Hubspot Case Study

The Problem

HubSpot began its journey in 2006 to harness the power of inbound marketing. It had a capable founding team, strong financial support and a diverse set of customers who really benefitted from the product. With scale, the founders felt the need to make the best use of available resources and maximize the revenue potential, there was a need to rationalize the product portfolio and target specific customer segments (Owner Ollies - OO, Marketer Marys -MM or both) and explore better pricing options. They also felt a need to explore outbound marketing opportunities to further improve the lead generation rate.

Owner Ollies, Marketer Marys or Both?

We opine that HubSpot should focus in targeting OO as they will be able to generate the maximum yield from its products and marketing efforts. We support this with our quantitative and qualitative analyses as shown below.

From a quantitative standpoint, there are obvious advantages towards pivoting HubSpot’s focus on OO compared to MM.  From the outset and in the shorter term, the breakeven point for OO stands at 2 months compared to 9 months for MM (Exhibit 1). This largely stems from MM’s higher acquisition costs compared to OO. A shorter breakeven point translates to a shorter runway to profitability, which is an important consideration for HubSpot. Secondly, when one takes the total potential market size into consideration, the market potential for OO is significantly larger (by 30%) as compared to MM (Exhibit 2). Besides a larger market size, the acquisition costs for OO at $1000, is a mere 20% that of MM ($5000). With a larger market size, lower customer acquisition costs and a shorter break-even point, we believe that these factors offer an attractive proposition for HubSpot to focus its efforts on OO. This is despite OOs having a lower customer lifetime value (CLV) compared to MM ($5131.95 vs $11125) as the churn rate of OOs are higher (4.3% vs 3.2%). However, the lower CLVs associated with OO can be potentially circumvented by decreasing churn rates (from 4.3% to 2.1%) via the migration of customers onto HubSpot’s CMS. In fact, by migrating HubSpot’s OO customers onto CMS, we have demonstrated that OO’s CLV will increase from $5131.95 to $11404.76, which is even higher (by 2.5%) compared to MM’s CLV ($11125). Churn rates will also improve to 2.2% which is even lower compared to MM (3.2%) (Exhibit 3).

If we see from only the quantitative figure, targeting both market is better as the total market potential for both segments is larger, but this may not be true as qualitatively discussed below. Therefore, given a) lower acquisition costs, b) shorter breakeven c) larger market potential d) potentially higher CLVs and lower churn rates with CMS migration, we believe that HubSpot should pivot its marketing efforts to focus on OO.  

Looking beyond the numbers

We argue that even from a qualitative standpoint, focusing on OO has its distinct advantages compared to the other options. We believe that HubSpot’s product achieves the best product-market fit with the OO segment. The competitive advantages for HubSpot’s products lie in its low cost and ease of use for Web 2.0 novices which are the exact same product specifications which its OO customers are looking for. In addition, HubSpot’s core product offerings fulfil market needs in all 3 segments of the customer funnel cycle, which is inline with OO market. Secondly, we believe that the future potential of HubSpot’s business lies in the conversion of customers onto its own CMS platform. This will translate to higher customer retention rates and drive up customers’ CLV. Thirdly, the OO segment is easier to reach and acquire, while MM contracts are often higher-level decisions which need to be approved by senior level management. Furthermore, most MM customers would already have pre-existing relationships with other companies for their marketing efforts e.g. Salesforce. It might thus be more difficult for HubSpot to gain dominance in this market.

Despite these advantages, focusing on OO does have its cons as well. OO customers, by nature of their smaller business, may be more focused on shorter term goals such as increasing leads so that they are more likely to cancel their subscriptions. However, this shortcoming can be potentially addressed with CMS migration. Secondly, these smaller businesses are also likely to have more limited resources and budgets compared to the MM segment, which may significantly affect revenue in an economic downturn. Furthermore, their business is not resilient in prolonged periods of economic recession. Thirdly, most of the OO does not have time to maximize the use of Hubspot software which lead to the low results of the inbound marketing.