Certainly appreciate you making time. Hope you had a happy Thanksgiving.
Thank you. You too.
Thanks for having us.
And so I'll start off with just a couple of kind of framing questions and then get into what I think are the valuable attributes of HubSpot from an investor perspective.
All right.
But I mean, maybe just frame for those who haven't been as present in the day-to-day how you would characterize the year-to-date and then Q3 in particular, just the highlights and the metrics that you're having the most investor conversation around.
Yeah, thanks. This is obviously the time of year to reflect. And so a little reflection on 2024 is definitely in order. I would say at the highest level, I think 2024 was a pretty challenging year from an external environment perspective, notably. But I think within that context, we've made some really strong forward progress across a few key areas, notably the sort of platform journey we have been on, AI, and then finally pricing and packaging where we introduced a new pricing model. And maybe I'll kind of click in a little bit to each one of those factors. And it's interesting, it came up a couple of times this morning. Last December felt great. We entered the year super optimistic after a really strong finish to 2023, really hopeful that 2024 would look different. And what we quickly discovered was that the external environment remained relatively cautious.
We have been seeing this for a couple of years now. Throughout the year, we have continued to see higher bar to action across the customers, longer deal cycles, lots of decision makers. We continue to see that. That said, we feel great about our execution, in particular across the areas that I talked about. First and foremost, we spent some time at our Analyst Day in September talking about this. Customers are choosing HubSpot as their platform of choice. They are consolidating solutions onto HubSpot. We are seeing more and more platform adoption, particularly upmarket. We shared a statistic in the latest earnings call. Half of our customers are on three or more hubs. It's just a steady progress that we have been able to make over the last few years. The second thing is really around AI.
We believe AI will be an important technology shift, and we have made a lot of progress around AI innovation. We announced at INBOUND the Breeze name, which sort of brought together a view of all of the AI features and functionality that we've delivered over the last year or so, and we feel really good about the value we're delivering to our customers. Then finally, I would say we launched a new pricing model at the beginning of March, and it was sort of multiple years in the works. The enablement and sort of rollout of the pricing model has happened over a couple of quarters here, but we feel really good about our ability to actually have that behind us.
The combination of the three of these things, I think, gives us a lot of confidence in our ability to set ourselves up for growth over the next, call it, three to five years.
Yeah. And those are all kind of good things that I also want to dive into a bit more. So maybe just in terms of the evolution to becoming more of a platform, I think one of the attributes that keeps investors focused on HubSpot is how that expands the market opportunity. And so just level set the evolution of that from the company's beginnings and more of a marketing-focused journey to where it is today. And then maybe also just frame penetration, where you are today versus what the TAM enables over a longer period of time.
Yeah, sure. I'm happy to do that. So the company's roots are in marketing automation. HubSpot was founded as a marketing application company. And there have been a few points in time in its history where we've made strategic choices. One of those choices happened, call it in, I think it was 2014, where we made this choice, where it was, do we want to go upmarket? We were sort of an SMB-focused marketing application. We had a choice. Do we want to move upmarket into the enterprise and continue to build a marketing company? Or do we want to expand horizontally? And we made the choice that we are going to stay focused on the SMB market, and we are going to build a CRM and a set of sales automation tools. And that began this journey, call it from marketing application into a front office suite.
So we first added Sales Hub, Service Hub. We've added Content Hub. We have Operations Hub, which stitches things together. We have Commerce Hub. We launched Breeze, which is our AI set of features. And we have Breeze Intelligence, which is a set of data intelligence tools that can really supercharge your CRM. And it's this broadening of the portfolio that has created incremental opportunity for us over time. Now, we shared the statistic at our Analyst Day that our TAM is $75 billion growing to $125 billion over the next five years. Our market share is single digit, and that's single digit across all of the products. And so there's a lot of opportunity for us to continue to grow over time.
I mean, one of the things that stood out to us despite your characterization, which I think is very consistent of a more challenging macro environment, is your ability to continue to add customers at a somewhat elevated clip to what we had been calibrating on for HubSpot historically. It stands out. And there are periods where we've seen HubSpot go through this journey of adding a bigger cohort of new customers and then realizing capturing the value of that cohort over time. So I know it's probably difficult for you to answer specifically, but what's enabling you to continue adding customers at that healthy clip despite some of the elongation and overall challenges that you're facing?
