Is dropbox profitable as of june 2010

Dropbox Case Questions

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Dropbox is a late mover in a crowded space. What are the key elements of Dropbox’s business model?

Is Dropbox profitable as of June 2010?

Imagine that at the same time Dropbox was founded, Google decided to target the opportunity Dropbox had identified. How would Google’s approach to pursuing “G-Drive” have differed from the approach that Dropbox followed?

What should Dropbox do about creating a separate version of its service for small and medium businesses?

This document is authorized for use only by Andres Suarez in ENT 6006 Fall 2019 taught by Alexander Settles, University of Florida from Aug 2019 to Dec 2019.

There is something about this product which is not in your face and that has made people feel like it’s magic. And it’s all the little details. It’s the details of how you treat people from the time they join from the time they move on. It’s the rate at which you send them e-mail. It’s how you deliver customer service. It’s the 50 little things that you do really well, and when you add it all up, you get love – the kind of love that gets people energized and gets them to pick up the phone and call their mom to chat about it. And if you screw any of those components up, or you start compromising on certain ones, that’s when you start losing the magic, and the magic is really what makes the whole thing tick.

—Sujay Jaswa, Vice President of Business, Dropbox

INTRODUCTION

It was the fall of 2012, and Sujay Jaswa—Dropbox’s Vice President of Business Development and Sales—surveyed the company’s 87,000 square foot San Francisco headquarters from its brand- new, in-house cafeteria. Dropbox—the ‘freemium’ data storage and data sharing SaaS startup that enables consumers and businesses to conveniently retrieve data stored in the cloud from anywhere and on any device they choose—was the tech darling of the moment. Its facilities and $250 million in venture financing to date, at a rumored $4 billion valuation, emphasized such.

Drew Houston and Arash Ferdowsi—Dropbox’s CEO and CTO respectively—founded the company in 2007 and formally launched its first product offering in 2008. Even in an industry marked by rapid growth, Dropbox’s progress had been remarkable. Over the past two years, Dropbox had grown from 4 million users to over 100 million users, and was now adding customers at a rate of one per second and saving over 1 billion files daily on the service (see Exhibit 1).

After receiving an MBA from Harvard in 2008, followed by two years at the prominent Silicon Valley venture capital firm New Enterprise Associates, Jaswa joined Dropbox in 2010 as its first formal business hire, tasked with creating and leading the company’s business development,

Justin Randolph (MBA ’12) and Professors Jim Lattin and Peter Levine prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

This case was made possible by the generous support of Bruce and Elizabeth Dunlevie.

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operations, finance and sales activities (see Exhibit 2). While Jaswa took great pride in the tremendous growth of the company since his arrival, the company had impressive growth plans, leading Jaswa’s ambitions, expectations, and gaze to all remained fixed sternly ahead, into the future. Jaswa had repeatedly emphasized that the focus of the business should be on the long term—building and nurturing a product and a company culture capable of constructing and disseminating the Internet’s underlying file system—rather than on past successes and accomplishments or on short-term opportunities.1

While the growth of Dropbox’s user base had burgeoned, the company’s sales efforts were still nascent. Though Jaswa was adamant about keeping headcount from growing at an unsustainable pace, he nonetheless wondered whether the company had reached a new inflection point that justified the need for a more formal sales organization. The company’s “Dropbox for Teams” business product was gaining significant traction with commercial accounts, and Jaswa pondered potential changes to the sales model in response to an added focus on such business customers.

It was late in the evening, yet Jaswa prepped feverishly in the company’s cafeteria for an upcoming meeting with Houston and Ferdowsi in which he was expected to discuss the potential evolution of the Dropbox sales organization. As his thoughts swirled, one thing was clearly evident—the distinctive nature of the Dropbox product would require a sales organization that was similarly unique.

