Ever heard of AARRR? Or Pirate metrics? Or AARRR framework / pirate framework? If so you might wonder: what does AARRR stand for?
Well, entrepreneur and start-up guru Dave McClure developed the pirate metrics or AARRR framework to help businesses achieve data-driven growth. AARRR stands for acquisition, activation, retention, revenue and referral and basically describes a funnel. Optimizing this AARRR funnel will help you understand your customers’ journey and thus grow your business.
Acquisition
The first A in AARRR refers to the process of how people find your product or service and turn into customers. You need to consider both, how many people visit your website and how many of those visitors turn into customers. To gain a better understanding of this process it is crucial to track every step of the customer journey including often underrated micro-conversions as well as macro-conversions.
Here’s an example of a customer journey :
- User sees a Facebook ad.
- Clicks on the ad, lands on the website, browses the products but doesn’t buy anything.
- Gets a remarketing ad suggesting newsletter signup for special offers a few days later.
- Clicks on ad and signs up for the newsletter.
- After the 3rd mail goes back to your website and buys the product.
Optimize your channels
Every step in this process (except for the sale) is a micro conversion. This logic of actions is called a sales funnel.
In order to optimize your acquisition channels we suggest testing the channels one by one on a small scale. If your tests generate positive results you can continue to optimize the channel and scaling it. Should the results not be satisfying, try the next channel using the same approach. Stick to this methodology and you should find at least one channel that drives high-quality traffic to your website.
If none of the channels seem to take off, you might want to re-evaluate your product.
Three questions to help you understand acquisition.
- Which channel is driving the most traffic to your website?
- What channel converts best?
- Can you find the lowest acquisition and conversion cost per channel?
Activation
The second A of the pirate metrics refers to activation, the first experience a user has with your product or service. It is not enough to get people on your website or app: you want them to come back and keep using it.
The sooner your customers experience the “aha moment”, the better.
Activation describes the timespan between the user’s arrival on your website and thinking “Woah, this is awesome”. The instant they’re convinced that your product is useful for them, they’re activated and will use your product regularly.
A good AARRR example for activation is Facebook‘s AHA moment. It happens after a user has connected with 7 friends over a period of 10 days. These 7 friends and the timespan are the average requirements for a user to experience the “aha moment”. Knowing this, they included a functionality to sync Facebook with the users’ e-mail contacts to accelerate this experience.
At Dropbox they realized that users who upload a file are more likely to understand Dropbox and keep using it. As a consequence they integrated the first upload in the sign-up process.
Experiments tell you what activates your users.
These findings seem obvious but can be hard to obtain and require a solid understanding of your customer. In order to understand your audiences in the same ways the big players do, you need tracking tools like Google Analytics or Kissmetrics.
We highly recommend that you test different strategies to find out what works best for you.
Three questions to help you understand the activation AARRR metric:
- What’s the best way to make sure users understand your product as fast as possible?
- Which factors must be given in order to guarantee a positive user experience?
- How can I set up my tracking to find these factors?
Retention
Retention is about your ability to make users come back and regularly use your service or buy your product. It is one of the most important parts in the pirate metrics framework, as it reflects people enjoying your product. The opposite of retention is therefore referred to as churn: the percentage of users that you lose in the process and does not come back. Understanding your churn rate means understanding if your product is actually useful or not. To understand why people are churning, you should talk to unhappy customers to learn what they did not like.
You could start by reading negative reviews and comments or use surveys to do so. If a high number of people try your product but 99% churn, the problem lies with your product.
You could start by reading negative reviews and comments or use surveys to do so. If a high number of people try your product but 99% churn, the problem lies with your product.
In order to achieve growth, your churn rate must be significantly lower than your acquisition rate.
It’s like pouring water into a leaky bucket. The bucket is your product, the water your customers and the leaks are the problems with your product. Make sure you find and repair the leaks in the bucket before pouring water into it, otherwise you are wasting time and money.
It’s all about trust.
Once a person bought from you, you convinced them and they start trusting you. It is important to leverage this trust, especially since it is cheaper and easier to upsell than to acquire new customers. Keeping your customers happy and retaining them is the only way to long-term success. Value your customers, listen to their feedback and don’t break the trust.
“If there’s one reason we have done better than of our peers in the Internet space over the last six years, it is because we have focused like a laser on customer experience, and that really does matter, I think, in any business. It certainly matters online, where word-of-mouth is so very, very powerful.”
-Jeff Bezos, CEO of Amazon
Three questions to help you understand retention:
- How many of people that converted use you product regularly?
- What is your churn rate and what’s causing it?
- Using your findings, what can you do to improve customer retention?
Revenue
Every organization needs to have a revenue strategy or monetization plan in place, and the second R in AARRR is about getting that money! Let’s focus on the two main factors that you should consider to optimize your revenue:
Customer Lifetime Value (CLV) and Customer Acquisition Cost (CAC).
CLV describes the revenue you can expect from a customer. The formula to get CLV is quite simple :
CLV = (Annual revenue per customer * Customer relationship in years) – Customer acquisition cost
This formula helps you understand how profitable your customers are on average. Furthermore it tells you how much you can spend to acquire a customer by estimating the return you can expect.
The customer lifetime value can be enhanced through upselling, optimizing customer retention and a variety of other measures.
Customer Acquisition Cost (CAC) describes the amount of money you need to spend to acquire one new customer. The formula goes as follows:
CAC = (Total Marketing + Sales Expenses) / Number of New Customers Acquired
Sum up your marketing expenses and divide them by the number of new customers you acquired with that budget. Apply this formula to every marketing channel to see which channels work best and where to optimize your acquisition process.
To optimize CAC you need to optimize your acquisition channels and focus on the ones that work best. The next step would be to build customized sales funnels around the best performing channels.
Three questions to help you understand revenue:
- What is your average customer lifetime value and how can you improve it?
- What is your average customer acquisition cost per marketing channel?
- How can you optimize the channels that work well?
Referral
Referral is probably the most underrated of the five steps and ironically one of the core pillars in growth hacking. Jeff Bezos already mentioned it: “word-of-mouth is so very, very powerful”. In that sense, referral is all about turning happy customers into advocates since word of mouth is very powerful. In order to leverage it, you must have a referral strategy in place that offers users an incentive that’s worth the effort. A good AARRR example for referral is Dropbox, who offers free extra storage for users that invite friends to join Dropbox and the Dollar Shave Club offers clients 5 Dollars worth of credits for every friend a user refers.
Dollar Shave club produced this youtube video with a budget of 4.500 Dollars :
According to Entrepreneur.com over 12.000 people subscribed to the dollar shave club in the first two days after releasing the video and another 12.500 by the end of the week.
They also state that all of those 25.000 customers were referred by people that were already dollar shave club customers and/or followed them on social media, saw the video and shared it with their friends.
Btw, the video has over 25 million views.
Why are we telling you this? Because we want you to get creative!
Three questions to help you understand referral:
- Do your customers like your product enough to refer it to their friends?
- If yes, how can you provide a lucrative incentive to motivate your users to refer you?
- If they are not referring your product although you have referral in place, what could be the reason?
Final word
The AARRR metrics or pirate metrics are just the tip of the iceberg. The truth is, there is no magic formula that works for everybody.
If this article was helpful to you, you check out the neon academy and learn how you can take your online marketing to the next level.
This article is also available on medium.com