Last week, Hubspot announced strong Q1’18 results of 39% revenue growth and 44% customer growth. These are great growth numbers, but more importantly, Hubspot announced a major evolution in its growth strategy. Here is how one successful SaaS vendor is evolving its model.
Hubspot invented and evangelized the term “Inbound Marketing,” dramatically influencing the SaaS playbook since 2008. While shifting the focus from outward bound sales and marketing efforts to inbound, the company still grew through heavy investment averaging over 60% revenues in Sales and Marketing, tightly managed through the traditional marketing and sales funnel. The investment in Sales and Marketing has paid off with strong revenue growth, although it dropped a bit in 2017 as the company achieved $376M in recognized revenues.
New Focus on the Customer Thru Product
With the announcement in Q1 of a new product, ServiceHub, Hubspot has announced not only a product suite model, but also a focus on customer word of mouth as the growth flywheel. This has an impact on the company’s growth strategy and where it will invest more of its operating capital in the near term.
“Now one of the biggest ahas in the last year is that when I speak with our customers, I see that the reasons they’re buying from us have really shifted over time in that word-of-mouth is increasingly becoming one of our biggest growth drivers. In fact, I stopped thinking about our business like a traditional sales and marketing funnel. It’s more like a flywheel where the customers are the main driver that pull new prospects in.” Brian Halligan, CEO and co-founder, Hubspot, Q1 2018 Earnings Call.
Sales and Marketing Spend Trending Down and R&D Spend Trending Up
In Q1, Hubspot’s R&D as a percentage of revenue moved up to 23% of revenue from 18.7% in full year 2017, while Sales and Marketing is continuing to drop from averaging over 60% between 2014 -2017, to 53% of revenue in Q1. Half of new paying customers are coming to the company through their freemium product and they are investing in a more “touchless” customer acquisition process. Freemium and more automated buying processes require investments in product and infrastructure rather than sales and marketing headcount and programs.
In addition, this SaaS Vendor is expanding its partner community from the original partner ecosystem that were primarily marketing and web design shops to more IT focused partners who can implement CRM systems and more fully support customers as they automate front office processes using the Hubspot suite.
Hubspot is finding revenue and customer growth through customers’ promotion of their products in addition to automating the move from freemium to paid customers. Of course, Hubspot also continues to investment in expanded features and integration of its products. This evolution of the Inbound Marketing strategy is causing a small but significant shift in spending from Sales and Marketing to R&D even as the company approaches half a billion in revenues. The company’s growth success has validated its reliance on freemium and a low touch model to continue expansion in the company’s core SMB market. With customers acting as the primary channel for bringing in new customers, the company is well served to continue investment in product through R&D.
As the company has shifted, it also has had to shift its partner strategy and composition. The company’s growth has benefited since early days from a dedicated partner ecosystem, originally just focused on Inbound marketing. A strong partner channel will continue with the company’s new suite approach but with new types of partners. As the SaaS model has evolved and matured, companies like this SaaS Vendor have proven the value of building strong and evolving partner channels to support growth. Many companies continue to rely on direct sales alone and could learn from Hubspot’s success.