ABOUT DROPBOX

The Market

As of 2012, data storage and data sharing represented a large, lucrative, and fast-growing market that appealed to the needs of both consumer and enterprise users. In the US alone, the personal cloud storage market was estimated to be $1.4 billion and was projected to grow to $5.8 billion by 2016 (see Exhibit 3).2

Moreover, the “consumerization of the enterprise” trend that had characterized a number of technology segments—in which consumers using technology products, services, and applications increasingly were using such applications in their work functions and environments—was of notable relevance to the data storage and sharing market. The proliferation of mobile devices had increased the need for and value of cloud-based data providers for users in nearly every aspect of their lives. Forecasts estimated that 90 percent of corporate America would use cloud storage technology by 2015, and according to Dropbox, 95 percent of Fortune 500 companies already had some use of the Dropbox product linked to their companies’ e-mail addresses.

While Dropbox commanded a significant lead in the industry in terms of the size of its user base, the data storage and data sharing market had become fiercely competitive. Competitors ranged from other fast-growing file backup and data sharing companies such as SugarSync, YouSendIt.com, and Box.net, to services offered by large tech companies such as Microsoft’s SkyDrive, Google’s Google Drive, Apple’s iCloud, and EMC’s Mozy. The competitive nature of

1 Interviews with Sujay Jaswa, Kevin Egan, and Oliver Jay, December 12, 2012, January 27, 2013, and March 11, 2013. Subsequent quotations are from the author’s interviews unless otherwise noted.

2 Jon Swartz. “Start-Ups Dropbox and Box Reach for the Cloud.” USA Today. March 5, 2012.

Dropbox E-471

the industry had been fueled in part by the rapid adoption of cloud computing, readily-available capital from VCs, and the fact that no one company has a clearly defensible advantage in the market among either consumer or business users.

The Product

Much of Dropbox’s acclaim resulted from the service’s simplicity and user-friendliness, epitomized by the company’s famed “Simplify your life” motto. From Dropbox’s early days, the company was adamant about offering a “single product” that appealed to the company’s entire user base. The founders explicitly emphasized product ubiquity, ease-of-use, and versatility, seeking to provide a general-purpose product that could be used for both personal and business applications by users ranging from tech neophytes to technophiles. In addition, the developer- friendly, open-source API that Dropbox constructed enabled hundreds of thousands of third-party developers to create apps that utilized the Dropbox platform and increased its value and functionality to users.

Houston viewed the company, with its multi-platform application, as well positioned to capitalize on the market need. As he commented, "Ten years ago, everything was on your PC. Now, it's spread across your PC, tablet, smartphone, and it will only get worse in the future. Dropbox stitches it all back together." 3

GENERAL OVERVIEW OF THE ‘FREEMIUM’ MODEL

The concept of a ‘freemium’ model, in which a version of a product or service is offered free of charge yet complemented with a ‘premium’ product version that provides enhanced features and/or functionality, is not new. Examples of such business models date back to the 1980s. However, in recent years there has been a proliferation of ‘freemium’ offerings, particularly in the software industry (see Exhibit 4).

Software businesses tend to be particularly well suited to the ‘freemium’ model, as the marginal cost of producing and distributing software product or services is often negligible. What is more, as consumers have a hard time observing the quality of software prior to using it, the value and price that should be paid for a software product is initially uncertain, but can quickly be ascertained upon consumption. In successful iterations of the business model, users discover and understand the value that is offered by the enhanced ‘premium’ product or service and implicitly recognize that the service has to cost money.

Further, the free-of-charge nature of the offering largely removes the psychological barrier and risk of any downside from trial in a user’s mind, serving as an emotional “hot button” and source of irrational excitement that can lead to viral uptake. In a famous experiment, behavioral economist Dan Ariely illustrated this tendency by asking participants to choose between a $0.14 Lindt Truffle or a Hershey Kiss for $0.01 (one penny). The vast majority of participants chose the Lindt, understanding the utility of the Lindt to be quite high, even at a higher cost. Yet when the price of both chocolates was reduced by a nominal 1 cent—making the Hershey Kiss free—nearly every participant chose the Hershey Kiss.4 As the free version of a ‘freemium’ product reduces

3 Ibid.

4 Dan Ariely. “When Free Is Dangerous.” Big Think. August 5, 2009. http://bigthink.com/ideas/15775

barriers and accelerates trial and adoption—which can be as simple as a quick download— ‘freemium’ products are often associated with a high level of virality.

