A startup is not a proven business model. At the beginning of the journey, the founders suggest and test ideas and hypotheses, changing scenarios and adjusting the product. AARRR metrics review several stages of the customer’s life cycle and help track the dynamics of the company’s development. They determine if the strategy was chosen correctly and find the possibilities for scaling.
Each step of the consumer has its own key performance indicators (KPI). Assessing them is useful for both startups and larger organizations mastering something new, be it a market, an audience, or a product.
Concept of AARRR
In 2007, founder of 500 Startups and venture investor Dave McClure developed AARRR — analytical metrics for evaluating and assessing startups. The model consists of five elements, corresponding to the stages the user goes through:
The AARRR method demonstrates the number of users at each stage of the funnel, indicating conversion (the number of people moving from stage to stage) and some other parameters.
Since the abbreviation makes one think of corsairs’ cartoonish “Arrr!”, it gave the pirate metrics its nickname. The AARRR system is used to analyze and make product decisions, tracking which KPIs are underperformed. In a general sense, pirate metrics are categorizing a startup’s performance by stages of the customer’s life cycle.
The model works well with companies that introduce IT products to the market, such as applications, services, online stores, and so on. For example, a startup offers a data storage service to the market. To achieve the company’s business goals, the AARRR funnel is used:
- Acquisition — to lure a client to the company’s website from social networks.
- Activation — to make a user sign up or create an account.
- Retention — to convince potential buyers to use the storage service by showing benefits.
- Referral — to make users bring in their friends and acquaintances.
- Income — to sell a paid subscription, additional storage space, and so on.
Each stage describes the company’s interaction with the target consumer, assessing if the goals were achieved. Also, AARRR is successfully used by well-established larger businesses when they need to master something new (a product, an audience, other customer needs, etc).
Purpose of pirate metrics
The AARRR method allows startups to focus on the main stages of customer interaction. The purpose of pirate metrics is to optimize the company’s activities, increase user conversion and income.
AARRR also covers the following tasks:
- Understanding customers’ journey and needs to properly scale the business.
- Identifying weak points of the funnel.
- Regulating client behavior at specific stages.
- Prioritizing and classifying tasks by importance, solving only those problems that are crucial at a certain stage. This makes it possible for startups to save significantly more time and effort.
Pirate metrics create a transparent business structure, allowing you to manage growth, navigating and rebuilding quickly in changed conditions. They give the team an understanding of what KPIs it can influence at each stage of interaction with the target audience.
When the AARRR framework is useful
The AARRR tool is useful for:
- startups designing a Customer Journey Map,
- growing companies that are ready to scale,
- larger organizations mastering a new niche, target audience segment, or product.
It is useful for a startup to apply the AARRR method during the market introduction and first sales. CJM and KPI give the team useful insights on how to attract, hook, and retain the target audience while monetizing the product. The analysis at the initial stage already helps determine whether the startup has potential.
Pirate metrics are efficient at the growth stage when the company has a working business model and enough time and resources to test hypotheses. Separate stages of AARRR reveal mistakes and shortcomings that require optimization for successful scaling.
We would also advise a larger company to use pirate metrics for further development, achievement of global business goals such as a dominant market share or an IPO, and solving problems whenever they arise (decrease in demand and / or revenue, strong competition, etc).
Acquisition Activation Retention Referral Revenue Model — 5 Key Steps
When visualizing the AARRR model from the most to least number of users, you get a graphic representation of a funnel. Start with the number of users acquired and end with those who ultimately made a purchase.
For example, 200 people moved from a social network to an educational website with online courses through a promo post. This is the stage of acquisition. 80 users scrolled some pages for several minutes and closed the website.
However, 120 people liked the offer and moved to the activation stage. More technically speaking, 20 bookmarked the website, 70 subscribed to the newsletter and free articles, 30 subscribed to the Telegram channel.
By the retention stage, there were only 60 users left. This is due to the fact that only 10 active subscribers remained in the Telegram channel, while the rest clicked the links several times and unsubscribed. 10 out of 20 forgot about bookmarks in the browser and did not come back. 40 people still get free articles and news, the other 30 unsubscribed from the mailing list.
At the referral stage, 15 people shared links in social networks.
