It was 2009, Brian Halligan and Dharmesh Shah, founders of HubSpot, leader of Web 2.0 and Inbound marketing, were facing an important decision.
In 2006, they launched a web-based software that could replace traditional and costly marketing and sales methods (direct mailing, trade shows, cold calling) with new tools such as online blogging, internet search optimization and social media exposure.
Only 3 years after their company's foundation, they hit the milestone of 1,000 customers base (p.7). Although the two founders knew that they had a unique product, they were aware of huge unattained market potential (Case Table C). Also, the financial partners, who joined in 2007 and 2008 (p. 2) expected HubSpot to make substantial progress in those market potentials.
Halligan and Shah knew that to go further they needed to increase profitability and accelerate growth rate.
Interestingly enough, these goals posted a direct challenge to Inbound Marketing as effective tool to achieve the very same.
In fact, despite the company's early successes, they started to perceive some warning signs. In 2008, even though HubSpot generated over 24,000 leads, the conversion rate leads to opportunities to new customers were quite small (Exhibit 1). In 2009, already 50% of new leads brought in by inbound marketing program were trimmed out due to the lack of quality.
To increase profitability, Halligan and Shah realized that they might need to target more profitable customers' segment, understand their sensitivity to price, and elaborate a relevant pricing structure. With regards to accelerate the company growth rate, they needed to establish whether just Inbound Marketing campaigns were effective enough to scale up or if they need to integrate traditional outbound methods.
Up to date, HubSpot has served both B2B and B2C customers across several different industries. Two are the main clients' types: small business owners (Owner Ollie) and professional marketers in big firms (Marketer Mary).
At this point, Halligan and Shah faced the dilemma of which customer segment (B2B or B2C) and/or customer target (Owner Ollie or Marketer Mary) to focus on as they came to the realization that such diverse clients' portfolio made strategic planning for growth just too difficult.
In a nutshell, they needed to address the real elephant in the room: are Inbound Marketing practices effective enough to achieve more scale and margin growth or was traditional Outbound Marketing a necessary complement to them?
Recommendation 1: Target Owner Ollie, B2B, CMS logins
1. Ollie vs. Mary
If we are here to segment the market through jobs-to-be-done lens, then Owner Ollies is HubSpot's call to action.
Owner Ollies are fairly easy to acquire as customers. They own small businesses up to 25 employees, usually do not have a dedicated marketing manager. They come with little to no experience in digital marketing and need consultation on everything from branding, building their websites to guidance on how to optimize leads' generation. HubSpot proposition has definitely a larger impact on Owner Ollies business. Even though they present higher churn rate (Case Table A) and lesser ongoing fees ($250 per month, Case Exhibit 7), their acquisition cost is significantly lower than Marys'.
Assuming a discount rate of 10% and giving the average churn rates as in Case Table A, Owner Ollies contributes with $4,410.71 Customer Lifetime Value (CLV), which is half of Marketer Marys' $8,000.00 (Exhibit 2).
However, for each Marketer Mary, HubSpot acquires 3 Owner Ollies - which accounts for the 73% of HubSpot's customer portfolio (Case Exhibit 6), producing so a bigger impact on the company margin and sales volume.
Case Table C shows that currently in US small and very small businesses - Owner Ollie's segment - are approximately 1.7 million out of a total 2.3 million of market prospect.
Thus, the proportion 1 to 3 of HubSpot current customers' portfolio holds for the market potential as well.
Halligan and Shah have a very attractive opportunity for growth in an extremely large pool of untapped market of Owner Ollies.
2. B2B vs B2C
When targeting Owner Ollies, I would recommend a heavy focus on B2B segment. B2B customers are the ones who get the best benefits from Inbound Marketing. In fact, they are detached for the consumers universe and so they lack expertise with Web 2.0 marketing. They usually have no exposure to marketing consultants, so HubSpot's services fill a void of information and understanding of market dynamics which is very appealing.
Considering an average churn rate 3.3% for B2B and 6% for B2C segments (Case Table A), the average customer life of B2B Owner Ollies' is almost the double of B2C Owner Ollies (30 months vs. 16.67 months).
Moreover, B2B Owner Ollies' CLV is $5,598.79, which is more lucrative than B2C Owner Ollies' $3,189.02 (Exhibit 2).
3. CMS VS. no CMS
Content management system (CMS) is HubSpot's webhost service that enables a powerful web presence and makes online publishing easy thanks to many templates for websites, blogs and social media. In general, customers who host their websites with CMS have lower churn rate than customers who host with other companies, so they definitely should be targeted.
