I Love the HubStop Business Model. But Not the One They Describe. (1 of 3) (Tech Strategy)

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  • HubSpot has a great business model in theory. This lets them tell a powerful story. Which they do.
  • But their business in practice is a bit different than the amazing picture painted.
  • And that’s ok. Because their business model in practice is pretty great too.

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I really like software bundles with recurring revenue. And especially when they have switching costs. Which means I am often looking at enterprise and B2B software.

I’ve recently been writing about Salesforce as an example of a specialist enterprise software business. In this case, it is specialized for customer relationship management (CRM). With a software bundle with recurring revenue. With deep switching costs.

I also wrote about ADP, which is enterprise software specialized in human resources management.

Both are specialized enterprise software bundles that are an interesting contrast to the more generalized enterprise software of giants like Microsoft, Oracle, and SAP.

HubSpot is similar. It’s an enterprise software bundle specialized in CRM (like Salesforce). But is focused on small and medium businesses. This article has my breakdown of its business model (which I like). And its issues going forward (which worry me).

The Standard HubSpot Story

HubSpot was founded 2006 by Brian Halligan (currently Chairman) and Dharmesh Shah (currently CTO). The business was a natural extension Brian’s thinking in digital marketing.

Brian argued that “interruption-based” marketing doesn’t work well anymore. Billboards, commercials, and other types of interruptions by a company in a customer’s life were decreasing in effectiveness. With a rising sea of digital products and services, you had to do more than just one way communication to customers and potential customers. He laid out an alternative approach, which he called Inbound Marketing. And that is a lot of what is offered by HubSpot to enterprises. And he is a thought leader in inbound marketing.

You can learn about it in his book “Inbound Marketing: Attract, Engage and Delight Customers Online”.

The really short version is that marketing is now about helping your current and potential customers. Providing them value at every step. And what they say to each other is far more important than what a business says to them. This approach leads to inbound visits, which can be converted to leads and then to sales. The goal is to attract, engage and delight customers, which is the goal of HubSpot. And is the subtitle of the book.

HubSpot provides Software as a Service to accomplish this. And is focused on small and medium businesses globally. Businesses with 2 to 2,000 employees.

It does this with a CRM suite of services (called Hubs), which are offered as subscriptions. The services are:

  • Marketing Hub – with tools for attracting, engaging, and nurturing leads. Especially marketing automation.
  • Sales Hub – with tools to increase the productivity and effectiveness of the sales team. Think personalization of communication, email templates, tracking, call schedules, and sales automation.
  • Service Hub – with tools for live chat, conversations, help desks, tickets, etc.
  • Operations Hub – with data tools for automation, data syncing, data quality, data curation.
  • Content Management Hub – with tools to create and edit content. Such as blogs, landing pages, SEO, and analytics.
  • Commerce Hub – with tools for ecommerce, payments, etc.

These software services and increasingly AI-powered engagement hubs are supported by a “Smart CRM” layer. Which is really a centralized database (combined with AI tools) that creates a unified customer profile with all the leads, engagement, and such. It creates a “single source of customer truth” that all the services utilize.

And finally, these services are extended by an App Marketplace. Basically, a marketplace of apps, integrations, templates, and expert partners. You can connect the HubSpot services with lots of different services like Gmail, Outlook, WordPress, Zapier, Facebook Ads, Instagram and Slack.

The narrative the company tells in its filings is a 3-layer business model

  1. A suite of digital services that create an “all in one” CRM service for small and medium businesses. They offer these with a freemium pricing model.
  2. A customer database that creates a single source of customer knowledge.
  3. An ecosystem of complements, apps and integrations. Which have a NE.

HubSpot’s Financials

As of 2023, HubSpot has 205,091 customers. And the business has 7,663 FTEs.

Here are the 2023 financials.

Hubspot financials

Note the revenue growth. Revenue grew from $1.2B in 2021 to $2.1B in 2023.

This is almost entirely from digital subscriptions. Which had fantastic gross margins of 84% in 2023.

As a subscription model, the key numbers in their financials are average revenue per customer (about $10k per year?) and retention (isn’t very clear but they list 103% net revenue retention).

The key expense to pay attention to is Sales and Marketing at 49% of revenue. That’s something I’ll discuss later.

Ok. That’s the basic HubSpot information and story. And it’s a good clear story.

However…

I Don’t Buy the Standard HubSpot Narrative. But I Really Like the Business Model Anyways.

I like software bundles with recurring revenue. Especially with switching costs.

My biggest question for this company is whether this is really an “all in one” CRM system.

Is this a complete software bundle?

Or is it mostly adoption of their Marketing Automation software.

Their Marketing Hub and supporting customer database is clearly very successful. Most industry estimates put HubSpot at around 37% of the market for marketing automation.

Is there market leadership in commerce and customer service? When compared to other point solutions like Zendesk and chatbots?

Is this really an “all in one” CRM software bundle? Or is it mostly a marketing app with lots of integrations with other apps?

Those interesting questions.

  • At what point does a successful service with some related services become a real bundle?
  • At what point does a successful service with integrations become a real marketplace? With network effects?

In theory, HubSpot has 6 hubs with services. And it has about 1,500 integrations and application. I view this more as a developer flywheel, where there are lots of complements offered. But not necessarily a marketplace or innovation platform with real power.

Hubspot developer flywheel

I call this an operational flywheel. They do describe this flywheel in their 10k (sort of). More developers building integrations means there will be more complements that make the service better. Which should attract more customers. Which attracts more developers. And so on.

And that is a great strategy (in theory). The graphic above is a really great business model. It’s a software CRM bundle that offers a “total solution” for customers. And then to add complements to that.

However…

It’s not clear to me how much of this is true in practice. Whether it is a bundle with lots of complements, or just a popular single service with lots of integration?

And HubSpot is exposed to big rivals, who could enter their market any time. They may be subscale.

Plus, they are a smaller business facing big tech changes due to generative AI. They may be under resourced for this fight.

So, the business model above is great. But I’m not sure how true it is in practice. My narrative for HubSpot is a bit different.

Conclusion: My Breakdown of HubSpot

Here’s my explanation for HubSpot.

  • They have a great SaaS product in marketing automation, with great adoption globally.
  • It is a scalable, easy to use solution with a freemium version offered.
  • Management are owners of the business. And they are thought leaders in this area. They are passionate about the subject.
  • Their core marketing services presents lots of opportunities for upselling and cross-selling. That’s great.
  • Their service has compelling switching costs. Like a lot of enterprise software. And it’s in an important area like marketing. And it is supported by a specialized database capturing all their customer knowledge.
  • This service is supported by a powerful sales mechanism. Especially their “marketing and sales flywheel”, powered by their Solution Partners (discussed in detail below).

That business model is great. It’s not as great as the one described above. But it’s still really great. And HubSpot is probably somewhere between these two models in practice.

And the part of their business model that is really worth studying is their “Sales and Marketing Flywheel”. Every online business needs one of these if possible. I’ll detail this in Part 2.

Cheers, Jeff

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Related articles:

From the Concept Library, concepts for this article are:

  • SaaS
  • Switching Costs: Financial, Procedural, Relational and Risk
  • Integrated Bundles
  • Enterprise Software: CRM
  • Enterprise: Specialty
  • Operational Flywheels: Developer Ecosystem

From the Company Library, companies for this article are:

  • HubSpot

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

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