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DROPBOX: GO-TO-MARKET SALES STRATEGY

Matthew Wong and Darren Meister wrote this case solely to provide material for class discussion. The authors do not intend to
illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.

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Copyright © 2017, Richard Ivey School of Business Foundation Version: 2017-07-07

INTRODUCTION

Dropbox Inc. (Dropbox), the pioneering cloud-based file storage service, was at an important stage of its
business life. Its titular product, Dropbox, was a “freemium” consumer product (i.e., it was free to use, but
additional features were available with a paid subscription), boasting more than 300 million users. 1 In
April 2014, Dropbox launched an enterprise offering called Dropbox Business, targeting large corporate
users. In early May 2016, Dropbox would launch its Dropbox Education service, targeting colleges and
universities.

The cloud storage industry had advanced rapidly in the past several years since Dropbox began in 2008.
Competition in this space was fierce, with similar service offerings from powerhouses such as Microsoft
and Google, as well as competitor Box in the enterprise space. These services were part of the rapidly
expanding software as a service (SaaS) business model. This model was common among large, well-
established providers, such as Salesforce, SAP, and IBM, but was also increasingly popular with start-up
technology companies.

In the San Francisco headquarters of Dropbox, Paul Jun, head of Strategic Finance at Dropbox, and
Praveer Melwani, a member of the Strategic Finance team, were preparing for one of their quarterly
meetings. Jun had an Honors Business Administration (HBA) degree from the Ivey Business School (Ivey)
at Western University, and had worked in investment banking and private equity before joining Dropbox in
2013. Melwani also had an HBA from Ivey, and had also worked in investment banking before joining
Dropbox in 2014. Both had been excited to join the rapidly growing Dropbox, but at the same time, needed
to quickly become knowledgeable about the analytical tools necessary for this dynamic industry.

In late 2014, Dropbox Business was just ramping up, and Jun and Melwani were wrestling with an
important question. Although they had asked this question before in relation to Dropbox’s freemium
product, every quarter they still wondered: what was the best way for Dropbox to invest its limited
resources? The company could choose between investing in a self-serve, inbound sales approach and an

1
Drew and Arash, “Thanks for Helping Us Grow,” Dropbox Blog, May 28, 2014, accessed March 16, 2017, https://blogs.drop
box.com/dropbox/2014/05/thanks-for-helping-us-grow/; By 2016, Dropbox would claim 500 million users: Drew and Arash,
“Celebrating Half a Billion Users,” Dropbox Blog, March 7, 2016, accessed July 20, 2016,
https://blogs.dropbox.com/dropbox/2016/03/500-million/.

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outbound sales approach but needed to decide the most effective use of that investment. The job of the
Strategic Finance department was to identify the relevant facts, analyze the financial implications, and
recommend the most effective option. Dropbox’s success and future growth were counting on the Strategic
Finance team to get it right.

OVERVIEW OF THE CLOUD STORAGE MARKET

“Cloud” computing and cloud storage had recently become ubiquitous terms in consumer technology. Cloud
computing primarily relied on distributed computer connectivity to a shared pool of resources, rather than
the centralized mainframe access and control that had characterized the previous decades of computer use.

In 2007, Dropbox had pioneered the use of the cloud storage technology as a popular consumer-level
service. Over the next several years, the cloud storage market would expand enormously in both business-
to-consumer (B2C) and business-to-business (B2B) services. The analytics firm OPSWAT estimated in
2014 that approximately 40 per cent of all Windows devices had cloud back-up applications. Dropbox was
the most popular, on 33.8 per cent of those devices, and Google Drive was in second place, at 25.1 per
cent. 2 Since several of the B2C cloud storage companies offered their services for free, it was difficult to
estimate the overall value of this market. However, research firm IDC valued the global market for
business file sharing alone at US$904 million, 3 with Dropbox leading with a 24 per cent share of the
market, and competitors Box and Microsoft not far behind at 21 per cent respectively. 4 IDC also projected
that the file-synchronization and -sharing market would steadily grow to be worth $2.3 billion by 2018. 5
The dramatically increased competition in this space meant a vigorous push toward adding features from
all companies, including from technology juggernauts Apple, Google, Microsoft, Amazon, and Tencent,
which would generate hundreds of billions of dollars (by market capitalization) of resources in this space. 6

BACKGROUND OF DROPBOX

Dropbox was founded in 2007 by Drew Houston and Arash Ferdowsi, who at the time were both computer
science students at the Massachusetts Institute of Technology. Dropbox’s origins famously lie with a long-
distance bus trip, where Houston had planned to catch up on some work. However, he had left the USB
drive containing the files at home. Frustrated at this mistake, Houston began to program the code that
would form the foundation for a cloud-based file syncing service. 7 Houston paired up with Ferdowsi to
apply to the Silicon Valley start-up accelerator Y Combinator, and were accepted into the summer 2007
batch. Dropbox officially launched in 2008 at the TechCrunch50 annual conference and quickly became
popular for its simplicity and the free storage space it offered.

