HubSpot:

Inbound Marketing and Web 2.01

None of [the old rules of marketing] are true anymore. The Web has transformed the rules, and you must
transform your marketing to make the most of the Web-enabled marketplace of ideas.

David Meerman Scott, author of The New Rules of Marketing and PR

Business was good at HubSpot. Founders Brian Halligan and Dharmesh Shah were thrilled with the
progress their young company had made in the two years since they began their journey to
convince corporate America that the rules of marketing had changed. HubSpot was now considered a
thought leader in the Web 2.0 space, coining the term "inbound marketing" to describe marketing
strategies and practices that pulled prospective customers toward a business and its products, through the
use of Web 2.0 tools and applications like blogging, search engine optimization, and social media.

Halligan and Shah realized that their business was at a crucial juncture. They had just reached the
noteworthy milestone of 1,000 customers, attaining this level of critical mass by practicing what they
preached. However, they realized that they would need to work through a number of issues in order to
achieve their goals for the company. First, they would need to decide which customers to serve, pulling the
best opportunities from the diverse pool of customers who were contacting them. Second, they would
need to make some decisions about their current pricing model to entice new customers to the company
and to maximize the profitability of existing customers.

Inbound Marketing
HubSpot built software products that helped companies execute inbound marketing programs to
supplement or replace their traditional outbound programs. In the current environment, outbound
marketing's effectiveness was diminishing as consumers, feeling bombarded by the daily deluge of
commercial messages, began tuning out. Increasingly, direct mail, trade shows, and telemarketing were
yielding less new business. In contrast, companies were finding that search engines, blogs, and social media
were generating new business at higher rates. These communication programs were more consistent with
the inbound marketing approach.

Inbound marketing is a collection of marketing strategies and techniques focused on pulling relevant
prospects and customers toward a business and its products. Inbound marketers offered useful
information, tools, and resources designed to attract prospective customers to the company during the
time when prospects were actively engaged in a search for a particular product or service.

The informative content that the inbound marketer produced was used to entice prospects to interact with
the company and begin a relationship with it. This new approach to marketing complemented the way
consumers were actually making purchasing decisions: by using Internet search, online blogs, and social
networking sites like Facebook and Twitter to learn about products and services before they bought them.
HubSpot preached this new way of marketing:

Instead of interrupting people with television ads, inbound marketers create videos that potential
customers want to see. Instead of buying display ads in print publications, they create their own
blog that people subscribe to and look forward to reading. Instead of cold calling, they create useful
content and tools so that people call them looking for more information. Instead of driving their

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Condensed from HBS Case 9-509-049.
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 message into a crowd over and over again like a sledgehammer, they attract highly qualified
customers to their business like a magnet.

Volpe estimated that a lead generated using inbound marketing cost five to seven times less than a lead
generated by outbound marketing. Businesses had increased the portion of their marketing budgets
dedicated to inbound marketing, particularly in business-to-business (B2B) industries, where 37% of the
marketing budget was spent on inbound marketing and 30% was spent on outbound marketing. Small
businesses had realized that inbound marketing helped level the playing field and were more aggressively
allocating their budgets to inbound marketing techniques.

The HubSpot Product

Embodying the philosophy of Web 2.0, the HubSpot Web-based software product was a complete inbound
marketing system, designed to help businesses attract prospects, qualify their potential, and convert them
into paying customers. The goal was to enable a firm to generate more qualified leads, to generate those
leads more efficiently, and to convert them into sales. The software included templates to design content
for websites, blogs, and social networking sites; tools to help customers optimize their exposure on the
Internet; tools to help customers solicit and engage the right customers; and tools to analyse their results.
HubSpot's Keyword Grader scanned the Internet and returned an analysis of the keywords relevant to the
company's business that were driving online search results. HubSpot's Link Grader analysed the links a firm
had on its website to see which ones were generating the most inbound traffic; it also analysed links to
competitors' websites to see which ones were driving customers to them instead of to the firm. The
HubSpot software had marketing intelligence analytics for tracking the interactions customers had with the
firm's content. This enabled firms to analyse which of their inbound marketing programs were working to
generate qualified leads, by telling them where potential customers were coming from and how they were
engaging with the company.

Pricing
HubSpot used a software-as-a-service (SaaS) pricing strategy for its product. Rather than paying a large up-
front fee, customers paid a smaller monthly fee (between $250 and $500), much like a gym membership
(see Table A for product portfolio and pricing). Hubspot's low cost and ease of use for Web 2.0 novices
were its competitive advantages.

HubSpots customers were required to purchase a $500 onboarding package, which bought them four
hours of HubSpots consulting. During this time, consultants helped customers through a process designed
to kickstart their inbound marketing program: (1) setting up the software, (2) using the SE0 features to get
found, (3) converting prospects to leads to customers, (4) analysing their results, and (5) institutionalizing
the process so that it could be repeated. Once the original consulting hours were depleted, customers were
on their own, unless they purchased additional consulting time at a cost of $500 for four hours.

Filling HubSpot's Customer Funnel

By 2009, HubSpot had 1,000 very diverse customers. Practicing what it preached, HubSpot had attracted
these customers through inbound marketing.

