Dropbox versus Instagram: A (brief) Case Study in Growing Revenue

We all love Dropbox. That in, and of itself is quite an accomplishment. There are very few companies out there that have virtually no detractors. We love Dropbox because of its features, but also because of the companies’ values. They (in)famously turned down Steve Jobs’ offer to buy them. Jobs’, of course, was onto something. Apple’s various attempts (MobileMe and iCloud) are pale imitations of Dropbox’s functionality.

The above aside, I had, until recently, only been sort of curiously impressed by Dropbox. It was there when I needed it; though I didn’t use it much. I knew it had its fanatical users and evangelists, and I really love the design/aesthetic. However, like Instagram, and many of these types of services, I was less-than-convinced of the ongoing underlying business model.

Dropbox ruled out the obvious “business model” when they rebuked Jobs’ offer; i.e. exit via acquisition. For Instagram and many beloved companies — those with fiercely loyal users, but no real revenue model — this is the obvious/only way out. Not that it’s a bad thing…if you can pull it off; as I tweeted back in April, this “Mark to Mystery” accounting struck me as a sign of a bubble.

I fully understand that Dropbox — like Instagram, Evernote, and other companies that, again, fit the description of beloved, but with no real business model — has a premium tier that does indeed generate revenue. Without being privy to Dropbox’s financials, if I had to guess, the revenue from this paid tier doesn’t nearly cover their run cost.

In fact, if this premium tier revenue did cover costs, they wouldn’t have made the move that they just made.

The move they just made, like much else that Dropbox has done, is elegant and very smart.

You may have noticed that the new version of Dropbox allows for effortless/frictionless upload of photos from your computer or phone:


By adding this functionality, Dropbox will, I believe, convert MANY casual users of their service (such as myself), who never ran the risk of maxing out their free Dropbox account into customers who — with some speed — exceed their free limit, and thus must become paying members.

What’s brilliant about the approach, is the way in which Dropbox has created this revenue model, which, in lesser hands, would’ve been seen as terribly mercenary. Again, I have to reference Instagram’s/Facebook’s recent gaffe with respect to trying to monetize Instagram.

Here’s why customers haven’t and won’t react to Dropbox’s move in the way they did to Instagram’s:

  • Dropbox has built brand equity (customer loyalty) over many years
  • Dropbox has become a dependable and necessary tool for countless customers
  • Dropbox’s new photo functionality adds value to the user even when potentially/likely costing the user something (of course, the user can opt out of this, and continue to use Dropbox as they always have)
  • Dropbox communicated clearly what is going on to customers in plain English (see above)
  • Compare the above elements with how Instagram handled their recent change, and Instagram’s relationship (or lack thereof) with their customers.

    For many, the Internet really is just a photo sharing/viewing tool. Facebook knows this (it’s why they bought Instagram in the first place). Dropbox’s management recognizes this too, but, unlike Instagram’s/Facebook’s management, should be congratulated for not only putting in place a revenue model — utilizing this tenet of the internet: people’s attachment to photos — that will likely change their fortunes (and continue to allow them to fend off pesky suitors like…uh…Apple), but has done so in a way that will not cause mass abandonement of or frustration in customers.

    All managers must take their cue from Dropbox when considering the delicate balacne between driving revenue and retaining/gaining customers.

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