2
OPSWAT, Advanced Threat, Cloud Backup and P2P Report: April 2014, accessed October 9, 2015,
www.opswat.com/resources/reports/advanced-threats-backup-p2p-april-2014.
3
All currency amounts are in U.S. dollars unless otherwise noted.
4
Eric Newcomer and Dina Bass, “Dropbox Is Struggling and Competitors Are Catching Up,” Bloomberg Businessweek,
June 24, 2015, accessed October 9, 2015, www.bloomberg.com/news/articles/2015-06-24/dropbox-is-struggling-and-
competitors-are-catching-up.
5
Business Wire, New IDC Worldwide File Synchronization and Sharing Forecast Shows Market Will Grow to $2.3 Billion by
2018, October 9, 2014, accessed March 16, 2017, www.businesswire.com/news/home/20141009006113/en/IDC-
Worldwide-File-Synchronization-Sharing-Forecast-Shows.
6
J. J. McCorvey, “Dropbox versus the World,” Fast Company, March 30, 2015, accessed October 9, 2015,
www.fastcompany.com/3042436/tech-forecast/dropbox-versus-the-world.
7
Nicole Carter, “Drew Houston and Arash Ferdowsi, Founders of Dropbox Inc.,” June 27, 2011, accessed October 16, 2015,
www.inc.com/30under30/2011/profile-drew-houston-and-arash-ferdowsi-founders-dropbox.html.

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In the years since, Dropbox grew enormously. Within several years, its service boasted hundreds of
millions of registered users, with users synchronizing more than a billion files every day.8 The company’s
headcount also grew explosively. In January 2010, Dropbox had 18 employees; only six years later, it had
approximately 1,200 employees, primarily housed in the corporate office in San Francisco. Much of the
company growth was fuelled by a recent reported $350 million round of funding in 2014, led by
investment fund BlackRock Inc., which valued the company at $10 billion. 9 This funding complemented a
round of funding in 2011 that reportedly raised $250 million. 10 Since it was a private company, Dropbox’s
revenue was not disclosed but was speculated to be between $300 million and $400 million in 2014. 11 A
significant contributor to revenue growth was the Dropbox Business service, which had nearly 200,000
paying business customers. 12 The new Dropbox Education service, used in more than 4,000 educational
institutions worldwide, 13 similarly sought to expand its revenue potential.

BUSINESS MODELS

For a one-time fee, traditional software business models typically sold customers a limited-usage licence to
a stand-alone software package (e.g., Microsoft Office or Photoshop). Every few years, customers would
decide whether they wanted to pay another one-time fee to upgrade to the next software version (e.g., from
Microsoft Office 2010 to Microsoft Office 2013). In contrast, Dropbox used what was known as a SaaS
business model. Essentially, SaaS models were recurring revenue or subscription businesses whereby users
paid the service provider at regular intervals (e.g., monthly or yearly). Customers always received the most
recent software version and had ongoing access to the online services (see Exhibit 1). Businesses that used
the SaaS model, such as Dropbox, Atlassian, and LinkedIn, were becoming increasingly successful, as
their number of users grew into the millions. These companies offered freemium services in part to entice
their large base of free users to become paid subscribers once they were convinced of the company’s value
proposition.

In addition to SaaS, infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) models were also
becoming increasingly popular. With IaaS business models, a company set up infrastructure, typically
computer hardware, and then provided access to that infrastructure for a recurring fee. The most common
category was computer servers and data storage. Amazon Web Services was perhaps one of the most well-
known examples, providing powerful network computing services to organizations small and large, such as
NASA 14 and Netflix. 15 IaaS provided the advantage of specialized expertise and technology without the
expense and difficulty of an organization creating a similar extensive infrastructure in-house. PaaS models,
such as Google’s App Engine, allowed users to use Google’s platform (i.e., a common programming
infrastructure) to host and scale web applications. Other PaaS providers included software giants
Microsoft, Oracle, IBM, and SAP.

