Cloud storage pioneer Dropbox (NASDAQ:DBX) is marching toward its one-year anniversary as a public company next week. One unique aspect of Dropbox's model is that the company does not invest heavily in a sales force, typically a significant expenditure for companies offering enterprise software. Instead, Dropbox relies predominantly on word-of-mouth referrals and its self-serve channels, where users purchase subscriptions directly through Dropbox's app or website.

Dropbox has started nudging more users to sign up for paid plans.

Check out the latest earnings call transcript for Dropbox.

Dropbox interface

Image source: Dropbox.

Limiting freebies

Dropbox is now rolling out a new three-device limit to free users, according to The Verge. Existing users that have more than three devices linked are grandfathered and unaffected, but as of this month new free users will be limited. If a user hits the device limit and doesn't wish to subscribe, they will have to go through the inconvenience of unlinking and relinking various devices. Of course, paying users in the Plus or Professional tiers enjoy unlimited linking of devices. When billed annually, Plus plans start at $8.25 per month and Professional plans start at $16.58 per month.

The move is similar to one that privately held Evernote implemented in 2016, where free users could only access their notes on two devices, with the same ultimate goal of encouraging paid subscriptions. Evernote also raised prices at the same time. Those efforts may not have worked for that company, though, as Evernote seems to be in financial distress and lost much of its leadership team late last year. "Evernote is in a death spiral," a source told TechCrunch at the time. "Paid user growth and active users have been flat for the last six years and their enterprise product offering has not caught on."

The good news for Dropbox is that, unlike Evernote, it is steadily growing its paid user base.

Dropbox nearly doubled its paying user base over three years

The cloud storage company has been mostly putting up solid results, although investors don't seem too impressed overall, with shares still trading below the IPO price. Paying users have been marching higher, ending 2018 with 12.7 million. In other words, Dropbox added 1.7 million paying users throughout the year, and has nearly doubled its paying user base from the end of 2015, when it had 6.5 million paying users.

Chart showing Dropbox's paying users growing over time

Data source: SEC filings. Chart by author.

However, due to Dropbox's unique model, a relatively small portion of its overall registered user base open their wallets. The company does not disclose exactly how many registered users it has but has always vaguely said that it has "over 500 million registered users across 180 countries." Getting this figure would give investors a better insight into what proportion of the user base is willing to pay, particularly as Dropbox still incurs costs in serving free users.

All we can currently say is that 2.5% or less of Dropbox's registered user base is made up of paying users. "A majority of our registered users may never convert to a paid subscription to our platform," Dropbox warns in its annual report.

Still, small tweaks to its service tiers to encourage more users to sign up for paid plans can potentially go a long way in building on that momentum.