If you don’t understand the AARRR growth model, you are already behind the times
Dave McClure, founder of 500 Startups and a famous entrepreneur, coined the term "Pirate Metrics" in 2007. Pirate Metrics, or AARRR, are the five most important metrics to help a business grow: Acquisition (A), Activation (A), Retention (R), Referral (R) and Revenue (R). From user acquisition to monetization, there is churn in every step of AARRR, and referrals bring in new users. Without tracking these metrics, you won't have a sustainable and scalable business.
User acquisition: As the name suggests, bringing in new users
User acquisition is the first step in Pirate Metrics and is usually the only metric that traditional marketers focus on. User acquisition comes from organic search, banner ads, TV ads, social media, SEO, joint promotions, and any other channel that allows people to find you.
In addition to taking many marketing measures to drive traffic to your website, landing page, or product, user acquisition should also focus on conversion metrics such as reference page visits (although of lower value), micro conversions (such as watching a video, clicking on a product page), or bounce rate according to the characteristics of different channels. These metrics help measure traffic quality and user behavior, and can be tracked with basic Google Analytics.
In the Google Analytics report above, we can see website visits from different channels under "Acquisition" in the left sidebar. From the report, we can see that the main single source of traffic to this site is direct URL visits and social media. This information can help us understand how people find our products and services.
Once you have established your user behavior metrics through the AARRR funnel, you need to continuously monitor and optimize. A/B testing and data analysis are essential to improving Top of Funnel Growth. Without proper testing and analysis, you can’t measure how users convert in your funnel. Once you find out how different channels drive traffic, you don’t have to focus on low-value metrics like page views. You need to focus on activating the users you’ve acquired.
User activation: Visitors begin to understand your products and services and want more
User acquisition is about making an impression, bringing the right people to your site or product, and tracking the most basic user behavior. User activation takes this a step further.
In this step, the focus is on conversions. For example, set a conversion rate metric to measure the success of a channel. You can start with the conversion rate from the home page to the sign-up page, and then include the entire user activation process.
Successfully activated users means that they see the value of your product or service and want more information. This is also the beginning of your relationship with the customer. Before this, they anonymously search for your and your competitors' products and you are not allowed to contact them. User activation should be measured by the number of visitors who take a specific action, such as registering for your product or requesting a trial. You can see this with a very simple formula: Activation rate = number of activated people / number of visitors.
In this example, let's look at a funnel report. From left to right, you can see "Visited Site" and "Created an appointment". The "Visited Site" bar chart tells us how many people visited the website, and below it is the source channel of the visitor. The activation metric we set is the number of people who "created an appointment", so you can see that our conversion rate is 0.6%. You can also find out which channel has the highest conversion rate. This can help us make more accurate decisions about future user acquisition and user activation.
User Retention: Your Customers Should Stay
Unless you are selling high-priced, low-frequency goods (diamonds, cars, yachts…), you can’t expect to build a sustainable business with a one-time sale. That’s why user retention is extremely important. User retention is the most important thing.
User retention is tracked differently for each company. If you are a mobile app company that makes free games and relies on advertising revenue, then you should track how many users come back to use your app the next day after using it on the first day. Since advertising revenue growth depends on the number of users, acquiring users and keeping them sticking to your app is the only sustainable way to grow. If you are an e-commerce company that specializes in winter clothing, then you should measure how many customers come back to buy new clothing every winter. If you are a software as a service (SaaS) company, you should measure user churn. Churn is when a user downgrades to a product or stops using it.
Reducing churn should be a top priority for all Internet companies. The simplest way to do this is to use cohort analysis (Cohort Report). In the example below, the data comes from a mobile app company that relies on advertising revenue. Looking at the left side of the report, we know when people first open the app. To the right, we measure the percentage of users who return to the app over time. We found that around 85% of users used the app more than 2 times on the first day, but only 6% returned on the second day. By day 11, only 1.5% returned. This tells us that the product has a very high churn rate.
The most important metric to track and understand for entrepreneurs or marketers is user retention. These numbers show how valuable you are to your users and customers. Low retention also makes it difficult to scale. Once you are able to retain users, you can focus on referrals.
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Every entrepreneur dreams of having users refer others to your product. It’s the purest and cheapest way to acquire users.
User referrals are ideal, but most marketing teams find it tricky to quantify referrals. It’s not easy to set up analytics to track referrals and conversions, or to set referral bonuses. Even when the analytics are there, the calculations aren’t always perfect. Let’s take Uber as an example.
Uber was once the fastest growing startup. Their user referral program led to aggressive growth, and measuring referral effectiveness was important to Uber. Each Uber user was assigned a unique referral code. Uber used the referral code to track how many times a user successfully referred someone, and how many new users each referral brought in.
They used this data to calculate a “viral coefficient.” Viral Coefficient = Invite Send Rate x Invite Accept Rate. If you have 1,000 users and send 400 invites, your invite send rate is 400 / 1,000 = 0.4. If 120 of your 400 invites are accepted, your invite acceptance rate is 120 / 400 = 0.3. Your viral coefficient is your invite rate multiplied by your invite acceptance rate, which equals 0.12.
When your viral coefficient is 1, it means that on average, each of your users will refer 1 other new user. While this coefficient is challenging, companies like Uber or Facebook have been able to achieve it in a short period of time. However, even the most viral companies don't always achieve this.
Track your viral coefficient over time to influence how fast your business grows. When you calculate how many new users an average user brings in over a certain period of time, that is, your viral coefficient reaches a certain value, you can scale your business to incredible levels by optimizing your spending. Create this formula to track your viral coefficient over time.
Monetization: You need to make money
Unless your startup is venture-backed and focused solely on product and growth, you need traditional sales and marketing to monetize. But not all monetization is created equal.
What’s important for your business is tracking the high- and low-revenue segments. Most companies only track overall revenue, without breaking down revenue per user and finding which users are breaking even or not generating any revenue at all. Breaking down revenue allows companies to send more appropriate messages to different users to increase monetization and reduce lost sales opportunities. Additionally, analytics-savvy companies have the ability to build complete marketing and sales funnels that allow them to track spend and profitability per channel, rather than relying solely on basic price per lead or acquisition metrics.
If you neglect to measure revenue per user and per channel, you won’t be able to allocate your marketing budget correctly and effectively, and worse, you’ll lose direction when operating. Even if you’re one of the lucky few companies that is venture-backed, monetization metrics can help you raise more capital in the future. Understanding monetization metrics can help you scale and reduce your reliance on venture capital after the rapid growth of your startup.
Final Tip: Apply Pirate Metrics to Your Business
AARRR is a guiding outline designed to help entrepreneurs and marketers focus on the metrics that matter most.
Data analytics is often talked about, but few businesses analyze it properly. In our experience, the reason most marketers ignore analytics is that marketing teams are often overwhelmed by all the data and options. We understand. That's why we advocate for Pirate Metrics - it simplifies a complex process.
Breaking down KPIs into AARRR helps marketers stay focused and on track. At least the AARRR metric will be more effective in maintaining and growing your business than any other metric.