The commercial success of any ‘freemium’ business model hinges around its unit economics, which is a function of a number of important metrics:

· The number of individuals exposed to the ‘freemium’ product (visitors),

· The percentage of visitors that sign up for the free product,

· The percentage of free-product users that upgrade to the premium product, and the time it requires such visitors to convert from the free to the premium product,

· Customer lifetime value of each premium, paying customer, which is a function of:

· The average revenue generated by the premium product per period,

· The average number of periods an individual remains a premium, paying, customer

· The churn (lost revenue) due to users canceling their subscription,

· The acquisition cost of each visitor,

· The per-period cost of offering the free product to a “free-riding” customer,

· The per-period cost of offering the premium product to a paying customer.

For example, an online consumer internet company offering a ‘freemium’ product may launch a Google AdWords marketing campaign that costs $0.05 for each individual that successfully clicks through each advertisement and initially garners 1 million visitors, along with word of mouth, over the course of a month (see Exhibit 5). Of those visitors, 5 percent may actually choose to sign up for the company’s free product—at a monthly cost of $0.10 per user in server, customer service, and other operating costs—and 5 percent of those free users may eventually upgrade to a premium product that provides additional functionality at a price of $10 per month, and a cost of

$0.50 per user in added operating costs. On an ongoing basis, if the premium product continues to satisfy the paying customer, the customer will continue to pay for the subscription service and will hence exhibit a high lifetime value. Otherwise, if the customer becomes dissatisfied with the product, s/he is likely to cancel the paid subscription.

Because a large part of the initial cost of a ‘freemium’ product begins with a product’s user acquisition cost, it is important for a ‘freemium’ product company to be efficient with the marketing and sales costs necessary to acquire a user. Irrespective of the number of individuals exposed to a ‘freemium’ product, unless the product offers true, recognizable value, a company will likely be unable to attract free or paid users. Thus, the most successful ‘freemium’ business models begin with a great product, and are thus able to convert a large proportion of visitors to either free or paid users. Typical ‘freemium’ companies convert between 1 and 10 percent of free users into eventual paying customers. In successful ‘freemium’ examples, the free product provides true value to users as opposed to a “gimmicky,” unsatisfactory product offering; further, the conversion from free to premium is motivated less by frustration with the free product than by hope and expectation that the premium product will provide additional value that exceeds the marginal cost to the user. 5

5 Ibid.

THE INITIAL DROPBOX PRODUCT AND CUSTOMER ACQUISITION

The core offering of Dropbox—coined Dropbox ‘Basic’—is free, but is limited to 2GB of data storage space. A ‘Pro 50’ account for individuals costs $9.99 per month and provides 50GB of storage space, and a ‘Pro 100’ costs $19.99 per month for 100GB in storage (see Exhibit 6).

Houston discovered that the company’s initial attempts at search marketing, in which the company bid on search keywords such as “online storage,” were not cost effective. The majority of users refrained from the paid version of the product, as the company was offering a product that people didn’t know they needed until they sampled it. As Houston explained:

Our cost per effective acquisition per paid user was thousands of dollars for a hundred-dollar product. So the big lesson here is if you adopt a ‘freemium’ business model your marketing cost is the free users. Search is great for harvesting demand, not creating it.6

The company recognized that user referrals were its biggest and most cost-efficient source of growth, resulting in a shift to a strategy that encouraged referrals via an incentive program. Current users were given an additional 250MB of data storage for each referral that became a Dropbox user. Thus, the company hoped its ‘freemium’ offering would effectively serve as its initial outbound sales model as it relied on its users to deliver referrals in exchange for added functionality. For every free user that joined Dropbox, a percentage would inevitably upgrade to the premium service and thus become a paying Dropbox customer.

