Hubspot inbound marketing and web 2.0 pdf

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________________________________________________________________________________________________________________ Professor Thomas Steenburgh and Professor Jill Avery (Simmons School of Management) and Naseem Dahod (MBA 2009) prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2009, 2010, 2011 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800- 545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

T H O M A S S T E E N B U R G H

J I L L A V E R Y

N A S E E M D A H O D

HubSpot: Inbound Marketing and Web 2.0

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. To be successful in the marketplace, HubSpot needed to be much more than just a software company. Its founders had to become evangelists, preaching a new way of doing business that would fundamentally change how marketers reached their customers. To their great pleasure, Halligan and Shah were finding a willing audience for their ideas. 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. HubSpot had built its business by turning its back on traditional marketing methods and was solely using innovative inbound techniques to acquire customers. Looking ahead, the founders wanted to accelerate their growth rate and increase profitability. Ironically, they were grappling with many of the same issues that their customers faced when implementing inbound marketing practices.

Halligan and Shah realized that they would need to work through these 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. Third, they would need to assess whether they could achieve enough scale through inbound marketing efforts, or whether they needed to supplement their inbound programs with traditional, interruptive outbound programs. This was more than a test of HubSpot as a company; it was a test of the inbound marketing business philosophy. If HubSpot couldn’t scale its own business using inbound marketing, then how could it convince its customers that inbound marketing would work for them?

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Founding HubSpot

The two HubSpot founders met at the Massachusetts Institute of Technology (MIT). As early and eager students of Web 2.0, Halligan and Shah recognized the transformative power the Internet possessed for changing the way small businesses operated. After graduation, Halligan joined Longworth Venture Partners, a venture capital firm with an expertise in technology. As he worked with start-up companies, he recognized an issue with which they all struggled—how to harness the Internet to build a business. Halligan, like many of his clients, came from a traditional sales and marketing background, working for the high-tech companies Groove Networks and Parametric Technology Corporation. However, at Longworth, he began to realize that the traditional marketing and sales methods he had previously employed were losing their effectiveness in the new Web 2.0 world. Shah also grew up in the technology sector, holding a number of management and development positions in technology companies. Prior to forming HubSpot, Shah was founder and chief executive officer (CEO) of Pyramid Digital Solutions, an enterprise software company and the winner of three Inc. 500 awards, which was acquired by SunGard Data Systems. Shah also authored OnStartups.com, a top-ranking blog and online community for entrepreneurs.

Halligan and Shah founded HubSpot in 2006. With Halligan’s marketing, sales, and venture capital expertise and Shah’s technological knowledge and experience as a successful entrepreneur, the two were a winning combination. Halligan became the CEO and served as HubSpot’s evangelizing front man. Shah became the chief software architect and focused on product development. On the strength of their business plan, Halligan and Shah attracted premier financial partners. After initially self-funding the business, Halligan and Shah raised $5 million from General Catalyst, a Cambridge-based venture capital firm, in 2007. Less than a year later, the team raised an additional $12 million from Matrix Partners, a venture capital firm with offices in Boston and Silicon Valley. For a young start-up, HubSpot had a solid financial foundation.

Halligan and Shah strove to create a distinct culture at HubSpot. They headquartered the company near MIT in Cambridge, Massachusetts, a hotbed of activity for high-tech start-ups, and they staffed up with young, eager MIT graduates who were immersed in Web 2.0 culture. The HubSpot office buzzed with energy. The sleek, minimalist architecture contrasted with the animated and passionate young team, who craved a fast pace. The team battled over business with the same gusto that they battled over the last slice of pizza.

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. As HubSpot explained on its corporate blog:

Outbound marketing is about pulling people away from their dinner, or family, or TV and interrupting their lives. Do you really think you are important or interesting enough for them to want to talk to you instead of doing whatever they were doing when you interrupted them? They have not invited you into their home, and they certainly do not happen to enjoy being interrupted. Instead of spending your whole day interrupting people and hoping they pay attention, try setting up a blog and writing interesting content, so that people want to hear what you have to say and come find you when they’re interested in your products.

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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. As HubSpot’s vice president of marketing Mike Volpe explained, “Instead of interrupting people that don’t care, why not help those who want what you’re offering to find you? We have found that building interesting tools is a more effective marketing tool than doing advertising. Things like this get people curious and draw them in.” 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 message into a crowd over and over again like a sledgehammer, they attract highly qualified customers to their business like a magnet.

To be maximized, inbound marketing required three distinct skills. The first was the ability to write compelling content that would attract customers to the business. According to HubSpot, this content had to be useful to customers and not just a promotional message:

Whole Foods publishes recipes, profiles of their vendors, forums and a lot more. Across all of these mediums they use the right tone. Their content is useful first, and promotional second, not the other way around. This means that their customers find them when they want to know how to make oatmeal cookies, when they want to learn more about where their apples come from or when they want to watch a cooking show.

