Thought of the Day - Brilliant or Crazy?

Yesterday I finally solved my backup quandary, I got 6 free months of the premium version of Dropbox to backup 50Gb of data online. I received this for participating in Tim Ferriss's 'Tweet to Beat' campaign along with 33,000 other people. Running the numbers I realised that even if only 50% of the other participants take up this offer, Dropbox will loose out almost $1 million in revenue over the next 6 months. My initial reaction was; 'they're crazy' but it then dawned on me that they might actually be brilliant instead, taking the 'Freemium' model to the extreme.

Anyone who has used web applications should have experienced the 'freemium' model. There is a limited free version of the WebApp that is available, but as you use it more and more, there are then paid levels to allow you greater functionality. The theory being that you can get used to the service, input a heap of data, then you are tied in and likely to pay because of the amount of time you have invested. A more common model is the '30-Day Free Trial' which is similar, but you have 30 days of free use before you have to start paying.

These models are an excellent idea for both the customer and the seller. The customer gets to decide if the product is worth paying for and the seller can reach a wider audience because people like to 'try before you buy'. The downside is that increasingly customers are wise to tactic and may try to resist it. The seller hopes that in the 30-Days or free period, the customer uses the product so much that they are effectively locked in to paying for it by the end. I suspect more and more, that cynical customers are deliberately not using the full potential of the services to avoid this lock-in. I know my first reaction to a free trial or freemium service are to avoid using it too much for precisely this reason.

So how does this relate to Dropbox? Well i have been considering using an online backup system for a while now and have seen various options ranging from free to really expensive, however i was having a hard time deciding between them. There was no easy way to compare features, prices, security and usability, which resulted in decision paralysis; too many options, so i won't pick any of them. Dropbox is offered on a freemium model.There is a free version where you can store up to 2Gb of data and a premium version for $9.99 per month with 50Gb of storage. Unfortunately i suspect this model doesn't work very well in this situation. The full version is really designed for backing up all (or most) of your documents, which is a very different market from the free version, which is so small it is really just for temporary online storage of documents. Due to the fact they are targeted at different markets, I suspect the conversion rate from free to premium is fairly low, this is further exacerbated by the fact that 2Gb isn't much of a lock-in. The alternative would be to offer a 30-Day trial of the premium version, but as i mentioned above, people are wise to that tactic. Few people would bother uploading 50Gb of data to a service if they might not like it or want to move.

On the other hand, how about offering 6 months free? Well that's a different story, 6 months is long enough that it doesn't feel like a lock-in and well even if it is, you're getting $60 of service for free! In reality the lock-in is very high, even higher than the other models above. Once you've setup a system for backups, used it for 6 months and are familiar with the system, there is very little chance you will move when the free period ends. The customer wins; they get some 'free' service and the company wins because they have excellent differentiation in the market and superb retention after the free period ends.

So why doesn't everyone do it? Firstly the company will still have to pay for the storage space, the bandwidth and other overheads that are going to be there. Furthermore they have deferred a large portion of their income for 6 months which is a bit of a cash flow no-no. Also if you offered it to everyone, 6 months is long enough that unscrupulous people would find it worth exploiting. Effectively you are betting the farm that having extremely high retention will benefit the business in the long run.

So is this deal genius or madness? Only time will tell, though after thinking about it i am now a little worried that cashflow might put the company (and all my data) under ...