The Dropbox Story, Retold

It’s time we take back growth hacking

By LI-XING CHANG

I despise the words ‘growth hacking.’ What started as a useful term for teaching startups how to scale quickly has turned into one that means running marketing campaigns on a minuscule budget. It’s been tossed around the startup water cooler so often that it’s brought a toxic group of marketers into the industry.

Just scroll through your LinkedIn feed, and you’ll know what I’m talking about. These marketers are the self-proclaimed industry influencers who spend more time writing articles or selling themselves as public speakers than executing campaigns.

Currently valued at US$12 billion, Dropbox is one of Silicon Valley’s most popular startup tales, and it’s frequently misinterpreted as the ultimate growth hacking success story by those marketers. This article will show how it’s, in fact, a case of applying deep industry knowledge and unit economics to build a scalable user acquisition strategy.

Before they made marketing history

When Dropbox CEO Drew Houston founded the company in 2007, he utilized two different strategies to acquire customers before settling on the now popularized referral marketing campaign.

Dropbox first acquired customers through content marketing by leveraging the community on Digg [digg.com], a website that showcases trending topics on the Internet. The team used a private launch video they created specifically for the outreach campaign, filling it with jokes and references only Digg readers would understand.

By customizing their content to attract Digg users, Dropbox was able to grow their customer base by 1,400% in one day–from 5,000 to 75,000 users, according to Houston. These numbers are astonishing even by today’s standards, but content marketing proved to be an unsustainable scaling strategy for small startup teams due to its resource demands.

The Dropbox story has always been chalked up as a ragtag team of misfits who did the impossible at almost zero cost to them, which simply isn’t true.

After carrying out a successful beta launch on Digg, Houston and his team moved on to Google AdWords in 2008. At first glance, this strategy seemed workable. They acquired four users at a $291 cost-per-conversion and maintained a 0.11% clickthrough rate at an average cost-per-click of $1.65, according to Houston.

However, for a product that generates $99 in revenue per sale, Dropbox would have lost $192 for every converted customer should they have continued down this road. With these metrics, they would have spent $1.455 million to acquire 5,000 customers, ending with a $960,000 loss. Clearly, not a scalable strategy.

Using the GB to their advantage

The remainder of Dropbox’s tale is one for the history books. At this juncture in the story, many entrepreneurs and startup geeks would say that they growth hacked their user base by 3,900% through a two-sided referral marketing campaign. However, if we look at the cost of a GB and other industry conditions at the time, it becomes evident that Dropbox was implementing a mathematically sound strategy.

Even though the cost of a GB was at an all-time low in 2008 at $0.11, the first MacBook Air, which launched that year, only had an 80GB hard drive–significantly less compared to the average 160GB hard drive of other computers. With 2008’s Mac OS Snow Leopard requiring 5GB of storage, the customer was paying $1799 and only getting 75GB of storage. In comes Dropbox with a fantastic offer: earn up to 16GB by referring friends to create a Dropbox account.

If I were an Apple user in 2008, the opportunity to increase my storage by 20% just by sending an email to my friends would have been a pretty sweet deal. Other computers were also stuffed to the brim with unnecessary software and a bulky operating system, eliminating a good portion of what’s available to the user. To this day, manufacturers still quote hard drive sizes, and not the actual amount of storage the customer will have on their device.

Now, it’s easy to understand why Dropbox utilized their most valuable asset (data storage) to create a referral marketing strategy. With each GB of storage costing only $0.11, the company was able to scale on the premise that for every friend a customer refers, the existing user would get 500MB of storage.

For example, if a user refers one friend, Dropbox would only have to spend about $0.05 to acquire the new user. To acquire 5,000 new users through this strategy instead of AdWords, Dropbox would have only paid $250 instead of $1.455 million. It’s through this program that Dropbox found the most success, leading them to eventually dominate the cloud storage industry.

The Dropbox story has always been chalked up as a ragtag team of misfits who did the impossible at almost zero cost to them, which simply isn’t true. So why do we keep telling the growth hack story?

In the beginning, marketers applauded Dropbox for finding a referral strategy that worked after AdWords failed them. Then came Internet marketing personalities like Neil Patel, who used their social clout to forcefully define growth hacking as a methodology where “the cost of acquiring each additional customer is much closer to $0” (neilpatel.com). These marketers kept selling this idea, and so it persisted.

The real lesson to be learned is that building a scalable user acquisition strategy requires a deep understanding of the end user, industry conditions, and business economics. Together with a sound product, Dropbox breathed new life into the world of computing, and they didn’t need to hack their way there.

Li-Xing is Jumpstart’s Silicon Valley Evangelist.