Product Metrics

Why understanding the pirate metrics (AARRR!) is crucial for product-led B2B SaaS companies

Aaron Kazah

Founder & CEO

5-MIN READ

Pirate metrics are a set of five user-behavior metrics that start-ups (especially SaaS companies) can use to measure product-led growth.

The funny acronym for the metrics (AARRR!) makes it easy to remember the metrics individually. As silly as the name is, pirate metrics are worth remembering because they can help grow your business by measuring the right things.

The pirate metrics

The five AARRR metrics are as follows

  • Acquisition
  • Activation
  • Retention
  • Referral
  • Revenue

The key to unlocking value in pirate metrics is to know what they are, how they are linked, and how they work. This article will cover everything you need to know so you can go ahead and use pirate metrics to grow your company.

What is AARRR?

AARRR (acquisition, activation, retention, referral, and revenue) is a metric framework for start-ups created by Dave McClure in 2007.

The framework includes the most important metrics in a sales funnel and is used to understand the customer journey and measure a company’s growth.

Since pirate metrics answer product growth and user behavior questions, they can also help optimise your sales funnel.

How do pirate metrics work?

The five pirate metrics are critical but straightforward user-behavior metrics that provide deep insight into your sales funnel and customer journey.

It’s important to note that you may not need to measure all five metrics -- you can pick and choose the metrics relevant to your product.

However, you should be obtaining various metrics from across your sales funnel to help you understand your strengths and weaknesses.

Here’s a breakdown of the main questions the metrics answer:

  • Acquisition: How do people discover you? This is the first contact.
  • Activation: How do people become users? How do users unlock value in your product? How quickly and effectively do users get value? This is the stage in which users try your product.
  • Retention: How many users continue to engage with your product? What percentage of customers do you retain over a period? This stage measures how successful your product is with your customers.
  • Referral: How many users recommend your product? Do users like your product enough to recommend it to others? This stage focuses on quality and growth.
  • Revenue: How many users are willing to pay for your product? What is your conversion rate? What is your customer lifetime value? This stage is concerned with identifying revenue targets and measuring success.

Pirate metrics are explained individually

What is Acquisition?

The acquisition is concerned with the beginning of your funnel. It measures how people find you. Do they come from Google? Social media? TV ads? These can be measured with web analytics, cookies, and unique URLs.

The acquisition is also concerned with how many people become customers. To measure acquisition rate:

Divide the number of customers acquired over a time period by the length of the same period. E.g. 3,400 (customers) ÷ 6 = 566. 566 is the rate of new customer acquisitions per month. You can use it to compare different periods.

Acquisition starts when the visitor first signs up to use your product. By understanding where visitors come from and the visitor-user ratio, you can establish what activities are driving the best results for your business.

What is Activation?

Activation is concerned with the next stage in your sales funnel - users trying your product for the first time after signing up.

Activation measures a customer’s first experience and their journey to get there, so it is useful for measuring when users see the value of your product. This could be immediately or several days after signing up.

By understanding activation, you can see how efficient your sales funnel is. It could be that you need to speed up your sales funnel with things like special offers, rewards, discounts, and extended free trials to drive greater product growth.

What is Retention?

Retention is concerned with how many users stick around after trying your product. In this sense, it is a measurement of product success.

To measure retention rate:

  • Start with the total number of customers at the end of a time period, e.g. 980
  • Subtract the number of new customers gained in the time period, e.g. 322
  • Divide the result by the number of customers at the beginning of the time period, e.g. 1,200
  • Multiply by 100
  • In this example, the customer retention rate = 54.83% (positive but not great). We can also get the churn rate by subtracting 54.83% from 100% (45.17%).

Having a high retention rate is a sign your product is solving problems and delivering value; a low retention rate is a sign your product isn’t useful. It’s easier to upsell than it is to sell, so it makes sense to measure retention accurately.

What is Referral?

Referral is concerned with customer satisfaction. How likely is it users will recommend you? How often do users recommend you to others?

A high referral rate means high acceptance in your industry. A good metric is the Net Promoter Score® (NPS), which is used in customer experience programmes, or you can use the Customer satisfaction score (CSAT).

CSAT is our favorite metric. Here’s how to do it:

  • Get 10 customer satisfaction responses
  • Once you have 10 or more responses, run this simple formula:

Number of customers who are happy ÷ total number of responses collected x 100

  • This formula will give you your CSAT score as a percentage, e.g. 89 (happy customers) ÷ 100 (responses) x 100 = 89%.

What is Revenue?

Revenue is concerned with how many users pay to use your product. It is the most crucial metric because it determines the viability of your business.

We recommend that you track your revenue with the cumulative value of sales over a period of time. Here are three metrics to do just that:

  • Cost of Customer Acquisition > Measures the cost of winning a customer. You need to factor in all costs, not just the cost of the ad. Here’s a simple formula: cost of sales + cost of marketing ÷ new customers acquired = cost of customer acquisition.
  • Customer Lifetime Value > Measures the total value of a customer to your business. Multiply the amount they pay per month or year by the contract term. If you have a rolling contract, multiply the amount they pay by the expected term.
  • Net Customer Worth > Measures the total worth of a customer to your business. Simply subtract the customer acquisition cost from the customer lifetime value, and you will have your customer net worth figure.
  • Conversion rate > Measures how users take action, e.g. how many users buy an add-on for your product. The formula is simple: Number of conversions ÷  the total number of visitors/interactions = conversion rate.

Overall

Pirate metrics might sound funny (AARRR!), but they are crucial metrics for every successful business. By following this simple framework, you can leverage deep insights to make better decisions and grow your business with accurate data.

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