Such a shift in acquisition strategy resulted in tremendous growth—largely viral via word-of- mouth—all without any spending on advertising. As a portion of people that were referred to the service inevitably upgraded to the premium service and/or referred other users to the service, such a strategy resulted in a multiplier effect.7 Likewise, the use of viral product features, such as offering ‘shared folders’ for collaboration and a convenient interface for file management and sharing, complemented the referral incentive program by encouraging current users to broadcast the service to others and effectively transformed the product’s user base into a Dropbox sales force and marketing engine.

DROPBOX FOR TEAMS

By 2010, after observing customer use, it became increasingly clear to the company that businesses and workers around the world were embracing the Dropbox product in corporate environments. Delighted by the free and addictive nature of the consumer product in their personal lives, employees began using the product as a productivity-enhancement tool for work- related tasks.

In response, at the end of 2010 Dropbox introduced an alpha version of a business-level subscription service—which it called “Dropbox for Teams”—to serve the needs of its business users. As employees began urging their CIOs to either offer or permit an alternative to corporate

6 Liz Gannes. “Case Studies in Freemium: Pandora, Dropbox, Evernote, Automatic, and MailChimp.” GigaOM.

http://gigaom.com/2010/03/26/case-studies-in-freemium-pandora-dropbox-evernote-automattic-and-mailchimp/

7 Ibid.

shared drives and remote-file access, the Dropbox for Teams offering sought to facilitate corporate adoption of the Dropbox product within corporate environments.

The Dropbox for Teams offering sought to simplify the Dropbox product within business organizations by providing 200GB in storage space to each member of a work team of up to five users, for $795 per year. It also offered certain additional features, such as a single centralized bill, unlimited version history and deletion recovery, dedicated phone and e-mail customer support, as well as a “pooled” storage offering of 1,000GB across an entire work team (see Exhibit 7). Particularly appealing to administrators, the offering also created an admin console to improve visibility into the file activity happening across their organization’s teams and to monitor and control product use. To provide security assurances, the product offered an AES-256 encrypted standard, equivalent to that used by banks to secure customer data.

While Houston and Ferdowsi were tempted to augment and “beef up” the business product, they were hesitant to move too rapidly. To them, the emphasis of a single, simple product that exhibited limited complexity was critical to preserving the “Dropbox magic” that they attributed as fueling the company’s rapid growth to date. While they were sensitive that the Dropbox for Teams business product release could be construed by some as a departure from the simple, convenient, and intuitive ‘Basic’ product on which Dropbox had built its reputation, they sought to explicitly abstain from any significant product changes or from substantially differentiating Dropbox for Teams from the ‘Basic’ product:

[Dropbox for Teams] is basically an extension of the existing product, not a new product or a substitute product—a feature layer on top of the existing product for a different user, for the IT organization or for some administrator. But its core is functionally very similar to any other Dropbox feature. It’s just Dropbox.8

However, Houston and Ferdowsi recognized that such an approach would require a delicate balance. While it seemed important to leverage the brand equity, success, and reputation of the simple, consumer-focused ‘Basic’ product, the company also sought to signal the introduction of a product that was truly designed for the particular needs of businesses and organizations:

What we didn’t want to do was to get to the point where we became analogous to the Facebooks of the world—those companies that find it virtually impossible to build an enterprise product because their brand is so clearly consumer ‘lightweight’ with photos, media, and the activities of our personal lives. We didn’t want to get trapped in that situation, where people perceived Dropbox as an inherently ‘lightweight’ product, even though in reality it’s not.9

SALES AT DROPBOX

At the end of 2010, shortly after the Dropbox for Teams alpha release and in the midst of ongoing rapid growth, Houston and Ferdowsi recognized the need for an individual to oversee the company’s non product-related activities and its nascent business product segment. Familiar with Jaswa from his efforts to convince them to take an investment from NEA, the Dropbox founders

8 Interview with Sujay Jaswa, March 11, 2013.

9 Ibid.

felt confident that he was the right person for the role. While Jaswa was formally tasked with leading the company’s business development activities, his responsibilities included designing all Dropbox-related business functions and constructing the foundation for a scalable sales organization.