Yeah, it's a good point, Michael. We've had some really nice success with net additions, particularly over the last couple of years, and it's really mostly been at that Starter tier where we've seen healthy additions, and there's been a few things driving that. One is we've continually pushed functionality from the higher tiers down into Starter to make that product more valuable. We've also taken friction out of the process of converting from our free product to the paid Starter product, and then finally, we're constantly trying to optimize pricing and packaging, so those three things have really helped that Starter tier have nice momentum from a customer addition standpoint. What we've seen more recently is a pickup in the number of Pro customers who are joining the platform, and that's been driven by the seats pricing model change that Kate talked about.
So we got rid of seat minimums, which has made it easier for customers to join at the Pro level. So what we see right now is more of a balance between Starter and Pro when you look at that net additions number on a quarterly basis. We did 10,000 in Q3. We're thinking 9,000-10,000 is the right range to think about for Q4. And then we'll give you all an update on how we're thinking about 2025 when we report Q4.
Yeah. And doing sort of the right thing for customers has also been kind of a consistent theme. We've seen times where you've allowed customers to remove duplicate contacts or do things that might be less favorable to the monetization initially, but create goodwill that potentially leads to monetization subsequently down the road. So when we're thinking about what you're saying now around adding more of the functionality and pushing it down into the lower tiers, what's a potential catalyst for seeing them graduate back up into the higher tiers? Is it something you're doing with the AI-related product efforts? Is it just continued growth of some of those cohorts? How do we think about the potential for that to kind of reverse course at some point?
Yeah, I'll start. You can certainly add on. I would say, first of all, you are right. The company is focused very much on the customer at the center of decision-making, and time and time again, we will make choices that are the right long-term choices for aligning HubSpot's incentives and our customers' incentives. The decision to continue to push features and functionality down the stack is one that both allows us to deliver. It really does allow us to deliver value at the low end and continue to fuel that sort of flywheel of customer acquisition and have customers choose HubSpot as their platform as early in their journey as a company as possible. That said, it wouldn't work if we weren't also innovating at the high end.
You need to continue to innovate at that sort of Enterprise tier with more sophisticated features and functionality that become table stakes over time so that you have a nice and consistent flow of functionality sort of down the stack.
Can we talk about just the coupling of NRR with that discussion and just some of the been very helpful in providing the bar charts that show the composition of what's happening there?
Yep.
For those who haven't seen those, maybe you can kind of level set where retention weights were versus where they are today, and as we think about potentially those evening out at some point in time, what's the factors to consider there are?
Yeah, sure thing. So I would just say in my history with the company, which is now, call it, six and a half years, the net revenue retention has expanded and then followed by a period of a bit of a contraction. So when I joined, we were sort of hovering around 100%, really trying to hit 100% net revenue retention every quarter. During this period of significant digital transformation in 2020 and 2021, our net revenue retention increased to 115% at the peak. The last three quarters, we've been at 102%. And so maybe I'll just talk a little bit about the puts and takes from that sort of 115% level to where we are today.
I would say the good news in the story is that our customer dollar retention, which you may think about as gross retention, has remained really strong and consistent throughout this period of time. To me and to the company, we talk about it this way internally. Customer dollar retention is the single most important metric that kind of shows you is your product and platform delivering value to your customers. Because if not, there's no reason for them to stay on. We've been able to retain and actually even grow a little bit customer dollar retention over this period of time, which means that what has driven that contraction in net revenue retention is a combination of more downgrades and less upgrades in a non-shocking turn of events.
What we have seen from a downgrade perspective is that following 2021, we entered this period of time where there was a sharp focus by customers on really optimizing their ROI on their software spend. There was a lot of work being done to clean up contacts, to reduce seats that weren't being used, to consolidate portals onto a single HubSpot instance, and in some cases, even downgrading the edition of the product. The good news is that we have seen that stabilize over the last three to four quarters. That pressure has abated a bit on net revenue retention. What we continue to see is pressure on that net upgrade motion across many of the diverse upgrade motions that we have: cross-sell, edition upgrades, and some of the consumption motions around contact tier upgrades and seats.
