AARRR – Pirate Metrics
All hands ahoy! Let’s talk about metrics for real pirates! Just kidding. You came here to talk about metrics, not the pirates, of course. Those metrics have an interesting name, but they are valuable not just by name, but help to better understand your customers.
What is AARRR?
Pirate Metrics were invented by Dave McClure in 2007. AARRR, also known as Pirate Metrics, stand for acquisition, activation, retention, referral, and revenue. It’s pretty much the pillar of understanding your customers, their journey and optimizing your funnel as well as setting some valuable and actionable metric goals for your startup. AARRR is widely accepted as the five most important metrics for a startup to focus on. That is because these metrics effectively measure your company’s growth while at the same time being simple and actionable.
How does it work?
The basic concept of Pirate Metrics is based on five types of measurements of user behavior:
- A: Acquisition – from what channels do users come from? This stage is your first contact with customers.
- A: Activation – what percent of them have a satisfied initial experience? This is the stage in which your users actually try your product.
- R: Retention – do they come back? This stage main goal is to keep customers locked to your product or service.
- R: Referral – do they like it enough to recommend it to their friends? This stage focuses on growth.
- R: Revenue – can you monetize your product? This stage starts when a customer buys your product or service.
The acquisition is the first step in the Pirate Metrics process. It describes how people find you and turn in to customers. They then to come through organic search, banner ads, social media etc. So, acquisition begins when you start to identify your customers as individual users. This is not just to look at visitors, but to know how many and how those visitors convert to customers. It all begins at the start of the funnel of a customer journey to the moment it converts to paying customer. Every step counts as micro-conversion. Those steps are from the visitor of your website, then the visitor who sign up to your email newsletter and to the conversion to a customer.
Picture 1. Customer acquisition funnel
You need to monitor those steps because it will help you better realize and optimize the customer journey. Therefore, start by establishing the right metrics for each step and each channel through your visitors came.
This metric focus on conversions, one in particular. Activation is the process where your visitor already signed up and decide to actually try your product. It’s about the first experience your customer has with your product or service. When your visitor activates, and they are starting to see the value of your product, they want to try it. This is called activation conversion. And this the primary focus of Activation. But it’s not enough to get people to try your product. They need to stick with it. It’s crucial to bring them to the realization of the importance of your product for their needs. And it needs to be realized as quickly as possible so that they keep coming back. It’s a good idea to segment and target users with specific onboarding emails.
Revenue is the stage that starts when a user finally takes a decision to buy your product. For a SaaS company, this is when a customer makes their first month’s subscription. Revenue is important for any startup. Even Facebook and Instagram, companies that started out as purely social, non-monetary platforms, are only successful today because of the huge advertising business behind them.
But let’s get back to business. It’s much cheaper to drive an existing customer to repeat purchase of your product than it’s to acquire a brand new one. So, the way of increasing revenue is by increasing Customer Lifetime Value (CLV) and decreasing Customer Acquisition Cost (CAC). CLV is the amount of revenue you earn from a customer during the time it sticks to your company. Your CAC is the amount of money you spend on acquiring your customer. This includes various costs, from marketing, sales and other. So, it’s logical that you need to lower CAC and increase CLV to see the revenue growth.
Customer retention is all about keeping people around after they try your product or download your service. How you turn your success with acquisition and activation into growth is what’s important. It’s 5 to 25 times more expensive to acquire a new customer than to retain an existing one. It’s also easier to sell to someone who has purchased from you before as trust between you has already been established.
Tracking retention is different for every business, however. For a SaaS company, this means continuing to keep a customer from churning, in addition to up-selling more advanced features of a current model of the product.
Retention is an important group of metrics to keep an eye on. If your retention numbers are low, it is very likely that you are not marketing the right product to the right people. With the low retention of a product, you are going to lose more customers and money in the process. Well-timed, targeted emails can be a really powerful tool for encouraging retention. With well-targeted emails, you can reach out in a personal way.
Referrals might be one of the most important, and an often underrated group of metrics to focus on. Word of mouth marketing is one of the best customer acquisition channels to focus on. So, the absolute best way to drive growth can be through referral. Having your customers refer others is every business dream. It’s a genuine and cheap way to acquire new customers.
Two metrics you want to keep a close eye on for referrals are the Net Promoter Score (NPS) and the Viral Coefficient. NPS lets you know how satisfied and loyal your customers are to the brand. The Viral Coefficient is the number of users a customer refers to you. A viral coefficient of two would mean that one customer on average refers two new customers to you. Therefore, your viral coefficient needs to be larger than one to actually have growth.
Applying Pirate Metrics
Pirate Metrics is simply a guideline meant to help business owners and marketers to find the most important metrics for them. Especially for startups and small businesses. These metrics will help you simplify this complex process and stay on track. Optimizing your funnels will help you to realize the most important stages that customer goes through when it interacts with your business. So, knowing how to act and react is of a key importance. At the very least, knowing these metrics will allow you to sustain and scale your business more efficiently.