The Dropbox ‘Freemium’ Model
Prior to Jaswa’s arrival, Dropbox had no formal sales activities, instead relying on the company’s ‘freemium’ model to generate revenue via an organic upselling process that stemmed from user conversion to the ‘premium’, paid product. Due to the viral success of the ‘freemium’ sales model with consumers, in which the product largely “pulled” customers to the company with little proactive effort, sales had been largely automated to date via an online, self-serve platform. According to Jaswa:

While we offered the premium upgrade that would increase storage capacity for consumers, no sales efforts were placed on the product. It was all viral, fully automated, and driven by the capacitated ‘freemium’ product. Simply put, if you were to go over capacity, you would pay, and you would pay online and conveniently via a credit card.

Through the creation of a small, “business operations” task force—comprised primarily of a few highly analytical individuals within the company who possessed previous venture capital and private equity experience—Jaswa sought to “anticipate the user needs of consumers”—from product education, booking, and ongoing customer service. In doing so, he hoped to automate as many systems and processes as possible so as to provide answers and tools to users without having to provide any human resources. The ultimate goal of such a task force was, “to spearhead automated processes and systems so as to enhance the convenience of the user experience and to improve user engagement.” As Jaswa elaborated:

Business Ops focused almost exclusively on increasing engagement with the product and building better product flows. Because the more people that use the product, and the more convenient the experience, the more likely it is that users will exceed their free storage capacity. So we strove to identify and remedy points of friction that would inhibit product use, and created incentives to get people to use the product in a more enjoyable and robust way, such as creating Q&A banks and automated notifications like, ‘Hey, did you know Dropbox can be used for this?’

As the company continued to enhance the user experience and install viral tools, such measures contributed to the rapid growth in the size of the company’s user base. As a sizeable portion of users upgraded to the premium product, revenues followed.

The Dropbox ‘Freemium’ Model Matures
As businesses of all sizes began making purchases of the offering via Dropbox’s automated, online sales platform, they also began calling into corporate headquarters asking for additional administrative tools. In spite of the product’s viral success, Jaswa recognized the need to segment

the sales process so as to offer these corporate users with a more customer-friendly service and to manage the ongoing business relationship. According to Jaswa:

The number one thing that we found is that, since users were putting such important data on Dropbox, what a lot of people felt like they needed was just a human being on the other line. Because as a Dropbox user, if my critical business documents go missing, or if I no longer can find my treasured photos that I placed somewhere on Dropbox, I need to be able to know that there’s a human I can call. That assurance makes me feel better and makes me more willing to continue to use the service.

At the time, the company merely had two full-time employees focused on supporting efforts for Dropbox for Teams—one representative to handle and book incoming orders via e-mail, chat, or phone, and one account manager who would inherit that customer relationship after booking. It became clear to Jaswa that the capacity of such an arrangement wouldn’t be sufficient to handle the growing corporate demand for Dropbox for Teams. Yet, he also felt it would still be vital to design an arrangement that matched the simplicity of the Dropbox product, which maximized the percentage of “inbound” purchases, and abstained from directly involving a member of the team.

What we really sought was to build off our efforts to maximize self-serve and build as light and low-friction of a sales model as possible. And having an inside sales process is extremely low-touch. We merely focused on the components of touch required in order to get people excited and comfortable with the product.

As such, Jaswa decided to effectively maintain the straightforward structure of the original two- rep model, but to scale the arrangement via added resources so as to meet customer demand. Headcount would remain evenly split between representatives—effectively booking agents, charged with responding to inbound requests—and account managers, responsible for overseeing customer relationships and responding to product questions and concerns. Far from a traditional sales force, the arrangement appeared more like a split telesales / customer service operation that sought to serve the core needs of the business customer in as automated a fashion as possible. To Jaswa, it was as simple as “clipping coupons and providing customer service.”

