In an ever more unpredictable business landscape, where new competition emerges overnight, customer’s loyalties shift erratically and exogenous economic shocks are a regular occurrence, every company, large or small, needs to be leveraging data-driven strategies to more efficiently grow their businesses. From the leanest of startups to the most established firms, this is imperative. And companies not able to risk being disrupted by a competitor who is.
A study by Innosight found that the half-life of corporations, across industries, was about ten years, meaning half of today’s public companies in the next ten years will cease to exist. “Efficient growth” is the operative term, which brings me to the topic of this article: the AARRR framework.
In 2007, Dave McClure introduced AARRR, a framework made up of five interlocking stages designed to help online companies better measure and analyze the average life cycle of their customers so they can strategically influence it to drive business growth. The stages of the framework starts from initial touch point, when a customer is first introduced to the company, to that customer becoming a paying one.
The name AARRR is an acronym that comes from the five stages of the framework that a customer progresses through in the course of their relationship with the business:
- Acquisition
- Activation
- Retention
- Referral
- Revenue
AARRR is also commonly referred to by the moniker, Pirate Metrics, which comes from how, when saying the acronym, one tends to sound like a pirate (i.e. “AARRR”). I know that all sounds a little hokey but make no mistake, lots of companies have used AARRR to optimize their marketing funnels and consequently successfully delivered efficient growth.
How it Works
AARRR works by breaking down the customer lifecycle into the five aforementioned stages and assigning specific conversion metrics to each. Those metrics are intended to measure the frequency of specific customer behaviors deemed vital to progress in the corresponding stage. So in practice, a business will analyze those metrics, stage-by-stage, and depending on what each reflects, inform their activities for taking action to optimize where needed.
Let’s look at the stages.
Stage 1 — Acquisition
Acquisition refers to the process of people first learning about you (a/k/a “Awareness”) all the way through to them taking their first meaningful action (the definition of “meaningful” of course varies by business). For an ad supported website, maybe that’s the first visit. For an ecommerce site, it might be perusing product offerings for the first time. Or for a SaaS platform, that might be a user signing up for a free trial, and the Acquisition flow might look something like:
- Step 1.1: User sees an ad
- Step 1.2: Visits a landing page
- Step 1.3: Views an online demo
- Step 1.4: Signs up for a free trial
Each of these steps is a conversion and should be measured and optimized based on where users are dropping off before converting.
Stage 2 — Activation
The Activation stage is when a user first recognizes the relevant value of the product or service. It’s what marketers call the “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 that serves to make a user more engaged with the Facebook platform. Based on that insight, Facebook decided to add a handful of ways users could sync its platform with their email service, which enabled Facebook to dynamically suggest people to invite to Facebook from the user’s contact list. For Twitter, this inflection point is when a new user has followed at least thirty people, which is why Twitter always suggests accounts to follow.
Success in Activation can weigh heavily on a number of factors, including:
- How compelling your value proposition is.
- The strength of your brand awareness.
- How well-qualified first time visitors to your site are.
- The UX and UI of your site, including the presence of friction when performing core tasks, ease of navigation, site performance, etc.
Going back to the SaaS platform example—often for SaaS companies one of the critical steps in the marketing funnel is to get users to sign up for free trials with the intention of ultimately converting them into paying customers over time. Converting people into paying customers after a free trial period is vital to the sustainability of the business. In this case, free trials are an expense. They don’t generate revenue and cost a lot to support. 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. Helping trial customers get value out of the platform quickly is an effective way to Activate them. It helps them rationalize paying for a subscription. Some ways that might be done include:
- Offering video tutorials to trial customers to help them become advanced users of the platform that take advantage of the productivity gains it affords.
- Making 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 does on its own.
Each of these approaches can be broken into conversions, tracked and optimized, and the cumulative effect can be measured against the goal of effectively and efficiently converting customers from trial to paying. For instance, with respect to the video tutorials idea, maybe one of the metrics 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, the better they’ll be at applying those skills when using the platform, and the better the results they will 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:
- Measure the conversion rate (video completions)
- Assess what the data is saying and draw insights
- Formulate hypotheses to explain what they are seeing (e.g. people are dropping off at higher rates when a video is over a certain length)
- Based on the hypotheses, design and execute experiments for ways to get people to watch more more training videos in their entirety (e.g. shorten videos by breaking topics into subtopics that are offered as chapters)
- Measure the effect of those improvements and repeat the process with the next insight.
Stage 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 it’s arguably the most important marketing activity for any business. Consider the following:
- 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 is only ~5-20% (ClickZ)
Effective Retention efforts enable a business to build lasting relationships with customers, which increases their lifetime value (LTV) to the business and improves the chances they’ll refer the business to others.
Churn
The opposite of Retention is Churn. 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 one time then something is amiss with the product and/or messaging.
How to Increase Retention
In the words of Bill Gates: “Your most unhappy customers are your greatest source of learning”. In other words…
- Analyze and Interview: Look at user behaviors for patterns that indicate adverse effects that explain your Churn. Also, 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.
Stage 4 — Referral
The most efficient way to grow is by way of customer referrals. Per Nielsen, 92% of consumers worldwide trust recommendations from friends and family more than ads. But 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. Referral can also be placed before Revenue depending on the business model. In other words, a referral can happen before a user becomes a paying customer, maybe when they are still in a trial period, and they can happen after someone becomes a paying customer. This just depends on the particulars of your marketing funnel.
Stage 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. An effective way to optimize LTV and CAC is through marketing funnel optimization measured by the AARRR framework. In other words, increasing LTV is really just an outcome of optimizing the previous stages—the more visitors you ultimately attract and activate, the higher your revenue.