I think the real catalyst for that turn is a change in the economic environment. That said, we do have a number of tailwinds that I think will help us expand net revenue retention over the next couple of years. First and foremost, we have moved to this new pricing model. Expansion rates under the new pricing model are healthier than expansion rates under the legacy model, and that should provide some benefit. We continue to innovate in AI and other areas, which will be a catalyst for upgrading. And then finally, we are migrating our installed base of customers onto the new pricing model over the next year or so. And they will renew. When they renew post-migration, their price will increase up to 5%.
And so those things will provide, call it a multiple point tailwind to net revenue retention over the near term or over the next couple of years, sorry. And I would just say the target that we have set is, in a normal economic environment, we believe we can be a 110% net revenue retention company. We still believe that's the right target, but it will take a set of factors for that to happen.
Yeah. This question is less on the mechanics of the price increase and more on the decision criteria that goes into sort of the change in pricing model. I have my suspicions, but I don't want to lead the witness. So I'm curious, what went into, what was the process in building towards deciding we're going to remove minimum three-seat thresholds, we're going to have this Core Seat capability that we haven't had before? Because I'd imagine that's something you take quite seriously given everything we've talked about and the do right by customer and other pieces of ethos.
Yeah, I'll keep it going. Yes, we take it very seriously. We have a pretty firm and steady pricing strategy that we've used for a very long time, which is really about not trying to extract the last dollar of value from our customers. What we want to do is add value first and extract value over time. The pricing decision that we made to move to what we refer to as our seats-based pricing model was very much consistent with that sort of mental model, and there were really two goals of the change. One was simply to make it easier to get started with HubSpot and make it easier to upgrade over time, and the second is that we wanted to align the customer pricing with the value that they are enjoying with the product, and so the changes, the mechanical changes were really three.
One was that we lowered the price of Starter and made it super simple. Two is that we eliminated seat minimums, as you heard from Ryan earlier. And three, we introduced this new Core Seat for customers or users who needed to edit the CRM. And the reason we did that was because we had been innovating the core CRM for a very long time and not monetizing it. And so this allowed us a mechanism to continue to build features and functionality into the core CRM. And so I shared this as part of my Analyst Day presentation, but we really thought that two big things would happen as a result of the pricing change. The first one was that we thought that we would get more customers.
Because we are eliminating seat minimums and lowering sort of the price of our entry point onto the platform, we thought we would see more customers, velocity would pick up, but that customers would get started with HubSpot at lower ASPs than they were under the legacy pricing model, and what we found was, yes, we were seeing lower ASPs initially, but it took us a little bit of time to actually drive the internal enablement that corresponded to that pickup in velocity, and so it took in Q3, and we shared this on our earnings call, we did reach the point where sort of those two things offset one another, and new ARR, new customer ARR was roughly neutral to what we had seen under the legacy model. The other thing that we thought we would see is higher net revenue retention over time.
One, because customers were getting started with what they needed, and they would have a more natural upgrade path. And two, because we are able to monetize the core CRM, and we are seeing higher seat assignment rates, we are seeing higher paid seat ratios. So both of those things are proving to be true. And so we are seeing expansion rates under the new pricing model higher than our legacy expansion rates.
On the piece that you mentioned around enablement, is that something triggered in the product? How does that mechanism work where you're able to catalyze them to appreciate value of kind of evolving what they're spending on?
I would call it primarily a rep enablement. There were many more prospects and customers, but we had not enabled the reps to be able to easily identify which of these customers are ultimately going to be meaningfully sized and which of these are one or two seat customers where we should put them through a lower touch motion, and so the enablement that happened in our pilot in Australia and New Zealand in a much more organic way. It was a smaller set of sales teams. They sort of learned the techniques pretty easily with themselves, and this was all about how do we scale this across the global launch, and it just took a little bit more time despite best efforts than we had originally thought.
