Startups are about learning and adapting fast. However, you can only change what you measure. But with so many metrics you can choose to track, the question is which are the ones to focus on. This article is about one of the most recognized startup metric framework – Dave McClure’s Pirate Metrics for Startups.
Pirate Metrics for Startups is a simple metrics and analytics framework for startups first introduced by Dave McClure (ex-PayPal now founder of 500 startups, the top global accelerator). The framework is built around assumption that in order to achieve growth, every startup needs to get customers through funnel with 5 key stages of Acquisition, Activation, Retention, Referral & Revenue. AARRR!
Acquisition means driving traffic to your site. The visitors have landed on your website, clicked around and maybe read a blog post. The most important thing is – you have their attention!
Acquisition is often used as vanity metric. However, the key to understanding user acquisition is knowing which traffic sources (ad networks, social media sites, campaigns etc.) are sending you valuable traffic. Dave McClure calls these “best-performing conversion channels”. These channels are not about sending you tons of pageviews, but rather users that do something meaningful (sign up, follow, like etc.)
Activation is about getting your users engaged. In practice it’s anything that can lead to a repeat visit – they signed up, created account, left their contact details, subscribed to blog newsletter or RSS, followed your social media profiles, downloaded promotional material etc.
New users who haven’t activated are unlikely to give you their credit card information and become paying customers. That’s because they haven’t yet developed confidence in value of the product comparing to price or the level of trust in the brand is not high enough.
BufferApp uses content marketing for user acquisition – the call to actions (CTA) placed on their blog lead users to the product.
Retention is about bringing the activated users back to your app. The more you interact with them and the more they visit your site, the more likely they are to develop trust and spend money with you.
In practice you bring users back using retention emails, special offers, by posting new content, notifications, text messages etc. A great example are Duolingo reminder emails above.
Referral is the viral element of your app. The more new users your engaged users refer the higher your growth rate and lower your customer acquisiton costs are. The amont of referrals is directly tied to how engaged the users are. A great way to measure your engagement is to measure the Net Promoter Score.
Note that referral does not belong to any particular place. It can come anytime before the revenue or after. In can happen in a form of virality (users share by using the product e.g. Instagram posts can be automatically posted to other social networks) or word of mouth.
Revenue is the ultimate goal of all businesses. Once you measure transactions, you want to find out what the lifetime value of the customer (LTV) is to optimize your CAC/LTV ratio. Weekly (or monthly) revenue growth shows how well you are doing. The earlier the stage your your startup the higher the growth percentage wise should be. If you look at the companies that made it to IPO such as LinkedIn, Zynga or Workday, their early growth was as high as 5-10% per week eventually slowing down.
At each stage of the funnel, you lose some of the potential customers as they flow from one stage to another. Your goal is to track each of the stages and minimize the churn and increase the growth. In practice it may look something like this:
So the more people convert the higher your return on investment. In fact, high customer acquisition costs are the number one startup killer so a well optimized funnel is what you should aim for. To give an example imagine you pay $1 per visitor and only 1 in 1000 converts to paying customer spending $500 in their customer lifetime. For every $1000 invested you only make $500 back, which means your startup is a loss making machine. Now imagine you end up converting 4 customers and each referring 0.5 customers at referral stage – you’re now making $3000 for each $1000 invested. Now, you’re in business.
The real value of AARRR is in it’s simplicity. There are far more complex models, but for a startup focus is the most important thing. It’s easy to get lost in tracking many different metrics but in your early days you need to be focused on 2 things: building growth and a viable business model. AARRR help you achieve both.
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