Conversion Optimization Applied

AARRR

I want to begin by introducing a framework called “AARRR”. In 2007, Dave McClure introduced a 5-step framework for growth called “AARRR” (or alternatively “Pirate Metrics”, think about it…”aarrr”? The sound a pirate makes…yeah). AARRR is a widely used framework for taking data driven action to improve marketing efforts throughout the customer journey. The name stands for the five stages of the journey: Acquisition, Activation, Retention, Referral and Revenue. In this section, I’ll take you through AARRR at a high level. However, for a deeper dive, there are a lot of good online resources. On that note, let’s jump in.

Phase 1 — Acquisition

The first “A” in the framework is for Acquisition, the process of people first learning about you (aka “awareness”) all the way through to them taking their first “meaningful” action (the definition of which varies by business model). For instance for a SaaS platform, that might be a user signing up for a free trial, for an ad supported website, it might mean the first visit, and for an ecommerce site, it might be perusing product offerings for the first time. The point is, the definition depends on the context which can also be said for the framework in general. Its application is very circumstantial. Let’s look at some examples… Acquisition In Action – Example 1: Enterprise SaaS Platform For example, for an enterprise SaaS platform business an Acquisition flow might look something like this:

Step 1: Site visit
Step 2: Email signup
Step 3: Webinar attendance
Step 4: Call with a sales rep
Step 5: Sign up (for a trial and/or as a paying customer).

Each of these steps counts as a conversion (micro and/or macro) and needs to be measured to be able to understand the customer journey so you can optimize it. Applying a conversion optimization process that might look something like this:

1: Analyzing user behavior patterns
2: Drawing insights
3: Asking questions and developing hypotheses
4: Designing experiments to test those hypotheses
5: Prioritizing work coming out any learnings and implementing improvements
6: Going back to #1 and starting the process again

For enterprise SaaS (or any other business for that matter that relies on a sales team to close the sale), one of the major differentiators between traction and non-traction is the difference between a plain old lead and a “qualified” lead. The former might be any site visitor who just provides their contact info, maybe in exchange for a downloadable whitepaper (what marketers call a “value exchange”, i.e. give me your email address and I’ll give you this thing of value). As you can imagine a lead like that is hardly qualified. The contact was coerced into giving their info, and may not even be close to making a purchase. However, if they go on to complete a few of the subsequent steps in the Acquisition flow — e.g. Step 3 (attending a webinar) and Step 4 (a call with a sales rep) — it reveals a higher level of engagement making them a more qualified lead. Acquisition In Action – Example 2: Ad Supported Website Another example is an advertising-supported business model (i.e. a business selling eyeballs). For any business of this sort, there are three core sets of questions that relate to marketing and conversion optimization: Question Set #1 – Traffic Volume:

Which marketing channels are driving the most traffic?
Why are certain channels excelling at driving traffic while others are not?

Question Set #2 – Traffic Value:

Which marketing channels are driving the most valuable traffic?
Why are certain channels driving more qualified visitors while others are not?

Question Set #3 – Marketing Efficiency:

Which marketing channels are most efficient?
Why are certain channels more efficient than others*?

(*In other words, which channel comes with the lowest customer acquisition cost? Note, question set #3 will be partially answered by the answers to question set #2. Imagine, for instance, if the cost per click (CPC) to get someone to your landing page is the same for two of your marketing channels but it takes twice as many clicks to get a visitor to convert on the second one, then the cost per acquisition (CPA) for that second channel is going to be double that of the first. Another way of saying that is that the second channel is half as efficient.) So what are we getting at here? It’s likely, especially early on, that one channel is optimal and to find it, you need to track micro-conversions using conversion optimization. Then, once you’ve identified that channel, you’d methodically test and optimize every part of your communication, also using a standard conversion optimization approach, until you arrive at your sweet spot. And finally at that point, you would put all your weight behind that one channel to drive growth. And here’s how conversion optimization might look in this scenario:

Conducting analysis and drawing insights: looking at all data relating to those question sets and identifying suggestive patterns
Developing hypotheses: developing hypotheses from the patterns you’re seeing
Designing experiments and measuring results: designing and conducting experiments to test your hypotheses
Applying insights strategically: prioritizing the work identified by the results of the experiments and implementing changes

Keep in mind that if every single channel fails, it’s likely that there’s something wrong with your product/market fit. But short of that, this approach is a great way to drive results in the Acquisition phase of the framework.

Phase 2 — Activation

The next “A” in the framework is for Activation. Activation relates to the first time a customer recognizes the value they’re getting from a product or service and that realization serves to make them more loyal customers. It’s what marketers call an “aha moment”. Facebook defines its “aha moment” as when a new user obtains seven new friends in a period of ten days, an inflection point where a user becomes more engaged with the Facebook platform. And based on that insight, Facebook added ways for users to sync the platform with their email provider which made it so Facebook could dynamically suggest people to invite to Facebook from a user’s contacts. For Twitter, this inflection point is when a new user has followed at least thirty people, which is why Twitter always suggests accounts for you to follow. So let’s look at some Activation examples… Activation In Action – Example 1: SaaS Platform Going back to the SaaS platform example, for SaaS companies one of the critical steps in the marketing funnel is to give away free trials with the intention of ultimately converting these trial customers into paying ones. So converting people into paying customers after the free trial period is vital to the sustainability of the business. And in this case, free trials are an expense, they don’t generate any revenue and cost a lot to support, so the business lives or dies based on how well it convinces trial customers to become paying ones. In the context of our framework, signing up for the free trial constitutes Acquisition but without the Activation step the business model doesn’t work. So how might Activation be done effectively? In short, by helping trial customers get more value out of the platform and thus helping them justify the cost of subscription. Some ways that might be done include:

Approach 1: Offering video tutorials to trial customers in an effort to turn them into more effective users of the platform. Ones that can take advantage of the productivity gains it affords.
Approach 2: Make it easy for trial customers to integrate the platform with other software tools they’re already using so together the two platforms provide a better overall solution for the business than either one does on its own.