The second skill was the ability to distribute that content so that it was easily found by prospective customers using search engines, which required a sophisticated understanding of search engine optimization. The third was the ability to attract and engage a community of followers who interacted with the content, added their thoughts to it in an ongoing dialogue, and disseminated it to others. Firms that nurtured an active audience gained credibility in the marketplace, because it was the support of an audience that conferred expertise in a particular area.

In contrast to traditional outbound marketing, in which a business’s message was pushed to a mass audience that contained many who were not in the market for the product, inbound marketing was designed to create content that pulled in only those customers who were interested in the product. This created marketing efficiencies. According to Mark Roberge, vice president of sales for HubSpot, inbound marketing blended marketing and sales: “One of our salespeople calls it ‘smarketing’—we really blend it together so much more.” Volpe explained this concept further in an interview with RainToday.com: “Our salespeople hear things like ‘Oh, HubSpot. I’ve been meaning to talk to you guys,’ or ‘Oh, I just watched your webinar yesterday. I had a couple of questions.’ So it’s the opposite of a cold call. It’s like getting a call from one of your friends because we’ve already built a relationship. We really don’t do any cold calling.”

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

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37% of the marketing budget was spent on inbound marketing and 30% was spent on outbound marketing. Given its lower costs and increased efficiencies, inbound marketing allowed small businesses to compete with larger firms in a way that had never been possible in the pre-Internet world dominated by mass media. 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. HubSpot’s user-friendly product allowed even those who were not familiar with Web 2.0 to build and manage a thriving inbound marketing program. 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 analyze their results.

Content Design

HubSpot offered its customers a content management system (CMS), software that made creating and editing online content easy. Further, HubSpot’s CMS allowed small businesses to add interactivity, the hallmark of Web 2.0, to their old “brochureware” websites. Predesigned templates helped customers create their corporate websites, providing guidelines for creating Web pages, blogs, online forms, and landing pages. The templates were designed to be turnkey so that customers without HTML programming knowledge could easily publish content online and have that content be search-engine-friendly. 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. Including these keywords in their content, companies could improve their organic search results, making it more likely that potential customers would find their content. Steve Douglas, president and creative director for The Logo Factory, explained how search engine optimization (SEO) worked for customers:

I had been doing SEO all wrong when I came to HubSpot, trying to optimize my site for the wrong keywords. With HubSpot, I’m now able to see the words people are actually using to find my products and services. I’m able to see which words have the greatest search volume in search engines, helping me choose the right words to optimize my site. HubSpot has helped me be a lot smarter about how I optimize my site and track my progress. (HubSpot, Customer Quotes, 2009)

Exposure Optimization

The HubSpot product contained a series of tools designed to help customers make their published content more visible on the Internet. These included SEO tools that graded the firm’s content based on its likelihood to be included early in the search results that were returned when a potential customer searched through Google, Yahoo, or other search engines. The SEO tools graded the company’s website, its key landing pages, and its blogs, and made suggestions for improving them to increase exposure. HubSpot’s Link Grader analyzed the links a firm had on its website to see which ones were generating the most inbound traffic. The Link Grader also analyzed links to competitors’ websites to see which ones were driving customers to them instead of to the firm. HubSpot customer Noel Huelsenbeck, president of the telecom expense management software firm Vocio, gushed:

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I love the HubSpot software. With just a little page optimization I’ve already gotten great results and my traffic and keyword rankings continue to improve steadily. I’m about to sign a deal from a company that typed in one of our top keywords for which we are now the #1 organic result, thanks to HubSpot! That one deal will pay for all the money spent with HubSpot three times over. On top of that, the support is incredible. The HubSpot team had dedicated their time, even at off hours, to get my site up and optimized. The application is great, but it’s the people that make this company stellar. (HubSpot, Customer Quotes, 2009)

Lead Tracking and Intelligence

The HubSpot software had marketing intelligence analytics for tracking the interactions customers had with the firm’s content. This enabled firms to analyze 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. Firms could generate an interaction profile for each customer by tracking the pages they viewed and the types of forms they completed. Firms could use this information to qualify prospective customers according to their potential. For example, HubSpot itself used the lead tracking software to construct its sales funnel (see Exhibit 1). Information about each customer allowed HubSpot to qualify some of its visitors as “prospects,” then “leads,” and then “opportunities” based on the behaviors they exhibited while on the site.

Team Jodi, a real estate firm, had seen a significant increase in business, claimed owner Jodi Bakst:

The traffic to my site increased by 97% in November, by an additional 62% in December, by an additional 31% in January and we’re on track for another big increase in February. In real estate, the absolute number of leads is way down. But what I’m looking at is the percentage of good leads. The percentage of good leads is actually going up right now and I attribute it to all of the hard work I am doing, 90% of which I learned from HubSpot. (HubSpot, Customer Quotes, 2009)

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. HubSpot’s low cost and ease of use for Web 2.0 novices were its competitive advantages. Volpe explained the difference between HubSpot and one of its competitors, Eloqua:

Eloqua is really expensive and complicated. It is awesome for larger enterprises. Everyone we talk to that uses Eloqua says, “If you can get it to work, it’s super powerful, but you have to give up your firstborn child to pay for it and you need to hire a full-time employee to run it because they have all these scripting languages and all this really, really difficult stuff.”