HubSpot's most successful inbound marketing program was its freeware, small software programs that
were available for free and accessible on the Internet. Three commonly used programs were the Website
Grader, the Twitter Grader, and the Facebook Grader. The graders allowed users to evaluate how well their
websites, Twitter accounts, and Facebook profiles were performing. Users who accessed the free Web tools
often completed a lead form expressing interest in other offerings, which fed them into HubSpot's

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customer funnel. By 2009, more than 650,000 websites, 22,000 Facebook profiles, and 2 million Twitter
accounts had been graded by the free tools.

When HubSpot was just getting started, the sales force called on all leads coming into the funnel. HubSpot
sold to any customer who was interested in buying its products. This helped achieve the critical mass the
fledgling venture needed to survive. However, by 2009 the company was weeding out almost 50% of the
leads in its funnel. Since HubSpot's inbound marketing did not target a specific type of customer, HubSpot
found itself attracting a diverse set (see Tables B and C). They included businesses from many different
industries, including professional services, health care, software, real estate, and construction materials.
They comprised businesses selling to other businesses (B2B), as well as businesses selling directly to
customers (B2C). Two different types of customers were visible: small business owners and marketing
professionals working in larger firms. HubSpot affectionately dubbed these two types "Owner Ollie" and
"Marketer Mary."

Owner 0llie: The Small Business Owner

Owner Ollies owned small businesses with 1-25 employees and made up 73% of HubSpots customer
portfolio. Given their companies small size, they did not have a dedicated marketing professional on staff
and thus did most of the marketing themselves. Time and resources were scarce, and Owner 0llies wanted
quick, simple solutions to help them generate leads, because leads were the lifeblood of their small
businesses. HubSpot's cost to acquire this type of customer was around $1,000.

Marketer Mary: The Marketing Professional Customer

Marketer Marys were marketing professionals working in companies that ranged from 26 to 100 people,
and made up 27% of HubSpot's customer portfolio. Unlike Owner Ollies, who tended to work alone on
marketing, Marketer Marys were supported by a marketing team. Marketer Marys ran many more inbound
marketing programs than Owner Ollies, and needed more robust and sophisticated tools to design them
and measure their results. Hence, Marketer Marys were more interested in the analytics and reports that
HubSpot provided. HubSpot's cost to acquire this type of customer was $5,000.

Apart from this segmentation, there were differences in the amount of different types of customers were
willing to put into using the HubSpot software. To derive meaningful results from the software, customers
needed to consistently invest 10 hours per week to it. HubSpot customers who were using the software
were seeing results - dedicated users experienced a burst of increased leads in the first six months after
using the software, a result of the creation of inbound marketing programs. Over time, the growth rate in
leads diminished, but customers continued to gain value by focusing on efficiently rating and following up
on the leads with the most potential.

*****

Halligan and Shah debated which segments were the best customer segments to cater to - was it the B2C or
B2B market? Was it Owner Ollies or Marketer Marys?

Halligan and Shah also wondered if their current pricing strategy was effective. Were they leaving money
on the table?

Table A: Product Portfolio

HubSpot Owner: For business owners who need a simple system to generate more qualified leads and
convert those to sales.

Pricing: $500 consulting fee at start-up; $250/month ongoing fee

HubSpot Marketer: For marketing professionals who require flexible, sophisticated inbound marketing
tools, including closed loop marketing reports

Pricing: $500 consulting fee at start-up; $500/month ongoing fee

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Table B: HubSpots Customer Portfolio

Number of Percent of
Customers Customers
Owner
Ollies 694 73%
Marketer
Marys 255 27%

Total B2B 647 68%

Total B2C 302 32%

Total 949 100%

Source: Company reports.



Table C: Churn Rates by Segment
Average Churn Rate
(cancellations per month)
Owner Ollies 4.30%
Marketer Marys 3.20%

Total B2B
3.30%
Total B2C 6.00%


CMS
2.10%
Non-CMS 5.50%

Total
4.10%
Source: Company reports.


Table D
Market Potential: Small and Medium-Size Business
Category Number of Employees Number of Businesses
Large 100 to 499 86,538
Medium 20 to 99 526,355
Small 10 to 19 632,682
Very small 5 to 9 1,043,448
Total 2,289,023

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 Exhibit 1

HubSpot's Product Timeline

2006

Q1: Content management system (CMS); blog; analytics (alpha)

Q2: Search marketing tools (alpha)

Q3: First paying customers

2007

Q1: Public launch of WebsiteGrader.com

Q2: Series A venture capital round funding

Q4: v1.0 product launch; 100 paying customers

2008

Q1: Started using "the cloud" on Amazon EC2; MO million page views served

Q2: Series B venture capital round funding; introduction of two separate products ($250/month and
$500/month)

Q3: PageGrader, aka The Crawler, HubFeed (entry into social media); single sign-on; Salesforce.com
integration; HubSpot Express + Trials

Q4: Changed products to HubSpot Owner and HubSpot Marketer; launched Grader.com, TwitterGrader,
Facebook Grader

2009

Q1: 1,000 customers; 500 million page views served; free trials for main product

Source: Company reports