Each of these approaches can be broken into micro-conversions, tracked and optimized, and the cumulative effect can be measured for how well it ultimately drives the goal of converting customers from trial to paying (the macro-conversion). For instance, with respect to the video tutorials idea, maybe one of the micro-conversions is “video completions” — in other words, watching a video in its entirety. The logic being: the more training videos people watch all the way through, the better they’ll be at mastering the concepts and skills explained in them. And the better they’ll be at applying those skills when using the platform. And thus the better the results they get from it. And ultimately, the more value they’ll see from the platform. So in this case, the marketer’s job would be to:

1. Measure the conversion rate (video completions)
2. Assess what the data is saying
3. Formulate hypotheses to explain it
4. Based on the hypotheses, design and execute experiments for ways to make the training videos more engaging and effective.

Activation In Action – Example 2: Ecommerce Business Now let’s look at an ecommerce business. AARRR is most often applied to SaaS but can easily be adapted to ecommerce to drive consistent and repeatable growth. Remember Activation is the first time a customer recognizes the unique value they’re getting from a business. In the case of an ecommerce business, Acquisition is them coming to the site for the first time whereas Activation is them taking a deliberate action, like:

Starting checkout
Carting a product.
Registering.
Subscribing to a newsletter

These types of actions serve as clear indicators of purchase intention, and can be measured using our conversion optimization process. I’ll explain — let’s say on your website you give people the opportunity to subscribe to newsletters that offer access to exclusive deals. In this case, there are three core conversions in the customer journey:

Getting visitors to sign up for promotional emails by making an attractive pitch with your marketing messaging (Activation)
Getting email recipients to buy by offering attractive deals in your emails (Revenue)
Getting these new customers to buy again by providing excellent customer support (Retention)

Notice in the above flow that Revenue comes before Retention. That is one of the “adaptations” I referenced needing to make when using the AARRR model for ecommerce. Remember our initial order of stages: Acquisition, Activation, Retention, Referral, Revenue. For ecommerce, we’d change the order so that Revenue (i.e. the first purchase) happens before Retention (repeat purchases), so our flow becomes: Acquisition, Activation, Revenue, Retention, Referral.

Phase 3 — Retention

Retention means different things for different businesses. For a SaaS business, high retention generally means that people are subscribing, actively using, and importantly, staying subscribed. For an e-commerce business, it’s measured by repeat purchases. In any case, Retention, as a marketing discipline, is about building high enough engagement with existing customers that they continue buying your products or services and Retention is arguably the most important marketing activity for any business. Consider the following from the perspective of conversion optimization:

Increasing retention by a mere 5% can lead to a 25-95% increase in profits (Harvard Business Review)
The probability of selling to an existing customer is ~60-70% whereas selling to a new customer it is only ~5-20% (ClickZ)

Effective Retention efforts enable a business to build lasting relationships with customers which get them to stick around, which increases their lifetime value (LTV) and improves the chances they’ll refer the business to others. Churn The opposite of Retention is Churn so it’s imperative to continually measure your customer churn rate, especially if the business model is subscription based. Doing so helps keep tabs on the rate at which the business is losing customers (i.e. the “leaky bucket”) and serves to prioritize the marketing spend. Additionally, Churn can tell you whether you’ve achieved a good product/market fit. If a lot of people drop off after using the product then something is amiss with the product and/or messaging. So how can you increase Retention? In the famous words of Bill Gates: “Your most unhappy customers are your greatest source of learning”. In other words, employ conversion optimization:

Analyze and Interview: Look at user behaviors for patterns that indicate adverse effects that explain your Churn. And solicit feedback from customers to better understand their behavior — why they unsubscribed, why they didn’t purchase again, etc. Net Promoter Score (NPS) is a great method for understanding the level of satisfaction of a customer base and garnering actionable insights for improving it (more on NPS below).
Develop Hypotheses: Think about ways you might address these customers’ issues.
Design Experiments: Design experiments to test your hypotheses.
Analyze Results: Analyze the results of your experiments
Prioritize and Implement: Prioritize the work implied by those results and develop an implementation plan.

Net Promoter Score (NPS) NPS is a management tool developed by Bain & Company, used to gauge the loyalty of customer relationships. It works by surveying customers with a simple question: How likely is it that you would recommend our [company/product/service] to a friend or colleague? Answers are recorded on a scale of 0-10. Those who respond with a score of 9-10 are deemed “Promoters”, and considered likely to exhibit so-called “value-creating behaviors”, like repeat buying, customer longevity, and referring the business to others. Those who respond with a score of 0-6 are labeled “Detractors”, and considered to be less likely to exhibit “value-creating behaviors”. Scores between 7 and 8 are considered “Passives”, and in the case of the business, are considered the best opportunities to become Promoters.

Phase 4 — Referral

The most efficient way to grow is by way of customer referrals. To successfully drive referrals, businesses need a systematic approach to consistently incentivizing that behavior. This is an area where NPS can be used to great effect. NPS can tell you a lot about the state of an existing referral program or the potential to implement one, and where you need to start when it comes to applying your conversion optimization process.

Phase 5 — Revenue (and Profitability)

What’s the best way to grow Revenue and profitability? By increasing the customer lifetime value (LTV) and decreasing customer acquisition costs (CAC) — your average cost of acquiring a customer. The rule of thumb ratio is an LTV to CAC of 3:1. And the most effective way to optimize LTV and CAC is through conversion optimization paired with the AARRR framework, plain and simple.