For those customers and interactions that required a human touch, systems, processes and skill building were put in place so as to maximize the efficiency and scalability of the inside sales team and ‘freemium’ model. Representatives responding to inbounds requests were trained to ask the right questions in order to increase the conversion rate to the paid product, and booking systems were automated so as to maximize the amount of time account managers spent talking to customers rather than invoicing and inputting information. Activities were targeted to enhance three metrics: 1) increasing the number of customer product adoptions per representative, 2) boosting the overall conversion rate to the paid product, and 3) enhancing the speed of conversion.

Though having a sales function for the Dropbox business product would depart from the company’s fully-automated, online sales model (which would still serve the company’s consumer segment), the arrangement was far from a dramatic departure and continued to embrace the ‘freemium’ nature of the product.

As Jaswa explained:

What we found was that for a pretty large percentage of our transactions, the product had actually done the sales for us, and we simply needed to hold users’ hands throughout the process, educate them along the way, and merely take orders and maintain that relationship. Such a sales process was very much ‘You use Dropbox, let’s help you get more control over it,’ and ‘Let’s get you more engaged with the product.’ It’s not ‘Consider us versus the competition,’ and isn’t RFP- driven. Instead, it’s entirely driven by existing utilization, which is where the ‘freemium’ segmentation really kicks in in an amazing way, because the more people who are using the product on a regular basis, the more likely those people are going to hit the free capacity cap. So the free product provided us with the sales opportunity—it created the lead for us. And as a result, the sales cycle to date has been incredibly short and has resulted in a great ROI per representative.

Jaswa sought to ramp up headcount as quickly as possible to meet inbound demand, while still meeting the company’s notoriously-strict hiring norms that, from the company’s earliest days, mandated cultural fit for all new hires. Over the next year and a half, Jaswa oversaw the growth of Dropbox for Teams to a group of thirty individuals. While sizeable relative to the company’s previous sales efforts, the organization was still considerably lean and undeveloped with respect to the market size and compared to other technology companies of an analogous stage.

A Unique Philosophy
To Jaswa, the type of business customer that Dropbox was responding to largely drove the nature of the organizational design. The vast majority of inbound requests the team serviced came from small and medium-sized companies, or individual work teams and business unit managers within larger organizations. Ramping up a structure that responded to inbound requests not only represented one that the company was already familiar with, but to Jaswa, it also appeared to be the most efficient and scalable arrangement. At such a stage, and given the rapid growth of the Dropbox user base, Jaswa viewed a higher-touch approach as being less efficient than the company’s current arrangement:

You can’t build an SMB-facing business with high-touch. The customer acquisition cost is simply too high to justify such a model. If you had a high-touch model to go after less than 100-person businesses, customer lifetime value wouldn’t be able to meet the acquisition cost.

To Jaswa, serving SMBs seemed to be consistent with the Dropbox brand, even if it meant forgoing short-term profits that could be mined from larger enterprise accounts. To him, the Dropbox brand housed the company’s “magic,” and, as such, the sales process had the ability to both foster the brand’s development as well as damage it:

We try to find metrics that keep our team from overlooking smaller customers, because it’s important for us that we not convey to the market that we treat users— big or small—in a differentiated way. We don’t want our account managers to get sloppy by thinking, ‘Well, if Wal-Mart, with their thousands of seats calls me, that deserves much greater priority than Joe’s Auto Body Shop that has 10 seats,’ even

if it means neglecting a big-ticket sale for now because the timing isn’t right. Our worldview has been that we simply need ensure that all of these customers are happy. And in order to do that, every customer, regardless of size, needed to have an account manager with whom to communicate. It was tantamount to the great Dropbox customer experience.

Rather than viewing sales and go-to-market pathways as fundamental drivers of the business, Jaswa saw them as marketing levers, merely meant to enhance the product. As he noted:

Fundamentally, Dropbox is a product and user-experience-driven company. So we have always started with the customer experience. The world is always changing, and if you’re not user-centric and you’re worrying about things that are not important to the user—and the user ultimately makes the decision—the rug will get pulled out from under you. We’re always starting with the question, ‘How do we make sure that our users are truly thrilled?’ Only after answering that question, do we ask, ‘How do we make money, and how do we monetize the business?’

