In 2007, Dave McClure, an investor in the 500 Startups venture capital fund, presented his AARRR method. AARRR is a marketing funnel formation model that takes into account five very simple and effective metrics: Acquisition, Activation, Retention, Referrals, and Revenue.
Because of the similarity of the abbreviation to the corsairs' shouting "Aarrr!", this method is also known as "pirate metrics".
AARRR SaaS Metrics helps to monitor the strategy of promoting startups and new products, and see the real picture of how your business is developing. Tracking each of the key five indicators allows determining weak points in your conversion funnel and come up with the right strategy to improve them.
For example, our client, Handprinter, identified that their product generates great interest with people at the acquisition stage, but because of the poor user experience, they fail to convert visitors into users at the activation stage. The solution we provided was a well-thought-out UI/UX redesign that helped Handprinter overcome this problem (read more in our case study).
At this point questions like “what do you mean by acquisition?” “How can I improve my activation?” and so on may arise in your head. No worries, that’s why we are here. In this article, we are going to dive deeper into each metric separately to understand how they work, how to implement them, and why they are beneficial for your SaaS startups. No more words, let’s do it!
Pirate metrics explanation
The way Dave McClure illustrated the AARRR model in his original presentation looks, let us say,.... a bit chaotic.
In fact, everything is simple.
AARRR is a sales funnel for a startup. If to order all 5 stages based on the number of users, starting with those who just came to the website and ending with those who made a purchase, we will get the following scheme:
Image credit: blog.tability.io
You need those actionable metrics to calculate the conversion: the number (or percentage) of users moving from stage to stage. The beauty of these five metrics is that they all are built on one another. The number of people that will move gradually down the funnel and eventually make a purchase depends on how thoroughly you will work out each stage.
Now, let’s one by one analyze each indicator from the pirate metrics.
The acquisition is about getting visitors to your website and making them sign up for your service.
For most SaaS companies the goal at this stage is to make the user sign up for a free trial of the product. However, if you have micro-conversions on your website (such as email subscription, call-back request, etc.), you can break down customer acquisition metrics and measure their performance separately.
Tactics to use:
- SEO optimization
- Guest posts
- Webinars in which you are a speaker/invited guest
- Email newsletter
- Contextual advertising
How to implement:
You are the one to decide which tactics to choose.
In case you have enough time and budget then test as many options as possible. You may create a table in Excel and put all the information about each campaign there (name of a campaign, type of target audience, number of transitions from the advertising to your website, amount of conversions, cost per customer). This way you will see which campaigns bring more conversions and benefit the development of your business, and which tactics are better to give up.
If you have limited time and budget, then it is better to start with those tactics that are most likely to be successful. At the end of the test period, you draw conclusions whether the channels and methods of business development were chosen correctly. You can understand it by measuring the cost per customer (to measure the cost per customer take the number of transitions to the site from a certain channel (we take the data from Google Analytics) and divide it by the money spent).
1. СPC - cost per click.
2. CPL - cost per lead.
3. СTR - click-through rate.
4. Leads - the number of leads.
5. Bounce rate - the number of users who left the site immediately after opening.
You can go and acquire a person to come into your SaaS app, but that doesn’t necessarily mean they activate (become a user). Activation means your leads take a meaningful set of steps to move forward in the funnel. If they just register and then leave to never come back, they never become activated.
Some examples of activation may be making the first booking on Airbnb, checking the first text with Grammarly, sending the first email as a new Gmail client, etc.
Take a look at how Evernote engages users explore their solution further. It sends a set of educational emails listing some special features and how to use them.
If the user interface of your app is consistent and the software is convenient and useful, then the customer will catch their “aha moment” and will be willing to continue using the app. If the transitions to the service did not result in action (conversion), analyze the behavior of users and figure out at what point they left the page.
Tactics to use:
- Optimize the onboarding process to make the product more understandable for users.
- Simplify the registration process.
- Offer a free month or demo.
How to implement:
- Choose the tactic. Based on it create prototypes and test them. Make several different variants of the onboarding process/registration forms with different approaches to the target audience, different designs, etc. Focus on the needs and problems of your customers.