I'd be remiss if I didn't go into Breeze at some point in the AI-related strategy. First of all, the naming, however intentional it was, was very clever, right? Removing the friction around.
You may be the first one to say that.
So exciting to hear that. Very, very clever. But maybe you can level set what the capabilities are. And then if we think about mapping that to certain use cases, certain hubs, where you think you'll see the more immediate feedback of what you're hoping to see with the new product set.
Can you start?
Yeah, sure. So the AI strategy initially was to take it and embed AI functionality across the entire platform. And we're doing that, have done that in a meaningful way. What we launched at INBOUND was Breeze, the branding, which includes all of that functionality, plus Copilot, plus four different agents that we launched. All of those are in beta. In terms of kind of where we are in the adoption process and what we look for to kind of get comfortable that customers are ready to adopt this stuff, we look at awareness, usage, and then value creation. And all three of those at this point are moving in the right direction. So we saw a really nice bump in awareness following INBOUND because of the Breeze branding. So people now know where that functionality is. We saw a 13-point increase in awareness that we have this functionality.
Usage, we've talked about two-thirds of Enterprise customers and 50% of Pro customers having used AI. We're thrilled by those numbers. What we're focused on now is that repeat usage, so people coming back and using it monthly, weekly, daily, because that's where the real value creation comes in. In terms of what's resonating, content creation is probably number one. You've probably heard us talk about Content Hub. We relaunched that in the spring. Essentially, everything new that we put in it was tools, AI-powered tools to create content, and we've seen the attach rate on that product triple since the spring, going from like 12% to close to 50%, so people are clearly using AI functionality to create content, and the outcomes are good too. More content's being created, the conversion rate is better, there's more personalization, sales cycles are shrinking because of it.
So we feel really good about that. And the other area that we're getting a lot of traction is Service Hub. And there's a bunch of things that we launched again in the spring, things like service call summarization, email generation for service calls. And the big one is probably the Customer Agent, which was launched at INBOUND. That's in beta, but customers who are using that can resolve 20%-40% of their tickets that were previously handled by a human rep. So there's a ton of value being created there, and I think more to come.
Do you have a hypothesis on the propensity of your customer base to take on new products and new technologies?
The reason I ask is because in the world of enterprise, we hear a lot of conversation around complexity of data, just not having things in a certain order, having certain governance, compliance requirements that are just obstacles to adoption. Your customers would seem to have less of that, and the use cases seem like they map well to what the technology is good at. But how do you? It sounds like maybe awareness is part of it, but how do you gauge your customers' willingness to take on something new from a technology standpoint?
I think you're right. I think there is a little bit less of that in SMB world than there is in enterprise world. Our customers just want something that works and helps them make their day go a little better and helps them grow faster, and they're not as hung up on some of the bigger governance issues that some of the Enterprise customers have. We're trying to drive awareness and more and more usage and get people kind of comfortable with the tools and understand what they can do to help drive adoption, and it really has felt like it's become more real this year. Last year at INBOUND, it was more of a concept. There was some hesitancy around "What is this stuff?"
“How do I use it?” And this year, there were real use cases, real value being created, and people thinking about how they're going to reimagine go-to-market leveraging AI.
I think Ryan's making a really important distinction around how Enterprise customers experiment versus SMBs. The theoretical excitement of AI that happened in 2023 was much less compelling for SMBs. They wanted a concrete use case and set of tools that they could easily use. They didn't want to have to build them themselves. There aren't a bunch of AI engineers sitting around at our customers that are ready to experiment and try, and so the launch of Breeze at INBOUND was a pretty significant step for our customers to really get in and try and use AI.
It sounds like the consumerization, like everyone, it's now been two years since everyone's had their chance to experiment with ChatGPT. That certainly seems like it creates some association too. Switching gears a little bit, but I want to touch on Cacheflow just as part of the product strategy and what.
Cacheflow of the company, not cash flow.
Yes. We only have six minutes left. Cacheflow of the acquisition and what made that a priority given the platform strategy and everything that you have in front of HubSpot?