According to HubSpot company reports, Owner Ollies who subscribe with CMS have average churn rate of 2.1% (Case Table A - CMS rate).
Exhibit 3 shows their lifetime jumping from 18.18 to 47.62 months and CLV increasing by 57%, to the highest value of $8,093.75.
B2B Owner Ollie with CMS hosting service is the most appealing customer segment with a very attractive retention rate of 97.9%.
Recommendation 2: Price Bundle to reduce churns, A la Carte Purchases and “Mileage Program”
1. Reduce churn rate, lock in Ollies with CMS
I recommend using a bundling structure pricing to attract Owner Ollies to subscribe with
HubSpot should continue to offer a package with basic features for “HubSpot Owner” and the package with more advanced features for “HubSpot Marketer” (Case Exhibit 7).
However, HubSpot should still target the segment Owner Ollies and incentivize them to host their websites with CMS solutions by restructuring the pricing offer.
The recommendation is to include the CMS plugins in the package with monthly fees of $250, while introducing a third package at $350 without the use of CMS. The churn rate of customers with CMS logins is low (2.1%) compared to customers who do not use CMS (5.5%), so the bundle will entice more Owner Ollies to sign up for a longer relationship with HubSpot.
2. Diving into willingness to pay
I recommend exploring more willingness to pay among Owner Ollies. Ollies often have no budget strict guidelines like Marys, who work in more structured and bureaucratic corporations.
They may more easily deviate some funds to marketing purpose at their will and timing when deemed worthy. Anyway, Ollies run small businesses with limited resources, so they are typically more price sensitive.
HubSpot shouldn't in increase the current pricing if it doesn't want to risk losing attractivity within the Ollies.
Instead I do recommend setting a menu “A la Carte” (Exhibit 5), offering extra features included into the “HubSpot Marketer”. Doing so, HubSpot would uncover untapped sales from Ollies.
Moreover, HubSpot can leverage the extra features to trigger a better retention as well. I would recommend linking them to a loyalty “mileage points program” similar to what airlines do. The idea is to offer a benefit plan that generates points at every new purchase besides the monthly ongoing fee. Ollies would earn points with every new purchase based on an age/seniority multiplier (the longer with HubSpot, the more the points earned at every new transaction). Ollies can redeem then their HubSpot mileage points for free features' upgrades and/or free access to new tools and new plugins.
The “mileage points program” would incentivize more purchases on top of the package offering, increasing loyalty and margin/sales growth.
Recommendation 3: Stick to Inbound Marketing with a Twist
HubSpot proposition through Inbound Marketing made it stand out within its competitive field. The customers funnel covered three main areas: creating traffic, analyzing and qualifying leads and closing sales. While most of HubSpot's competitors focused in only one of the areas – Salesforce.com dominated the segment of closing sales- some of them would offer integrated services (Case Exhibit 3). Halligan and Shah's intent was to position the company as leader in the first two areas.
Given the exceptional results of Inbound Marketing (p. 7) and the uniqueness of HubSpot products, I recommend staying true to its Inbound Marketing calling.
Nevertheless, I would still attack surgically some areas of churn by contacting B2B Owner Ollies who terminated their contract. HubSpot needs to learn why and investigate how improve/enhance services to address their needs. If outbound approach is used topically and limited only to feedback collection, it would not betray HubSpot's brand and mission but instead enable it to gather data and lesson learned to improve Inbound Marketing tools definition.
1. Short term (3 to 6 months' time frame)
The most urgent action is redesign their videos and tutorials to address the specificity of B2B Owner Ollies and re-express their proposal embedded into CMS logins. The new price package and mileage program should be launched and promoted at once as well.
2. Medium term (6 to 1-year's time frame)
In order to focus on B2B Owner Ollies, with CMS logins requires a better screen of high volumes of leads. HubSpot is ignoring 50% of their leads (p.12), which means that it might be wasting valuable contacts with profitable prospects. The company needs to work on better methodology/software to capture more B2B Ollies from their customer funnel (Case Exhibit 1). I suggest also to develop smart analytics that can be also promoted as new product to improve rates /to leads /to new opportunities for customers.
As CMS revealed historically to be the best tool to lock customer loyalty for Marketer Marys. it needs to be translated into Owner Ollies' language and “job-to-be-done”.
The systems should be strengthened with systematic releases of new tools that fit Owner Ollies needs. Lastly HubSpot must develop new training material to enable Owner Ollies to benefit more and more by Inbound Marketing techniques.
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