Jaswa elaborated on the company’s unique philosophy:

The reason the sales function matters at Dropbox is that it allows us to get feedback that can translate into better product development. And we wait until the product is only truly sellable in a very efficient way before we embark on monetization and it becomes a priority and worthwhile of our time, attention, and resources. Otherwise, 'sales' becomes the decision-maker around 'product'. It’s a case of the tail wagging the dog, because the incentives of a sales organization often aren’t aligned with the incentives of the end-user or the heart of the company. So we only embrace monetization if doing so doesn’t compromise the product, the user experience, and the culture that has been developed to nurture that user experience.

Large Enterprises? An Internal Debate
While Dropbox’s low-touch sales arrangement still exhibited traction with certain larger commercial accounts, these larger organizations often required and were accustomed to a more proactive level of sales and direct outreach from other vendors. At the time, there was a lot of internal discussion within Dropbox around whether a direct sales force—one which proactively went out and “sold” on a commission-based basis—would be better aligned to the traditional sales cycle of large enterprise accounts, and if so, whether the potentially lucrative opportunity seemed worthwhile.

However, Jaswa strongly believed that if Dropbox decided to embrace direct sales, it would have fundamentally altered the business product in unproductive ways because of the nature of such sales and the second-order consequences of doing so. Jaswa recognized the particular sales processes that enterprise buyers typically have in place—RFP procedures, strict policies around data, and hierarchical buying structures; thus, he viewed appealing to enterprise buyers required a very different sales process—one which would involve conversations related to how the product features stacked up against those of the competition.

As Jaswa explained:

Back then, we felt that building a direct sales team would have resulted in our seeing our customer as the CIO or IT administrator of an enterprise—the ultimate decision maker of tech purchases in an enterprise. We believed we would have ended up building a product for IT—left, right, and center—and doing so would have compromised our prioritization of the user experience. We never wanted to create a product that end-users didn’t celebrate, and assumed CIOs would likely dictate a product so encumbered by features that it would be difficult for end-users to celebrate. We didn’t want to get put in the position of having to choose between the end-user and IT departments in the short term.

To Jaswa, a direct approach at the time not only felt anathema to Dropbox’s approach to date and incompatible with a focus on the end-user experience, but it also did not seem truly scalable to him at that moment in the company’s history:

Far from ‘clipping coupons,’ direct enterprise sales would require real resources and a more IT-centric approach. We would have had to convince someone that, ‘Hey, you’re right. This other product has 40 more boxes checked on a standard feature comparison, but it’s those 40 checked boxes why end-users don’t use the product,’ and that was a much more difficult sales process and a distraction from a focus on the user experience. We view the tech companies that truly succeed as being the ones that work closely with IT, but never do so to such an extent that they compromise the magic that their products offer. We felt at that time that it would be too difficult to walk that tightrope.

Organizational Design and Culture
The relatively automated nature of Dropbox’s sales process created a management quandary for Jaswa who, in keeping with company culture, aimed to hire highly talented and accomplished employees with pedigreed, Ivy League-educated backgrounds. He deliberated as to how best to keep such individuals motivated while “clipping coupons” and responding to an extremely simple process of inbound calls.

Consistent with the company’s product development culture, Jaswa decided to conduct an experiment. His first four new hires included the number one national sales performer at ADP, a leading account manager handling larger accounts at MySpace, a top sales manager out of Google, and a young, recent Stanford undergrad. For initial order taking, Jaswa discovered that discipline was the number one criterion for high performance. However, interestingly, youth turned out to be the biggest determinant in the ability to sustain such high levels of sales. For this reason, he gravitated toward a younger, less experienced background, which was nonetheless hungry to impress and eager to exert effort. According to Jaswa:

At the end of the day, reps have to register sales, and you can correlate that very directly with the amount of time they spend on the job—rather than past experience—since the job doesn’t require a lot of rocket science. By and large, time and effort proved to be the best proxies for performance. We tried everything from a heavy quota system—requiring that each rep log a certain quantity of bookings—

to then saying, ‘Wait a minute. We’re hiring such self-motivated people, let’s see what happens if we have no quota.’ Incredibly, we found no difference in performance. So we settled on letting the team focus on optimizing its own problems—allocating a large enough fraction of the job to problem solving—as opposed to just simply encouraging ‘robot selling.’