Finally, only 5 people moved to the revenue stage as they decided to purchase paid educational courses.
Pirate metrics help you find out the conversion, i.e. the proportion of users moving from stage to stage. The better the analysis, the more people you will be able to turn into income-generating customers.
Let’s take a look at each stage of AARRR separately.
The first step is to understand where users are coming from and which channel is the most effective. The choice of how to attract customers depends on the goals of the research, the startup’s budget, time available for the team, product specifics, and other related factors. You can use various channels:
- contextual and / or targeted advertising,
- offline advertising (TV, radio, billboards, business cards, leaflets, etc),
- videos, posts on social networks,
- expert publications in the media (industry media),
- Telegram channels,
- (for apps) Apple Store and / or Google Play,
- SEO promotion,
- email newsletter.
If a startup has enough time and money, it makes sense to mix and test as many options as possible. At the same time, all channels are summarized in a table comparing performance in order to subsequently determine where the conversion is higher and whether the costs are justified.
If time and money are limited, the team selects several key acquisition methods which are also analyzed in the table. The results help in assessing if the chosen channels are effective.
You can track acquisition data using systems for business analytics and online services (Yandex.Metrics, Google Analytics). The metrics to define at this stage include:
- CPC — cost per click,
- CPL — cost per lead (the ratio of costs to the number of clicks from the channel),
- СTR — click-through rate (the ratio of clicks to impressions),
- the number of leads,
- CPM — cost per one thousand impressions,
- bounce rate — visitors who left the website immediately after visiting.
For individual channels, performance indicators may differ. Bear in mind that at this stage of AARRR, it is important to monitor both the size and quality of the audience. It’s unwise to attract 100,000 untargeted people who bring no income.
The purpose of the activation stage is to make the user interact with the product so that they close their need. This is the moment acquisition transforms into a certain target action, which may include:
- signing up,
- subscribing to news, mailing lists,
- ordering a callback or a free consultation,
- using the trial version of the product (the most common activation method for IT startups).
If the user performed such an action, it means they got activated. If acquiring a user did not end with conversion, you should analyze customer behavior using statistics and special services (time spent on the website, specific areas of interest, and so on). You should also record negative actions, i.e. what the user refused to do when they left.
The activation stage metrics may include:
- CR — conversions;
- CPA — cost per action (signing up, subscribing, etc);
- the total number of authorized users (subscribers) for a specified period;
- engagement — duration and depth of the session;
- the number of views of certain pages of the website;
- bounce rate.
To fix the issues with the activation stage, it is necessary to figure out what repels users, what fails to impress them. We also recommend you introduce and test new methods of making users perform the targeted action. For instance, you can simplify the sign-up process, describe the product more understandably, introduce onboarding, offer discounts for providing contact information or following your social networks, and so on.
The goal of the stage is to transform users into clients by retaining them and reducing the churn rate. To do this, it’s important to understand why the consumer abandons the product. Not everyone who has registered on the website will return to it. And those who agreed to a free demo do not always become paid users. The task of a startup is to retain a client by using the most effective methods, for example:
- email newsletter,
- push notifications,
- posts in social networks, Telegram channels (initiating discussions to identify the product’s weak points),
- service and technical support for the user.
It is recommended to use personalized notifications and emails as they find a response faster. What we mean by that is it wouldn’t be appropriate to offer electric shavers to a user who has just added a smartphone to the cart.
It’s also worth finding how often a person returns to a product. However, the frequency might vary. For example, a client can launch an accounting program once a month, but a banking application is used every day.
The metrics of effective retention also include:
- Time of interaction with the product per visit. How the activity is distributed during the day, week, month.
- The total period of using the product.
- Churn rate (CR) — the ratio of lost customers to all users. In general, the indicator should not exceed 5%.
- The ratio of clicks on push notifications to total impressions.
- Views of posts in social networks and Telegram channels.
Communication with the user (questionnaires, surveys, interviews) will help improve retention rates by identifying and eliminating weaknesses in the product. You can try to return the consumer by sending an email explaining how to improve product functions, providing examples of successful cases, and introducing loyalty programs. The key is to never deceive users’ expectations. Otherwise, their journey in your startup will most likely be interrupted.