- Do A/B testing to find out which variant works best in the chosen strategy.
- Collect a base of activated users and analyze their actions. Pay attention to the way they interact with your product. As well, analyze which features of your app they don’t use. These observations are the key to what you need to improve and change in your app.
- CPA - the cost per acquisition: registration, subscription, a transition from free to paid version.
- Engagement - duration and depth of the session.
- Bounce Rate - the percentage of bounces.
After you have activated users, you need to make your product impossible to give up.
Retention is the most important stage for any SaaS business, as most cloud companies use a subscription-based pricing model. It means you can once acquire a customer and keep getting a predictable amount of revenue for an unlimited period of time (in case the client sees the value and is satisfied with the service you provide).
And that’s really crucial because acquiring new customers is difficult and costly, but if you optimize retention, you will have a consistent relationship with the customer and get a predictable flow of revenue coming in.
For example, Grammarly has come up with a creative idea of sending retention emails to users in a form of achievements.
Tactics to use:
- Email newsletter (e.g. describe how you improved the functions that the client has already used)
- Weekly digest
- Improve user experience.
How to implement:
Track the statistics of how often customers use your service and at what point most users leave your app. Monitoring the churn will help you to identify what features in your service require improvement.
To keep your customers, you should find out what they love most about your app and how they receive the value from using it. Ask your most devoted clients what they do in your application, what features they use more often, and why.
Don't forget to take care of customer support as one of the working strategies to reduce the churn rate. Listen to your users and react to their feedback as fast as you can.
Once again, the most effective way to make your customers come back to your app, again and again, is to learn what they value most about your product. Keep improving the most popular functions and never stop refining the user experience.
A consistent and intuitive design of your app is what unveils your solution's most powerful features and lets users see its true value. At Eleken, we managed to help many SaaS companies make their products hard to give up thanks to a well-thought design.
- Session duration - how long the user interacts with the product during one visit.
- Customer return rate - how many users reuse the product over a certain period.
- Customer churn - how many users stop using the product over a certain period (for example, a month).
It is at this stage of retention that your customers become brand advocates. Your task is to take care of them and encourage them to spread the information about the company.
This is where the referral phase begins.
If you acquire a customer and then they activate and keep using your app and they love it so much they start telling other people about it, either through word of mouth or through some referral system, or whatever it may go, they invite their friends or team members to use your product and it is the referral metrics stage.
The goal here is to encourage users to recommend your product. Do everything to make the process of sharing quick and easy.
Tactics to use:
- Send email reminders about your referral program
- Offer referral rewards (cashback, discount, etc.)
- Offer two-sided reward (like Airbnb that offers credits if someone signs up with your shared link)
- CSI - Customer Satisfaction Index (measured through testing).
Income is an indicator of whether you have successfully completed all the above stages.
Only those users who fully understand what value your product gives them will proceed to the revenue stage.
The main goal at this stage is to receive first money from your customers.
Tactics to use:
- Add a step of connecting the payment card for users before they start a free trial
- Configure push notifications that will inform the user about the limitations of the free version and offer to switch to the paid version.
- Consider up-selling and cross-selling
- ACV - average contract value
- LTV - life time value, profit from a client for the entire time of working with him.
- The total amount of proceeds for a certain period.
Revenue was the last “R” in the AARRR framework. If you start to make decisions on how to optimize each of these core metrics that means you can accelerate the path to the next stage of growth of your cloud business.
Does the customer journey end here?
And the answer is, of course, no. It’s just the beginning.
AARRR funnel framework is a great start. It helps to:
- See the entire customer journey
- Recognize the bottlenecks of the funnel
- Check each stage separately and adjust the client's behavior
The metrics are transparent enough to customize the flow of customers when launching a SaaS project: from acquisition to activation and purchase. But this model only considers the number of people at each stage of the funnel. By relying solely on these metrics, you will not be able to fully gauge the long-term performance of your actions, so you must keep track of other important metrics as well.
If you need some more guidance on how to track the right numbers that matter specifically for SaaS, take a look at our article about Financial KPIs for SaaS Companies, or for those who prefer more traditional variants check the list of best books on SaaS metrics.