One thing is easy to agree on, though: competing directly with a company like this is very hard. ‘ | Benedict Evans on Amazon’s profit graph