Compounding revenue growth and margin expansion are widely accepted as the most important factors for long-term value creation. For software companies, this is no different. To achieve compounding revenue growth at scale over a long period of time, companies need a large total addressable market (TAM) to grow into. Individual software products generally have defined TAMs, so there are two paths to a large market: 1) start with a large market where you can continue to sell your core product with strong unit economics and utilize pricing strategies to grow with your customers’ growth even as the total TAM might tap out (such as usage-based pricing), or 2) expand your market by building new adjacent products to cross and up-sell to existing customers and to sell to new customers as another acquisition wedge. In this post, we dive into considerations for SaaS companies going multi-product by analyzing the evolution of HubSpot, one of the most successful public SaaS company multi-product stories.
For most SaaS companies, the upfront cost to acquire a customer is greater than the first year of gained gross margin, meaning the paybacks take longer than a year and most profits are created over time through high retention rates and thus high lifetime value (LTV). Adopting a multi-product approach where a company cross-sells more products to current customers should in theory improve unit economics by adding more gross profit with meaningfully less acquisition costs. Older cohorts then can become incredibly profitable and that margin can be invested in R&D for new products to enhance this flywheel. Put simply, you have more ways to win by being a multi-product company with Act II, III, IV, and beyond. This is summed up well in a 2020 HubSpot transcript where CEO, Founder & Chairman Brian Halligan spoke about the “Clydesdale Rule” and how it related to HubSpot’s multi-product strategy; one Clydesdale horse can pull 1,000 pounds but if you add a second Clydesdale that can also pull 1,000 pounds, the two combined can pull 4,000 pounds i.e., 1 + 1 = 4. The “Clydesdales” are HubSpot’s different products or Hubs (Sales, Service, CMS, etc). They’re built on shared services underneath, the UI is the same and it’s the same data model. HubSpot’s Hubs are greater than the sum of the parts – a true platform. And once you’re a platform with many hooks into a single customer or market, it can create a significant competitive moat.
With that said, there are considerations and potential risks to pursuing a multi-product strategy as outlined below. In today’s challenging macro environment, start-ups could consider investing more in R&D to create additional long-term vectors for growth while the short-term selling environment is turbulent. There are many considerations depending on a company and end market (and of course resources) and below are some key questions to consider:
There are many other multi-product public company success stories such as Datadog*, Atlassian, ServiceNow, Veeva, and others. We analyzed HubSpot since the company has excellent disclosure available in its filings and it’s clear in almost every metric how the company’s multi-product strategy has contributed to durable revenue growth, improving efficiency and margins, and free cash flow. HubSpot began its journey as a public company with $108M of implied ARR from one product (Marketing Hub), 83% net dollar retention, and (21)% LTM FCF margins. Today, the company is almost $2B of implied ARR with net dollar retention of 110%, ~50% of net new ARR coming from non-Marketing Hub products, and 11% LTM FCF margins. HubSpot’s market cap is up 24.8x or 2,378% since its 2014 IPO and its TAM (total addressable market) has more than doubled to $45B.
As you can see in this presentation, there is no doubt HubSpot’s multi-product strategy contributed to much of the company’s success over the past 10 years. HubSpot meticulously picked off areas of customer pain and created adjacent solutions for its customers’ needs and also sold the products effectively. HubSpot is a great inspiration; there is no doubt a multi-product strategy can pay massive dividends for SaaS companies of all stages and is a strategy that any company should consider, particularly in today’s environment.
You can access the entire HubSpot Multi-Product Case Study here.
*Meritech is a current shareholder in Datadog.
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