HubSpot’s customers were required to purchase a $500 onboarding package, which bought them four hours of HubSpot 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 SEO features to get found, (3) converting prospects to leads to customers, (4) analyzing 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. Customers were also given access to Success.HubSpot, which provided Internet marketing training and resources. Halligan described the HubSpot product as much more than a piece of software; it was a system of tools and training (see Exhibit 2):

HubSpot is a complete inbound marketing system that will help you get found by more prospects and convert more of them into paying customers. We use the word “system” intentionally. HubSpot is more than software. We have a complete inbound marketing

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methodology comprised of best practice guides, training materials, software tools, a community and support. Plus, HubSpot is hosted on demand software, meaning that you don’t need any IT staff to get started. We don’t just give you a new marketing tool. We teach you to be an expert in how to use it.

HubSpot’s products had garnered acclaim that drove buzz for the company. In 2008, HubSpot received the W3 Silver Winner Award in branding and marketing and the MITX Impact Award for innovative business strategy. HubSpot’s Website Grader was an official honoree for the “Best Websites in IT Hardware/Software” category in the 12th Annual Webby Awards. In February 2009, HubSpot was named in the top 10 of PromotionWorld’s “Best SEO Companies” ranking.

HubSpot’s Marketplace

Halligan and Shah envisioned that HubSpot would become the market leader of the industry space carved out by software companies and consulting firms focused on helping businesses fill and manage their customer funnel. The term “customer funnel” metaphorically described the critical processes firms undertook to attract prospective customers to their business; qualify those prospects to determine which ones had the highest probability of converting to paying customers; and, finally, close the sale. The customer funnel was divided into three main activity areas. Most of HubSpot’s competitors chose to play in only one of those areas, although some offered integrated services that spanned all three (see Exhibits 3 and 4).

Creating Traffic

The goal in the top part of the customer funnel was to attract large numbers of prospective customers. Firms used marketing programs to capture attention and interest to feed prospects into the funnel. Firms offered information, contests/sweepstakes, or free consulting on their websites to entice prospective customers. To receive the information or to participate in a contest, prospects filled out an online form that asked them for their contact information and other valuable information, such as budget available for the purchase and estimated purchase timing. HubSpot’s competitors in this area included consultants who built online advertising, websites, blogs, and a social media presence for companies, as well as software companies with SEO products that helped companies maximize their likelihood of getting found by consumers using search engines.

Analyzing and Qualifying Leads

The goal in the middle of the customer funnel was to assess the potential of different prospective customers brought in by the lead-generation programs. Selling a customer required an investment of human and financial resources, and firms wanted to ensure that they were targeting these resources to prospects who were most likely to convert to customers. Many prospects brought in through lead generation had a low probability of becoming customers, and firms could save substantial money if they could identify those customers early and weed them out. The lead-qualification process focused on finding customers with potential to pass along to the sales force. HubSpot’s competitors in this area included consultants and software companies with proprietary methods for rating and ranking prospects based on historical analysis of the company’s current customers and conversion rates.

Closing the Sale

The goal in the bottom of the customer funnel was to convert prospects into customers. One player, Salesforce.com, dominated this segment, providing easy-to-use customizable software that

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helped firms create a database of their prospects and track their conversion progress in real time. Salesforce.com’s software had become the industry standard for managing and tracking sales efforts.

Halligan and Shah hoped that HubSpot could dominate the lead-generation and analysis/ qualification stages of the customer funnel, just as Salesforce.com dominated the stage devoted to closing the sale. They claimed, “HubSpot could be to marketing what Salesforce.com is to sales.”

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 used several different tactics to drive prospects into the funnel. First, the company had a robust website that attracted more than 300,000 unique visitors in 2008. The website featured white papers, webinars, podcasts, and a blog that provided information about Web 2.0 and inbound marketing strategies. HubSpot created and managed an 8,000-member LinkedIn group called Pro-Marketers, dedicated to marketing professionals who were interested in learning about Web 2.0 and inbound marketing. Employees came together every Friday to host their own television show, HubSpot TV, a live streaming podcast (also available on iTunes) that featured interactive commentary on topical events. HubSpot also produced YouTube video spoofs that changed the lyrics of popular songs like “You Oughta Know” by Alanis Morissette to sell the inbound marketing concept. The most popular of these spoofs was viewed more than 50,000 times. A video entitled “Cold Calling Is for Losers,” which humorously showed the futility of outbound marketing techniques, was viewed more than 35,000 times.

The HubSpot team was encouraged to build the company’s own Web 2.0 presence to supplement corporate activities. Many employees blogged and participated on social media sites such as Twitter to promote HubSpot. Inbound marketing was a passion for the HubSpot team members, who used every avenue they could to evangelize it to whoever would listen. The company website claimed, “At HubSpot, we live and breathe inbound marketing. We know a lot about it. We love to teach. We’ll make you an expert.”