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In Dropbox’s most recent quarter[1], the cost of goods sold - that is, the cost of actually delivering the service, not marketing, corporate operations, or othe

In Dropbox’s most recent quarter[1], the cost of goods sold - that is, the cost of actually delivering the service, not marketing, corporate operations, or other tasks - was about 25.5% of revenue. That means of every $10 Dropbox charges, they spent an average of ~$2.55 on service delivery costs like storage. Customer support is often included in that, but let’s assume all $2.55 was spent on storage. On a $10/month plan, reducing the included storage by 50% would reduce their costs by ~$1.27. Using your example, decreasing the storage by 90% would reduce their costs by about $2. That is, to generate equivalent margin, the available plans would be 1 TB for $10 or 100 GB for $8 (not $2). [1]: https://dropbox.gcs-web.com/news-releases/news-release-details/dropbox-announces-fiscal-2019-first-quarter-results https://dropbox.gcs-web.com/news-releases/news-release-detai...

Barrin92 7y ago
I'm only an engineer and don't have much business acumen so forgive me if that is a dumb question, but wouldn't it be perfectly fine to accept a much lower margin as long as you're still making money, given that having me around as a Dropbox customer is better than me going to a competitor?
- chrismeller 7y ago
  In general, sure. In reality... not necessarily. Just think about everything else that goes into providing the service and getting (and retaining) users. After you’ve included marketing and all the business people who are guiding the direction of the product you’ve got the HR and internal IT people and systems supporting all of that. Having 100 customers paying $10 and 1000 paying $1 are very different things. Customer service costs are going to be (likely disproportionately) higher for the latter group simply because you’ve got a different pool - they are no longer your business users and power users, they’re grandma and grandpa who have no idea what they’re doing or how to explore and figure out how to use your service. Even if you build better tools and guides for self service that’s an engineering investment. Credit card transaction fees will also be higher. Due to the type of user you’re also going to have a much higher rate of failures, which means more retries, follow-ups (Sendgrid is charging per email after all), and more users who are in the grace period whose data you have to retain but who aren’t actually paying for it. You’ll also have more people calling in or emailing trying to resolve this, which brings us back to higher customer service costs. So while storage seems like what you’re selling and that there should be a linear correlation between 100gb and 1tb in reality what you’re selling is the service around that storage and that’s why things will never scale the way you’d expect.
- troydavis 7y ago
  In addition to chrismeller’s reply, I’d add one other consideration: some, probably a lot, of current 1 TB customers would be satisfied with 100 GB. If Dropbox offered, say, a $5/mo plan with 100 GB, it’s possible that many existing $10+ customers would downgrade, so although they’d make some money from new paying users, they’d also make less from existing paying users. Here’s more on this tradeoff: https://en.wikipedia.org/wiki/Cannibalization_(marketing) https://en.wikipedia.org/wiki/Cannibalization_(marketing). And on substitute goods, as a 100 GB plan would be for some 1 TB customers: https://en.wikipedia.org/wiki/Substitute_good https://en.wikipedia.org/wiki/Substitute_good In a sense, it’s a linear programming problem: finding the number of customers of each plan (current or hypothetical) which maximizes the resulting profit. (Worth noting that if Dropbox was losing a ton - say, 20%/year - of customers to a cheaper competitor and they had enough margin to make a more competitive plan, they’d probably do so. That doesn’t seem to be the case here, though.)

Barrin92 7y ago

I'm only an engineer and don't have much business acumen so forgive me if that is a dumb question, but wouldn't it be perfectly fine to accept a much lower margin as long as you're still making money, given that having me around as a Dropbox customer is better than me going to a competitor?

chrismeller 7y ago
In general, sure. In reality... not necessarily. Just think about everything else that goes into providing the service and getting (and retaining) users. After you’ve included marketing and all the business people who are guiding the direction of the product you’ve got the HR and internal IT people and systems supporting all of that. Having 100 customers paying $10 and 1000 paying $1 are very different things. Customer service costs are going to be (likely disproportionately) higher for the latter group simply because you’ve got a different pool - they are no longer your business users and power users, they’re grandma and grandpa who have no idea what they’re doing or how to explore and figure out how to use your service. Even if you build better tools and guides for self service that’s an engineering investment. Credit card transaction fees will also be higher. Due to the type of user you’re also going to have a much higher rate of failures, which means more retries, follow-ups (Sendgrid is charging per email after all), and more users who are in the grace period whose data you have to retain but who aren’t actually paying for it. You’ll also have more people calling in or emailing trying to resolve this, which brings us back to higher customer service costs. So while storage seems like what you’re selling and that there should be a linear correlation between 100gb and 1tb in reality what you’re selling is the service around that storage and that’s why things will never scale the way you’d expect.
troydavis 7y ago
In addition to chrismeller’s reply, I’d add one other consideration: some, probably a lot, of current 1 TB customers would be satisfied with 100 GB. If Dropbox offered, say, a $5/mo plan with 100 GB, it’s possible that many existing $10+ customers would downgrade, so although they’d make some money from new paying users, they’d also make less from existing paying users. Here’s more on this tradeoff: https://en.wikipedia.org/wiki/Cannibalization_(marketing) https://en.wikipedia.org/wiki/Cannibalization_(marketing). And on substitute goods, as a 100 GB plan would be for some 1 TB customers: https://en.wikipedia.org/wiki/Substitute_good https://en.wikipedia.org/wiki/Substitute_good In a sense, it’s a linear programming problem: finding the number of customers of each plan (current or hypothetical) which maximizes the resulting profit. (Worth noting that if Dropbox was losing a ton - say, 20%/year - of customers to a cheaper competitor and they had enough margin to make a more competitive plan, they’d probably do so. That doesn’t seem to be the case here, though.)