While Jaswa decided against a performance-based sales quota, he did nonetheless issue a monthly target for each representative of $100,000 in booked revenue, which, given the relatively predictable ‘freemium’ conversion rate, he calculated by looking at past product conversion data and felt confident assigning. 10 Jaswa was also sensitive to how compensation could affect organizational culture throughout the rest of the company:

We realized that in such an order-taking job with self-motivated individuals, performance is really an hours-in/hours-out formula. So I thought, ‘Does it make sense culturally to incent one type of person to be like a slave while everyone else in the organization embraces creativity and freedom?’ A rivalry is the last thing you want in a place where you’re trying to create a one-company culture. And so we decided flat compensation was fundamentally a cultural decision, because we wanted something that would scale over a 10-year horizon so as to eventually accommodate tens of thousands of employees. Above all else, we wanted to ensure that all functions within the company held mutual respect for each other so as to avoid the classic mistake of having smart, introverted engineers and hard partying salespeople, where all of a sudden, a really terrible tension arises where engineers don’t want to talk to salespeople.

For Jaswa, a large part of ensuring such cultural compatibility rested on cultural fit in the hiring process and hands-on onboarding to ensure all employees epitomized the same values. As he explained, “We try to hammer into our employees a few core values, over and over again. First, don’t make short-term decisions—make long-term ones. Second, it’s team first here, period. We have a zero tolerance policy with the individualistic behavior that is often characteristic of other sales organizations.” While every rep had the potential to make a higher salary in sales-specific roles at other companies, Jaswa believed Dropbox represented an opportunity to be a part of something “bigger than themselves” at a unique moment in tech history.

Hiring as a Natural Bottleneck
Throughout 2011, lead volume and customer demand continued to grow at breakneck speed. Jaswa became concerned about overexposing the product without adequate sales and support functions. However, the company’s hiring parameters proved to be so tight that it was virtually impossible to hire fast enough to keep up with the growth of the business. As he struggled to find sales talent that met the company’s hiring criteria, Jaswa found that, on the account management team, each employee’s customer load exceeded a few thousand customers per individual. As he explained:

Our cofounder, Arash, still to this day interviews all hires. So clearly there are some natural bottlenecks in place that prevented us from hiring at the velocity that

10 This target only applied to representatives that responded to inbound calls as opposed to account managers.

may at times be needed. So my message to the team was merely to hire as fast as we could possibly find people that would meet the cultural bars we set. If we could identify such individuals, I figured we could simply free up a position for them.

A CHANGE IN TACTICS?

Throughout 2012, competitors began a campaign aimed at convincing large corporate organizations that Dropbox’s security features were inadequate. According to Jaswa:

The IT departments of many commercial accounts were sitting there saying, ‘Oh my god, we’re now being told left, right, and center, that Dropbox is not secure. And if a board document leaks and I just sort of let this thing happen, I’m going to get fired.’ And IT’s job above all else is to not get fired. So they have everything to lose and nothing to gain. And so, while IT departments recognized that Dropbox was valuable to employee productivity, they also began paying for large rollouts of competitors’ products that they deemed to be more secure than Dropbox. This way, if a document did leak via Dropbox and the CEO rang, the CIO could say ‘It’s not my fault. The employee didn’t follow our IT procedures and process by using our Dropbox-like product. Fire him/her, not me.’

Jaswa determined that the depositioning effort had the potential to seriously tarnish the Dropbox brand, and thus ultimately demanded a direct response. As he recalled:

The core Dropbox brand was getting impacted in the enterprise market by all of these efforts, and we began to worry whether it was too risky to continue going to market with our ‘happy-go-lucky, you-have-to-come-and-find us’ approach with our competition sowing the seeds of discontent by actively and falsely positioning to IT that we stacked up poorly to them. It began to feel like the whole IT community was moving against us.