This is where a user begins to recommend the product, sharing their positive experience with the target audience. As a result, the company gets new customers through existing ones. If a startup has well-detailed elements of AARRR, there will be no significant problems during the referral stage.
Great reviews form a brand reputation and increase customer loyalty. Here, it is important to simplify the process of referring friends and subscribers to your product while also motivating clients to share their experiences.
- Put the “Share” button on the website (in social networks, messengers).
- Send an e-mail request to leave a review about the product or service.
- Introduce affiliate programs that provide certain benefits for attracting other users.
- Offer bonuses for spreading feedback about your company, i.e. great reviews, reposts on social networks, and so on.
The key metric is the viral factor, which is calculated by the formula:
K = X × Y × Z, where:
- K is the viral factor,
- X is the share of users who have invited new potential consumers,
- Y is the average number of people invited by one user,
- Z is the number of people who accepted the invitation.
The higher the K factor, the more viral the product is, the more users like it and recommend it. Other performance indicators of this stage include:
- NPS (Net Promoter Score) is a difference between the numbers of product supporters and critics. You can calculate it during surveys.
- CSI (Customer Satisfaction Index) is also calculated during surveys where users are asked to rate the performance of a company on a 10-point scale.
This stage includes not only motivating clients to spread positive feedback about the startup but also working with negative reviews. This way, you gather information on weak points of your product that need optimization. The company’s response to bad reviews and desire to fix the problem (or better, real actions and a deadline) will enhance loyalty and keep customers.
This stage defines the best thing about running a business: income. It shows how successfully the previous stages of AARRR have been completed. This is where the money comes from customers who understand the benefits of the product and are ready to pay for them.
Depending on the type of product, moving the consumer to the revenue stage can be achieved by offering:
- Paid subscription after using free content for a certain period of time.
- Extended functionality after testing the demo version.
- Advanced courses after free basic training.
- New levels of a computer game after passing the free version.
Hypotheses can be different depending on the specifics of the startup and product.
Metrics used to assess the effectiveness of a startup at this stage:
- Increase in paid users.
- Customer Lifetime Value (LTV) — how much net profit one customer brings over the entire period of product use. To calculate LTV, consumer’s margin is multiplied by their average life expectancy. Life expectancy is defined as 1 / CR (customer churn). The lower the score, the worse the startup’s position. A negative LTV result indicates that the business is unprofitable.
- Average check (ARPU) — revenue per customer per month.
- Total revenues.
- Cost of customer acquisition (CAC) — the ratio of marketing costs to the number of new customers.
- MRR (monthly receipts) growth rate — a stable increase from month to month indicates that a product has a good pace of development and satisfies both clients and the market.
This stage shows that apart from custom metrics, the AARRR tool must include business metrics. The final stage of the funnel demonstrates how the real situation corresponds to the predicted business model. When a client brings no income, it is important to analyze what prevents them from buying a product and how to fix it as quickly and efficiently as possible.
Using AARRR when you are not Dave McClure. Summing it up
There are no clear hypotheses or formulas that help you use the AARRR model. It all depends on the product specifics, customer journey, and startup priorities. There is no universally working system that suits everyone. In each case, the team is acting all by itself. It chooses how to differentiate the stages, what target actions are expected, what performance indicators are, and considers other aspects of research and analysis.
The sequence and order of the stages are also quite flexible. You can swap them, remove or add them. Sometimes companies put Awareness as the initial stage, describing aspects of a person’s need and future channels for obtaining information about a startup or a product. In this case, the model is called AAARRR. Also, Referral and Revenue are often reversed, with the last step being the Referral. It’s up to the team which sequence it prefers. In the classic version of Dave McClure, the Referral stage goes before Revenue with Revenue completing the funnel since it’s the main indicator and a goal of the company.
The order of the elements and the focus on individual stages should reflect the specifics of the startup and customer's journey. But when moving to a new stage, it’s important to preserve and consider the results of the previous one. The goal of the AARRR model is to help founders understand their business. It makes them ask the key questions:
- What are the stages of my funnel?
- What indicators can be used to measure the effectiveness of each level?
- How to improve the efficiency of each stage?
Essentially, calculating pirate metrics and testing hypotheses within the framework of AARRR determine if the startup has enough potential to launch a viable product. And you can find your answers already at the initial stage.