Freemium Pricing at Dropbox, Inc.: The Freemium Pricing Strategy

¶ … dynamic nature of the current business environment, identifying and implementing an efficient pricing strategy is one of the most critical decisions that an organization has to make when launching a new product. This was the case for Dropbox, Inc. back in 2007, when the founders, Drew Houston and Arash Ferdowsi, introduced their product in the market. According to Dropbox (2015) the idea for their business came about after Houston forgot to carry the USB drive that would transfer files from one device to another.

That, together with the fact that he constantly had to email himself files when he needed to work from more than one computer, necessitated the invention of a file hosting service that provided users with remote storage over the internet. However, the pricing strategy posed a problem particularly because consumers were not accustomed to cloud storage services and they could not figure out a way to make them pay (Teixeira and Watkins, 2014).

The best decision the founders made for their business was to adopt the Freemium pricing concept, which would allow consumers to enjoy basic services for free then pay for premium versions. In fact, the business had 4 million users in January 2010, and by November 2010, this had grown to 200 million (Teixeira and Watkins, 2014). Due to increased competition, it is imperative for Dropbox to re-evaluate its pricing strategy and assess whether it will still give it a competitive advantage in the future.

This text takes a look at the issues and challenges inherent in freemium pricing and gives recommendations on the way forward for Dropbox. Key issues and challenges in freemium pricing at Dropbox Dropbox has gone down as one of the best and most skillful entities in utilizing freemium pricing in cloud storage. The consumers had the opportunity to discover a new service and not pay for it until they could not do without it.

Moreover, the company also introduced a referral program, where consumers would get more storage space if they referred more clients -- an undertaking that further increased its popularity and market share. However, while freemium pricing enabled Dropbox to grow its subscriber base tremendously, there is still the risk that the consumers on the free basic services will not transition to the premium services, which has a negative impact on the continuity of the business. The company also incurs large costs when servicing new customers.

In 2013 for example, the total cost for direct hosting and storage was $1.32 per user in a year (Teixeira and Watkins, 2014). Powerful competitors like Google, Microsoft, and Apple have also introduced services similar to those of Dropbox. There is the possibility that may take advantage of their influence and larger market share to subsidize their products and eventually seize some of Dropbox's market share.

Analysis Since Dropbox has no intention of selling its marketing company, there is need to evaluate whether it is meeting its objectives and if not, whether to increase the attractiveness of its free products or to provide more services for free. Given the nature of the competition, the company may be giving too much away -- hence it needs to decide where to cut back. According to Seufert (2014), free services will render them accessible to the largest number of people.

Currently, only a small percentage of consumers are providing revenue at Dropbox and there needs to be a solution to motivate these consumers to pay. Dropbox also continues to rely on referrals while its strong competitors invest millions in marketing campaigns and winning advertisement strategies. Conclusion Seufert (2014) states that when a product or service is popular, and it gives them an opportunity to make larger repeated purchases, consumers may be inclined to spend more money in the product than they would have if the product had been free.

It is, therefore, evident that Dropbox is selling itself short and that elimination of the freemium model would not necessarily lead to collapse of the business. The crux of the founder's decision to use the freemium pricing strategy, lay in the potential to maximize scale, paid engagement and attract customers to such an extent that the total sales generated would outweigh the proceeds that would be gained if the product cost money (Seufert, 2014).

The small percentage of revenue generating consumers proves that this strategy will not work because the sales generated are bound to start declining. Furthermore, companies are not as price sensitive as individuals and free services on their part may be viewed as more short-term, which may cause them to lose interest. Companies may not also waste their time recommending a product to other companies. Therefore, Dropbox needs to change its pricing strategy if it intends to compete in today's dynamic business environment. Recommendations Since Dropbox has already established its brand.