In March 2018, Dropbox began trading on Nasdaq with a valuation of $9 billion. It was the biggest tech IPO since Snap Inc. in 2017.
Founded by Drew Houston and Arash Ferdowski in 2007, Dropbox has achieved extraordinary growth. The duo was accepted into Y Combinator, of the world’s top startup accelerators.
Dropbox’s growth story is an excellent case study in how to build a billion-dollar company. When Drew Houston came up with the idea back in 2007, there were already scores of cloud storage companies. Dropbox had stiff competition and yet, most of them have since shut down or have had very limited success. Dropbox, however, currently has 500 million users and more than a billion dollars in annual revenue.
What did Drew Houston and Arash Ferdowski do right? Here are 9 reasons why Dropbox achieved phenomenal growth.
1. Learned which channels work
Dropbox tried out a bunch of things to acquire customers in its early days, which did not work out at all.
One of the most notable examples was trying out ads. Drew hired an expensive SEM professional and tried out targeting different keywords on Google AdWords for acquiring customers for its premium plans.
It failed miserably. The cost of acquiring a single customer ranged from $233 – $388. For a $99 a year product, the numbers were totally off.
Dropbox also tried out affiliate marketing and display ads, none of which worked out either.
Drew Houston later pointed out that the problem was not with AdWords or any other type of ad platform, but with the nature of the product. People were not actively searching for cloud storage at that point of time. Drew Houston says that nobody wakes up in the morning wishing they didn’t have to carry a USB drive or email their files to themselves.
People were becoming Dropbox customers in a different way. What Dropbox did right, was abandon paid channels when they realized that they weren’t working and doubled down on what clicked.
2. Stellar Referral Programs
So if ads didn’t work for Dropbox, what did?
Referral programs. They increased the company’s signups by 60% in its early days, and is still a major growth factor. Between late 2008 to early 2010, Dropbox’s user base grew by nearly 4000% over 15 months – majorly driven by referral programs.
How does it work?
The vast majority of Dropbox users have free accounts with limited storage space. However, every user is given more free space for any additional users they sign up.
What made Dropbox’s referral program so successful? After all, referrals were not an entirely new thing.
First, referrals are deeply embedded into the Dropbox experience. When you sign up, it’s part of the onboarding process.
Second, Dropbox made the referral process extremely simple. You can send your friends an email or post invitations on FaceBook or Twitter. You could even invite all your Gmail, AOL or Yahoo! contacts by syncing your contact lists with Dropbox in just a few clicks.
Following Dropbox on Twitter also gave users additional space and encouraged them to keep sharing their tweets and driving more visits to their site.
Third, any user who signs up through a referral also gets additional free space. They are actually encouraged in the invitation email they receive to refer other people! Essentially creating a viral loop.
Fourth, Dropbox gamified the entire referral experience. They created a panel where you could see the status of your referral invites – how many people had accepted it?
But most importantly, referrals worked because they turned out to be the easiest way to convince people to try out the product. No one would feel the need the use Dropbox, until they start using it – and then they get hooked! Word of mouth was the easiest way to convince people to try out the tool.
3. Embedded Virality
Dropbox users sent nearly 3 million referral invitations in April 2010.
Why were people so eager to create other Dropbox users? Was it all about more free storage space?
Dropbox has been engineered to be a viral product. When you simply share a file with someone who isn’t a Dropbox user (even without trying to refer that person), they were invited to open a free Dropbox account. (Earlier it wasn’t mandatory to open an account, but now it is)
But more importantly, every Dropbox user has an incentive to create other users. Not because they will get more space, but because it makes things easier for them to collaborate. Rather than share a file every single time, they can just add it to a Dropbox folder for the other person to read or edit. Collaborating on documents becomes super simple when you have shared folders.
That’s what set Dropbox apart from the scores of cloud storage companies in that point of time. They were doing the exact opposite and were deliberately making it difficult for people to share documents.
Services like Megaupload, Rapidshare, Hotfile and other file hosting sites would slow down download speeds and were full of spammy ads. You had to go premium to get normal speeds.
Why would you want to share a file with anyone using these services when you can rely on good old email?
4. Clear Value Proposition
Most companies struggle to get this one thing right – have a crystal clear value proposition. Dropbox, on the other hand, has perfectly nailed this!
The Dropbox home page was simple – get cloud storage and sync your files across different devices. In fact, for quite a while, their home page was like a simple landing page! Check out the UI from 2010.
On referral pages, the headlines were clear – “Get More Storage”. You can always write “Refer a Friend,” but it’s not immediately clear what you get for a referral.
This might sound frivolous, but do remember that people’s attention spans are really low on the internet. Unless you can explain the value proposition in a couple of seconds, you lose the reader.
5. Rigorous Testing
How did Dropbox create such perfect viral loops?
Not by some sort of magical intuition or genius! They tested the hell out of their referral programs.
They ran extensive A/B tests on the two most critical areas of their funnel – the referral flow and the signup flow. Moreover, they didn’t just come up with hypothetical scenarios to run tests on out of a hat. All their scenarios were based on in-depth user research and surveys.
Running A/B tests is commonplace and easy nowadays with plenty of tools that get the job done, but that was not the case back in 2009!
It’s interesting to note that Sean Ellis, who was heading growth for a while during those early years, went on to fund Qualroo, a customer decision analysis company.
6. Lean Startup Methodology
Long before a minimum viable product was ready, Dropbox started collecting feedback from potential early adopters. Drew Houston created a screencast and posted it to Hacker News.
In addition to collecting emails, they also received 71 comments which were invaluable for shaping the product vision.
Perfect example of the lean startup methodology at work!
7. Launched in the Right Place
One of Dropbox’s biggest wins was its private beta launch. The feedback they had received so far told them exactly who their early adopter persona was and where to target them.
The company launched with a simple screencast video on Digg and Reddit where Drew Houston gave a simple demo of Dropbox. Here’s the launch video.
The video got 1506 Reddit upvotes and 12,000 Diggs which catapulted it to the first page and acquired more than 75,000 signups for their waiting list.
Dropbox had made its first mark in building a true community.
The company did not let everyone into its beta program at once because it was unsure how well it’s servers could handle the load. The restricted access created a ‘scarcity’ effect and led to even more signups.
8. Capitalizing on Linux
Although the cloud storage industry was crowded in 2008, there were no free tools available for Linux users.
When Dropbox exited its beta in 2008 it also released a Linux version. This was a brilliant move by Drew Houston because Linux users are a closely knit community and are also more prone to be early adopters. In February 2010, it had 224,000 Linux users – 5% of the Dropbox total user base.
9. Business Customers
A large chunk of Dropbox’s $1.1 billion in revenue comes from its business customers. Acquiring such customers can be an expensive process if you go through a traditional marketing and sales route, whereas Drew Houston wanted to remain lean.
Therefore, instead of building a large sales and marketing team, the company has been employing a reseller and partner-driven approach, similar to what Microsoft had done in the 90s. In fact, Dropbox hired Thomas Hansen from Microsoft as its VP of Sales and Channel to execute this strategy.
Even though this meant smaller accounts and paying substantial commissions, it allowed Dropbox to scale its business segment consistently and reliably.
Dropbox did not succeed because the product was unique, or by spending millions of dollars on marketing. It’s growth is based on a few simple principles – understand your customer through extensive research, make the product itself viral, test rigorously and stay lean.
If you’re currently a Dropbox user, you can store your files in Dropbox and use ClickUp to manage your tasks. Check out how it integrates together!
Know any other factors that helped Dropbox grow? Let us know in the comments below.