Pricing. For expansion-stage companies, it’s an important (and often ubiquitous) topic of conversation. While most company leaders recognize that there’s an ongoing opportunity to improve pricing structure in response to market changes and other factors, the actual process of updating pricing can induce deep anxiety in even the most stalwart of CEOs. Change is hard, even when it’s for the best. And changes in pricing might upset current customers or reduce your win rate with future customers. There’s a lot at stake.
Brad Coffey, Chief Strategy Officer at Hubspot, has successfully run the pricing gauntlet twice in recent years as the inbound marketing giant implemented two major pricing initiatives. Many of the lessons Brad ultimately learned from going through these updates took months (even years) to fully play out, but in retrospect he was able to see that there is definitely a set of best practices that can be applied to launching a new pricing structure. Happily, Brad is willing to share the wisdom he’s gained.
Everyone Has to Start Somewhere
“In the beginning, we picked the price point out of thin air,” Brad admits. This isn’t an unusual way for a startup to determine initial pricing. But, as Brad points out, that baseline price often becomes the foundation for later pricing. In Hubspot’s case, as they released new products, they created simple tiered pricing that was basically multiples of that initial price point.
The turning point that inspired Brad and the rest of the team to take a closer look at their pricing structure came while Hubspot was in the midst of a fundraising effort. In the process of analyzing their metrics for venture capitalists, the team realized that there was room for improvement. “We had a pretty good story, and there were parts of the business that were doing really well,” Brad recalls. “We were acquiring customers and our retention was pretty good, but we weren’t getting many upgrades.” This insight inspired some soul searching, and they realized it was time to update their pricing to match the value they were actually delivering.
The Major Pricing Overhaul in 3 Steps
The pricing overhaul process involved most of Hubspot’s executive team as well as leaders of the product team and the company’s founders. Working together, this group engaged in a three-step process to develop a new and more effective pricing strategy.
Step 1: Do Your Homework
For Hubspot, the starting point for the pricing conversation was heavy analysis on two major data points. First, the team took a deep internal dive on retention. They wanted to uncover which parts of the product were most valuable by identifying correlations between particular features and people sticking with the product. The team’s research helped them pinpoint the parts of the product that had a lot of sizzle in a demo, but that users dropped after a few months. They were also able to single out the parts of the product that were maybe harder to sell and set up, but which – once in place – played an important role in keeping users on board for the long haul. Specifically, for Hubspot, the feature that had the most influence on retention was contacts. “We realized that once a user got contacts into the system, they were going to stick around longer,” Brad says. “Having contacts allowed them to get more value out of the platform.”
To complement this internal data point, the team also analyzed the market to see how their competitors were pricing. This helped HubSpot understand what customers were used to paying and also gave them a window into pricing strategies that were different from their own, simple approach.
Step 2: Get Input from Everyone
Based on their research and analysis, the team crafted their initial vision for the new pricing. Next step: get feedback from everywhere.
“We solicited feedback from our peers, our customers, and from all our employees. We even posted the new proposed pricing on our internal wiki where we had a rousing debate leading up to final decisions.”
While there were plenty of external people HubSpot could have engaged in this process (including pricing consultants), the team decided to drive the process internally via their own staff and customers. Working with a very detailed high-fidelity mockup of the new pricing page, Brad shared the new strategy with anyone who would talk with him. “It was a little nerve-wracking,” he says. “But it worked to get us the feedback, so it turned out to be a pretty valuable process.”
In addition to benchmarking specific price points against HubSpot’s competitive set, Brad interviewed customers to try and understand what they expected to pay for the product. It was, of course, important to understand how price factored into deals lost and won; but Brad ultimately felt that figuring out which price accurately reflected the value customers saw in the product was more important when it came to determining whether the new pricing structure would fly or flop.
“It’s important to understand what the customer’s value axis is and how they expect to pay for it. We need to kind of put customers on the spot and ask them what they think about certain tradeoffs.”
Step 3: Implement Like a Pro
There were two keys to ensure a smooth transition: consistent weekly meetings and having all the right people involved – not only at each step of the process, but in the appropriate roles. The weekly meeting served as a valuable touchstone throughout the process, giving the team a chance to assess progress, proactively decide on next steps, and continuously engage different groups within the company to prepare for the changes.
The list of attendees shifted throughout the hundred days leading up to the launch. Initially, the focus was on people in the product and finance areas to ensure that the pricing model was in place in terms of packaging and the mechanics of delivering it to market.
“It was important for the product team to really own the process. More than just ‘getting on board,’ they needed to be able to drive the process in a way that delivers a lot of impact.”
From there, different functional teams cycled into the meetings. The product marketing team attended as talk turned to positioning, promotion, and launch plans. The sales team got involved as the launch loomed closer so they could be fully trained on the new pricing and the marketing plan supporting it. Services-oriented groups were next and helped prepare for the rollout to the existing install base including customers coming up for renewal. Throughout the process, anyone who wanted to learn more about the pricing change was welcomed and encouraged to get involved.