8
Drew and Arash, “Live from DBX,” Dropbox Blog, July 9, 2013, accessed March 16, 2017,
https://blogs.dropbox.com/dropbox/2013/07/dbx/.
9
Anthony Ha, “Dropbox Has Raised $350M In New Funding at a $10B Valuation,” Techcrunch, February 24, 2014,
accessed June 28, 2017, https://techcrunch.com/2014/02/24/dropbox-filing/.
10
“Dropbox,” Crunchbase, accessed October 16, 2015, www.crunchbase.com/organization/dropbox#/entity.
11
“The Dropbox Valuation is Irrational,” CB Insights Blog, September 1, 2015, accessed October 15, 2015,
www.cbinsights.com/blog/dropbox-valuation-bubble/.
12
Dennis Woodside, “Our Next Milestone: 200,000 Business Customers,” Dropbox Blog, July 11, 2016, accessed July 20,
2016, https://blogs.dropbox.com/dropbox/2016/07/200000-business-customers.
13
Jason Katcher, “Secure Collaboration of Campus: Introducing Dropbox Education,” Dropbox Business Blog, May 10,
2016, accessed July 20, 2016, https://blogs.dropbox.com/business/2016/05/introducing-dropbox-education/.
14
John Breeden II, “The Tech behind NASA’s Martian Chronicles,” GCN, January 4, 2013, accessed July 21, 2016,
https://gcn.com/articles/2013/01/04/tech-behind-nasa-martian-chronicles.aspx.
15
“About Netflix,” Amazon Web Services, accessed July 21, 2016, https://aws.amazon.com/solutions/case-studies/netflix/.

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DROPBOX’S GO-TO-MARKET STRATEGIES

Fundamentally, a go-to-market strategy referred to how a company got its products to customers. It took
into account such factors as pricing, distribution, and required resources. Dropbox’s customers were
generally segmented by product type and size. For example, Dropbox’s consumer product customers were
individual users, whereas Dropbox Business’s customers were varying sizes of companies. A small-tier
company would have fewer than 250 users, a mid-tier company would have 250–1,000 users, and the
enterprise tier would have more than 1,000 users. Similarly, Dropbox Education had institutional
customers that ranged in size by faculty, staff, and student population. Larger customers, while offering
substantial business to Dropbox, were also significantly more complex and involved. Enterprise customers
typically had many of their own workflows, with sophisticated procurement teams that Dropbox needed to
interact with. Larger companies could also have more complicated security issues, and as a result, a great
deal of time could be required to recoup Dropbox’s investment in these customers.

Generally speaking, Dropbox had two primary go-to-market sales strategies: self-serve/inbound sales and
outbound sales. The self-serve/inbound sales strategy reflected the company’s original model of
transitioning free customers to paying customers. Individual users, based on their own initiative and
interest, used a self-service interface (e.g., website or phone) and signed up as a paying customer. This
approach was efficient, incurred a relatively low cost of customer acquisition, and was simple for the
customer. Significant effort was invested to make the upgrade flow and payment process as easy as
possible, with the use of A/B testing. 16

Alternatively, an outbound sales model reflected a traditional sales staff and account management
approach whereby real, human sales staff sourced leads, negotiated arrangements, and closed sales deals.
High-quality sales staff were critical, as was motivating and compensating them for high performance.
Similar to sales at many other organizations, Dropbox’s sales staff were incentivized through variable
compensation (i.e., commission on sales), so they were highly motivated to sell to customers. Since
Dropbox served multiple tiers of customers, the sales staff tended to self-select to the types of customers
they were most effective at servicing. An outbound sales model allowed Dropbox to target these different
businesses. Such customers could have complex needs and requirements that were best handled by
experienced staff rather than a generic interface.

Strategic Finance at Dropbox

Because Dropbox was a powerful and complex technology company that was active in both financial
investment and spending, finance was one of the most important departments at the company. According
to the company’s website:

Our finance team builds the financial infrastructure to scale our growing company. We combine
analytical and strategic thinking to develop a sound financial future for our global brand. We work
closely with teams across the company, as well as with external partners.17

The Strategic Finance team used data, analytical tools, and business insights to try to improve strategic and
financial decision making at Dropbox. The team had a broad mandate, ranging from raising funds from
investors to developing business plans for new products. The team’s recent projects included raising
reported $350 million through a Series C funding round; completing a reported $500 million unsecured
credit facility; developing and executing projects around business efficiency; creating business plans for
16
A/B testing is a popular approach to testing user interfaces by presenting users with variations (e.g., an “A” interface and a
“B” interface) and then collecting metrics on how the users responded to the variations to guide improvements.
17
“Finance,” Dropbox, accessed August 29, 2016, www.dropbox.com/jobs/finance.

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new product launches, including Dropbox Enterprise; and creating focused user acquisition and
distribution strategies to grow revenue and reduce costs.

One of the core responsibilities of the Strategic Finance department was understanding how Dropbox was
making money (i.e., its key business drivers) and how best to invest Dropbox’s substantial but finite
resources, which also meant understanding the financial impact of the company’s strategic decisions and
using that information to shape future decisions. In other words, the Strategic Finance department was
involved in translating and evaluating the quantitative impact of strategic decision making, all in service of
the overall aim of continuously scaling the company.