Yeah, so Cacheflow acquisition, maybe stepping back, Commerce Hub has had some nice momentum over the course of the last year. We helped people bring their own processor to Commerce Hub, and that really drove an increase in enrollments and an increase in the amount of payments that are being processed over the system, but despite that momentum, one thing we consistently heard is that people wanted more sophisticated subscription management and CPQ functionality, and that's what Cacheflow does, so think of that kind of last mile of a transaction, creating a proposal, changing it, getting it signed, issuing an invoice, all the way through payment. They make that whole piece of the process a lot more seamless, and that's something our customers have been asking for, so we're super excited about bringing that team on board.
The strategy would be a lot like what you saw with Clearbit and PieSync before that, where we'll integrate the team, which we're doing right now, and then we will build the technology right into the platform so that user experience is not impacted in any way.
Okay. Is there a timeline to think about that product integration piece?
It's not something that we have shared. But the one thing that I would add is if you just sort of took a step back and thought about what was our strategy or what were the sort of core tenets that we had in going into the commerce space in general, it was very much around marrying commerce data with customer data within a CRM and the sort of advantage and actionability that that brings. And that's even sort of more true in a world of AI. So I think Cacheflow puts us in a position to really kind of supercharge that forward.
Okay. I'm trying to get through as many of these as I can. So we've hit on the TAM, the customer-centric culture, the pricing power, the platform story. One element that probably doesn't come up as much in investor conversation, but is clearly evident within HubSpot, is just the culture. I think some of it is tied to just there's been unique strategic decision-making throughout the process, like the company's evolution, right? You've taken different directions at multiple points. But I'm curious what you see that has enabled, and maybe you can't appreciate how different it is than other technology companies, but what you see that keeps employees there, engaged, keeps that cultural fit moving, and how you keep that as you scale and start to think about moving up market and these more mature company dynamics?
Again, I will welcome Ryan's feedback as.
He came back.
Yes. Yes. For those who don't know, Ryan was at HubSpot when I first joined, left, and we pulled him back in. So he is happy to have him back as part of the team. I would say having lived in multiple companies before I joined HubSpot, to me, the thing that stood out around the culture is, and it sounds super simple, is just it's purposeful, right? I think in a lot of companies, the culture is a result of stuff that just happens as opposed to stuff that you actually want and mean to have happen, and from the beginning, and I credit Dharmesh and Brian both, they thought about the kind of company that they wanted to build.
And Dharmesh has written a Culture Code document, which is like 128 slides long, and he has rewritten it over time as the company has grown and life has evolved. And so to me, that is the foundational ingredient that makes the culture of HubSpot different. That said, life has changed a lot. And we have grown as a business. We have embraced hybrid work and continue to be committed to doing so. And so adapting the culture in this world requires a lot of continuous improvement and thinking. And Dharmesh launched just, gosh, what was it, like four months ago, his latest edition of the Culture Code, where frankly, it's interesting that we started with this customer centricity because it reoriented the entire Culture Code deck around what we are delivering for our customer.
I think it was a great way to pivot from a world where we were sort of solving, in large part based on the sort of shock and awe of the pandemic, solving for our employees at almost all costs to one that we could reset expectations and really solve for our customer, which is the real foundational purpose of the business. We continue to work on it, and we'll continue to work on it as long as HubSpot is in existence.
That's great. Just at the last minute or so, just curious in closing remarks, you mentioned last year had, and you're seeing a little bit more of a pronounced Q4 seasonality. Just the signals you're watching that inform year-end perspective, key priorities that you're thinking through in terms of planning for next year and for the next five years within HubSpot?
Yeah. I mean, I think one lesson that we've learned pretty significantly is that you can really only control what you can control. And so we are all about putting our heads down and executing very rigorously through the end of the year. That said, 2025 priorities for us are super important, and we're going to continue to focus on delivering on our mission, which is to help millions of organizations grow better. We think people choose HubSpot because we have a platform that is easy to use, that delivers them lots of value and fast time to value, and provides a real unified view of their customers. And it's all going to only get better with AI. So those are the priorities for us, is to just continue to double down on those things.
That's great. Perfect note to close on. Kate, Ryan, thank you very much for joining. Appreciate it.
Thanks, Michael.