This Company Is Flipping the Marketing Playbook on Its Head

Do you like receiving sales calls? Junk mail? Watching television commercials? Most consumers don't, which is why they use caller ID, ad blockers, and DVR to remove these annoyances from their daily life. But how are companies supposed to reach their target market if traditional marketing channels lose their effectiveness?

Hubspot (HUBS 0.28%) believes that the answer is to focus on "inbound" marketing techniques that make it easy for consumers to find you when they are finally ready to buy.

In this episode of The Motley Fool's Industry Focus: Technology, host Dylan Lewis is joined by Motley Fool contributor Brian Feroldi to discuss whether HubSpot is like a rocket ship that is poised for takeoff.

A full transcript follows the video.

This video was recorded on April 20, 2018.

Dylan Lewis: Why don't we first start talking about this company HubSpot?

Brian Feroldi: Sure. I have a question for you. When is the last time, Dylan, that you answered a cold call, opened up a letter in the mail, or watched a TV commercial, and you actually changed your buying behavior?

Lewis: I will tell you that I get a cold call every single day. You get those phone calls that, it's your area code, and some telemarketer or some automated telemarketer is sending you some garbage automated message, and I've learned to just block every single one of them. So, never, to answer your question. [laughs]

Feroldi: And that's the world that we're living in today. For decades, the traditional way that companies founded new businesses is, they would advertise with spots on TV and spots on the radio. But consumers really hate to be interrupted. That's why they use caller ID, to make sure they never pick up a phone call that they don't recognize. Or, they use DVR to skip TV ads. Or, they put their phone number on Do Not Call lists. These realities are making it harder and harder for companies to shout out their message to their consumers that they want to reach.

In response to that, this company called HubSpot basically is taking the traditional marketing playbook and flipping it on its head. They're pioneering a strategy that they call inbound marketing. And the idea there is, don't spend all your time, money and energy shouting at people and interrupting people to get them to learn about your product. Instead, try to create easy-to-use content like blog posts, like videos, so that when people are searching for a product or service like the one you're offering, that you are easy to find. The idea is to put out blog posts that are helpful, that people will actually want to read naturally when they have a problem, and to essentially get people to come to you when they have a need.

Lewis: So, instead of blasting a message, you're creating these organic "outreach," because the people are actually coming to you, experiences with potential customers.

Feroldi: Exactly. And think about your own shopping. When you have a problem, and you're interested in learning about a new product, what's the first thing that you do?

Lewis: Search it on Google.

Feroldi: Exactly. You type in the problem to Google, or maybe you go to YouTube and look at a video for how to solve it. That's exactly what HubSpot does. They offer tools that help companies to grow their social media presence, or to rank highly in search engine optimization, and to really put out free-to-consume content that builds up their brand and helps them to build trust with customers, so that when they are actually ready to buy, they're already familiar with the company. This has proven to be hugely impactful for getting new customers to come onto the brand.

Lewis: It sounds like a business that rides the tailwinds of e-commerce and digital marketing very well, too.

Feroldi: Absolutely. And HubSpot's target market is, they're going after businesses that have between 10 and 2,000 employees, so they're going after the small companies that don't traditionally have the huge budgets.

Lewis: So, they're kind of a fix for resource-poor companies, basically. [laughs] It's nice to be a one-stop-shop. And that's actually something we're going to see with a lot of these businesses we're going to talk about, is, you have a provider that makes it really simple to do something that you would have an entire department do if you were a larger company.

Feroldi: Absolutely. HubSpot sells using a software-as-a-service or SAAS model. Customers come on and they subscribe, and they can use all kinds of tools to help manage, basically, that filter process that brings new customers into their business.

And these guys are growing like crazy. They currently have over 41,000 customers that have signed on to their platform, and the average customer spends over $10,000 per year with HubSpot, so that translated into about $375 million in revenue last year. So, these guys are just growing like crazy, and companies everywhere are really signing onto their platform.

Lewis: And that growth comes at a price, and we'll see that with all these companies we talk about. I think they're a roughly $4.5 billion company right now. So, you think about that, that's a little bit more than 10X sales.

Feroldi: Yes.

Lewis: And that's what you're going to pay for these very scalable businesses that are growing very quickly.

Feroldi: Absolutely. And these guys are growing like mad, and they're absolutely in build-out mode. HubSpot only recently became profitable and cash flow positive because they were investing everything that they earned back into the business to scale out their platform. But, I'm personally interested in this business because they are free cash flow positive, so, they're no longer consuming cash at the rate that they once were. Their co-founders are still highly involved in the business. In fact, they're the CEO and CTO. Their company culture just gets rave reviews on review sites like glassdoor.com.

And while they've already grown like mad, and investors have already done very well by buying into the company after the IPO, the company thinks that its total addressable market is about $45 billion annually. You compare that to the $375 million that they pulled in last year and the tailwinds that they're riding, and I think this business can grow very, very quickly for years to come.

Lewis: Yeah, it certainly seems like there's a pretty good growth runway ahead of it.