Looking Back: Challenges, Lessons and Outcomes
In retrospect, the pricing overhaul was a clear win for HubSpot, but that doesn’t mean it wasn’t without its challenges. For instance, Brad acknowledges that there was plenty of internal debate throughout the process. Rather than allow conflicts to bring things to a grinding halt, Brad stole the “disagree-and-commit” concept from Amazon. This approach allowed everyone to have a voice and ensured that the process was very transparent, but also made it clear that once a decision was reached, everyone needed be 100% on board. “I love that HubSpot is the kind of a company that encourages loud, boisterous debate,” Brad says. “But with this approach, once we’ve made a decision, it’s going to get done. If you disagree, it’s your responsibility to speak up and let the team know you disagree; but it’s also your responsibility to really get on board – not just give the project lip service, but to put everything in to make the effort as good an experience as possible for our customers.”
In addition to internal machinations, there were also some customer-facing hurdles to clear. For one, the price change involved charging customers for adding contacts. Research had shown that the ability to add contacts was a highly valued feature that increased customer retention, but up until the price change, customers hadn’t had to pay for contacts. “There was a voice in the back of my head that kept me up at night,” Brad recalls. “It said, ‘Let me get this straight, Brad. You want customers to add contacts to HubSpot, so you’re going to start charging them to add contacts to HubSpot, and actually increase their price when they add more? Isn’t that going to completely disincentivize them from doing the exact thing you want them to do?’ I’m not going to lie. It was a little terrifying.”
Happily, everything turned out great, an outcome Brad attributes in huge part to the company’s inside sales model, which enabled everyone to clearly articulate the value of having contacts in HubSpot. It also helped that contact-based pricing was something the market expected because they were used to that kind of pricing structure. In the end, the pricing change ended up creating a great deal of alignment across the company. From the marketing positioning to the sales pitch and from services and onboarding to product development, each group within the organization was able to really focus on delivering value through contacts.
Another customer-facing challenge that almost always comes up was whether or not to grandfather in existing customers. This question inspired some great debate, but HubSpot’s philosophy of being very generous with existing customers drove the team to uphold their standard – and very forgiving – grandfathering policy. “It may not be the right move for all companies in all situations,” Brad says. “But we were lucky enough to be growing quickly so that as the install base churned over time and we added more customers, the economics shifted toward having the majority (and eventually all) of our customers migrated onto the contact tier pricing.”
While it took some time to switch all customers over to the new pricing, the team committed and the resulting improvement in retention proved that was the right move. In 2011, the company’s retention was in the low 70s and they were seeing approximately 2 to 3% in upgrades, so, overall, about 75% revenue retention. In 2014, after the pricing overhaul, retention jumped into the low 80s and upgrades increased to about 15%, resulting in almost 100% revenue retention. While the pricing update wasn’t the only change HubSpot made over those three years, the shift in pricing strategy definitely made a big impact.
Looking Ahead: Creating New Opportunity with a Freemium Product
In 2014, coming off their IPO, HubSpot faced another major turning point: whether they should stay within their existing product footprint or go wide and expand from marketing into adjacent categories like sales and customer success. Ultimately, they chose to go wide, and they take the opportunity to try something radically different than anything they’d done before: enter the market with a freemium product.
Unlike the core pricing overhaul, which involved almost the entire company, the approach to developing the freemium sales product involved assembling a small group of some of HubSpot’s best people – engineers, product folks, sales reps, service team members, etc. – to create an all-star team with a tight feedback loop.
“This was a completely new motion for us,” Brad says. “We gave this group a lot of ownership and autonomy to figure things out. We didn’t want it to become a process in which every executive was tossing their pet rock into the design or lobbying their opinions. We wanted to enable the team to make decisions really, really quickly.” In addition to creative and decision-making autonomy, HubSpot also gave the team their own budget.
This experiment was mostly a success, though Brad notes that they did initially take the independence factor a little too far. “We wound up investing in a few different freemium motions at the same time and some of them were going after a different persona on a different tech stack with a different brand name,” he explains. “Ultimately, we ended up putting everything on the same platform and tech stack, so that – if you did use all of our products – they looked the same, felt the same, and worked incredibly well together. We also brought all products back under the HubSpot brand and made sure that as people tried our freemium products, they were also aware of the other HubSpot products they could buy.”
Because the sales category was an entirely new market for HubSpot, the team had the advantage of any win being a net positive. There was no existing revenue stream to compare to and no worry about cannibalizing existing business. The tightly coordinated team was able to launch the freemium product within about six months, an impressively short timeframe. Even better, the launch had a substantial impact on HubSpot’s business. “Historically, we had three products – a basic, a pro, and an enterprise. Now, we’re able to lead with a free product, which has been a dramatic shift,” Brad says. “Now, instead of just getting our content, prospects can actually start to use and engage with our product and ultimately, via upgrade, touchlessly buy more. It’s really shifted our frame of reference internally.”
The freemium approach has also generated excellent NPS results, proving that the product is generating a lot of value for users. And, on the other side, the economics have also worked out well as the team continues to find and implement new ways to upgrade users either within the sales product or by adding the marketing product.
“We’ve been around for about ten years now,” Brad says. “Early on, we were a single-product company, but we’re now in the midst of what we think of as ‘phase two,’ which is about becoming a suite of apps. We have a marketing product, a sales product, and we announced a customer success product last fall. We built all of this on the foundation of a free CRM that’s working really, really well for us. Eventually, we want to open that up and turn that into a platform that others can develop on top of – we’re looking ahead and thinking broadly about how we can enable millions of businesses to grow. That’s our ultimate mission.”