Thus, fundamental aspects of Jun and Melwani’s work in Strategic Finance at Dropbox were a
comprehensive understanding of both the SaaS model (see Exhibit 2) and the implications of inbound and
outbound sales on revenue and growth. Both Jun and Melwani were experienced professionals who were up
to the challenge of Dropbox’s rapid growth. For example, Dropbox grew from 300 to 1,200 employees in
just three years. And yet the challenge was significant, as Jun, Melwani, and the rest of the Strategic Finance
team managed numerous core performance metrics, distilled key takeaways, and communicated this
information to executive management. Their work helped Dropbox to make decisions that would spend
millions of dollars and impact hundreds of thousands of companies and hundreds of millions of users.

In the early days of Dropbox, the company did not have an outbound sales team. Its inbound sales model
was working quite well as the company scaled up with individual users. In 2013, Dropbox had less than a
dozen outbound sales staff in the whole organization. By 2014, Dropbox had rapidly expanded its service
offerings to more individual customers, businesses, educational institutions, and beyond.

With the pressures of growth in a competitive market, it was obvious to the Strategic Finance team that the
company would need a combination of self-serve/inbound sales, which would require more online
advertising, and outbound sales, which would require more sales staff. The team had $10 million left to
allocate this quarter.

The question was, what was right amount of each type of sales? What was the most effective use of
Dropbox’s limited resources? What would be the incremental return of investment in each of those areas?
Dropbox needed to carefully consider both its resource allocations and its strategic value. For the financial
analysis, the company needed to understand lifetime customer value, average sale per customer, churn, and
the cost of customer acquisition, along with the strategic implications for investing more in each area.

Jun, Melwani, and Dropbox’s Strategic Finance team would need to know how to make these
determinations and anticipate outcomes. Dropbox’s future success—particularly in an increasingly
crowded market—would depend on it.

CONCLUSION

Jun and Melwani sat in one Dropbox’s numerous conference rooms, and Melwani casted his laptop onto a
large, flat-panel screen. He minimized the SQL queries he had been running and brought up several
spreadsheets representing dozens of figures the team had been working on. The pair had worked through
this information before, but every time it was a little bit different as Dropbox competed in a dynamic
environment. “All right,” Jun said, “let’s have a look at how things have been shaping up this quarter and
see what we’re going to do.”

The Ivey Business School gratefully acknowledges the generous support of the John M. Thompson
Case Studies and Curriculum Development Fund in the development of this case.

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EXHIBIT 1: DROPBOX PRODUCT/SERVICE OFFERINGS AS OF NOVEMBER 16, 2016 (IN US$)

Cost per
Cost per User
Product/Service User Storage Space Notes
per Month
per Year

Dropbox Basic free free 2 gigabytes

Yearly rate is
Dropbox Pro* $9.99 $99 1 terabyte
discounted 17%

Minimum 5 users
$15
As much as
Dropbox Business (Monthly is not offered through $150
needed Yearly rate is
outbound sales program)
discounted 17%

Case by As much as
Dropbox Enterprise n/a
case needed

Dropbox Education n/a $49 15 gigabytes Minimum 300 users

* Dropbox Pro was renamed “Dropbox Plus” on March 2, 2017.

Source: Company files.

EXHIBIT 2: SOFTWARE AS A SERVICE FINANCE DEFINITIONS AND FORMULAS

Term Definition
Annual Churn Rate (%) Percentage of customers that do not renew their service
Average (Annual) Sale Price Average price that customers pay per licence, including discounts (primarily for
(ASP) ($) outbound customers)
Average Deal Size ($) ASP × Average Number of Licences Sold per Customer
Lifetime Value (LTV) ($) LTV = (Average Deal Size × Gross Margin) ÷ Annual Churn Rate
Cost per Sales Rep ($) All-in cost per each sales representative (including supporting costs: management,
sales opportunities, information technology, leads, and other related factors)

Quota ($) Annual sales target per sales representative

Cost per Click Cost for each online ad that a customer clicks on (e.g., Google AdWords). Online
ads can also be sold on a “cost per impression” (CPM) basis (cost per click = CPM
÷ Click Rate Percentage)
Purchase Conversion Rate (%) Customers that make a purchase ÷ Total customers that visit website (“traffic”)
Cost to Acquire a Customer Cost to acquire a customer
(CAC) ($) For outbound sales: Cost of Per Sales Rep ÷ (Sales Quota ÷ Average Deal Size)

For inbound (through advertising): Cost per Advertising ÷ Purchase

Conversion Rate
LTV/CAC Ratio An important measure of the relative return generated on investment in
different sales channels

Source: Adapted from David Skok, “SaaS Metrics 2.0—Detailed Definitions,” For Entrepreneurs, February 20, 2015,
accessed March 16, 2017, www.forentrepreneurs.com/saas-metrics-2-definitions-2/.

This document is authorized for use only in Professor Don O'Sullivan's EMBA Marketing July 2020 at Melbourne Business School from May 2020 to Nov 2020.