The AARRR funnel model is pretty much the bee’s knees for understanding customer metrics. Put simply, it’s everything you need to know about your customers. Therefore, you should be tracking it religiously. It is a startup metrics model that was introduced by the entrepreneur, Dave Mcclure. It outlines five phases— Acquisition, Activation, Retention, Referral and Revenue— through which a typical customer passes during the lifetime of their relationship with your business. It helps startups set their long term goals based on measurable actions.
AARRR is also important for startups because it drives growth and allows businesses to focus on what really matters. The reason why startups and businesses as a whole should adopt it without reservation is that these five metrics are very straightforward, ultimately measuring your company’s growth (financially or otherwise), but also being very versatile in its interpretations. They make customer/founder interaction easier because they’re so flexible, which makes it very valuable to track your early performance. Let’s discuss them individually:
Acquisition: “Where Are Our Users / Customers Coming From?”
Acquisition is the first step of the AARRR customer lifecycle framework. It describes your prospects and how they find you or find out about you. The goal is to get a stream of customers coming in through your front door. It is a crucial stage in the lifecycle of your business. Making your product successful is one thing, but there’s a whole other side to it. You might have a great product/market fit, but if people don’t know it then they won’t buy it. You need to acquire them in some way. The best way to do this is by marketing to the right audience through the right channels. Examples of the channels include SEO, inbound marketing, banner ads, social media, etc. By focusing on the acquisition phase, you can maximize your chances of reaching potential buyers and selling them your product or service.
Acquisition can be measured by a variety of metrics: number of visitors, conversion rate, sign-up rate, and so on. Folks tend to drop out at many corners. For example, a new visitor downloads an e-book, then signs up for your mailing list. Next, the visitor comes to one of your events. Then after that, he decides to create a user account on your website. Along this path, many people and companies must monitor drop off rates for optimization points. You should approach business in this way. Forget the “big picture.” Work with your sales and marketing teams to create a holistic approach to acquisition that delivers value for everyone rather than simply hiring as many sales reps as possible. Also, don’t be fooled by vanity traffic. It is not revenue-focused. Driving leads and conversions are the best way for sustainable revenue growth over the long term. Defining a step-by-step process before being a customer is called micro-conversion. Remembering each micro-conversion step can help you understand your consumer’s journey, and allows you to optimize the steps they go through before converting to a paying customer. For SaaS companies or companies that rely heavily on an active sales team, it’s important to measure qualified leads versus leads in general, as each will afford different amounts of ROI if properly nurtured.
At this stage, you can use “The Bullseye Framework.” The Bullseye Framework examines three steps of transforming your startup idea into a significant and valuable business. Gabriel Weinberg, the founder of DuckDuckGo, who wrote a book entitled “Traction,” created this system to help teach startup founders how to identify and cultivate strong ideas along with validating their vision before spending time and energy on it. The Bullseye Framework suggests that after brainstorming 19 channels, start with just one channel and test it in a small version because it is much easier. In this framework: you select a traffic channel, brainstorm how to exploit it, evaluate the results when you achieve them (and if not, make tweaks), and repeat. Businesses at different stages in their growth will have different traction channels. Find your main channel and make sure it is pumping along as it should. If all of these fail, go back to the drawing board. You are either shooting for the wrong target market or your product/market fit isn’t quite right. Three questions you should be asking yourself about your acquisition:
- Which channel is bringing in the most traffic?
- Which channel is converting the most visitors into customers?
- What channel can give you the best bang for your buck when it comes to acquiring new customers?
Activation: “How good is the user’s / customer’s first experience?”
Activation refers to the moment when users begin using a product or service. It is the most important moment in your customer’s journey. It’s when they are just starting to get to know your product and decide if they like it. If you want them to keep using it after that initial use, you need to make sure their experience with your product is seamless and enjoyable. Make sure you have key metrics in place so that you can measure customer success. There’s one big moment your customers get after they sign up for your product — and only then do they decide to stay with it, or not. Measuring this moment or process is key to realizing what works well — and what doesn’t.
Retention: “How many of your customers are you retaining and why are you losing the others?”
Retention refers to the number of users who come back to use your product or service over a period of time. Some marketers call this process “engagement.” The best way to keep users engaged with a platform is by creating an easy-to-use onboarding process that shows off the best parts of your platform, and by making sure your product keeps evolving and that bugs are fixed as quickly as possible. The opposite of customer retention would be customer churn. It’s important to stay on top of your customer churn rate. A relatively low churn rate is a sign that you have achieved a good product/market fit. Your churn rate can give you insight into your business and help you in determining how well your customer acquisition strategy is working, both from an ad spending level and a customer nature level. Also, churn rates can be used to predict how successful your company will be in the near future. Secondly, make sure that your customer churn rate is lower than your customer acquisition rate. When that happens, you’ll be able to achieve growth.
An article from Harvard Business Review says that it’s five to 25 times more expensive to acquire a new customer than to retain an existing one. Your relationship with an existing customer is essentially easier — you can confidently share your goods again or offer them a competitive deal without fear of losing them. Customer retention is increasingly challenging to achieve, and it pays huge dividends. By staying in touch with past customers via email newsletters, companies can increase revenues. Automation is easily set up for an easy-to-follow continuous series of emails with attractive graphics and subtle sales messages to keep the brand top of mind long after the product has been purchased.Referrals: “How can you turn your customers into your advocates?”
Referrals are extremely important because it shows your customers trust your product. If customers love your product, then they certainly will tell their friends about it. And that is why a referral is such a strong metric for success. Referrals are great because they are transparent and honest. Referrals are essentially any action taken by your customer that indirectly benefits you and your business. Examples of this include word-of-mouth advertising, which is conversations between your customers regarding your business, recommending new customers to you, and encouraging the use of specific products or services. To really drive sales you need to be able to generate referrals for your business because, in the end, most customers will not go out of their way to find out about your product, service or business. They will either hear about it from a friend or on the Internet. Everything else is just a bonus.
A Net Promoter Score (NPS) is a popular way to measure customer satisfaction and loyalty. An NPS of zero indicates that a business has completely dissatisfied customers, while a score of 100 indicates that customers are very satisfied. A score of 50 or below means that it’s time to re-evaluate your company – you may be headed towards disaster and bankruptcy if this trend continues. As referrals are a very very important driver to growth, companies incentivise users to recommend them. Dropbox, using its own product as an example, offers free space on its product for each user referred. You can also measure referrals using the virial coefficient, which is the average number of people one user refers to. For example, a number of 80 means that on average every time one person refers to another, they’re referring to about 80% of their friends/family.Revenue: “How can you increase revenue?”
Revenue is the ultimate expression of success, so revenues are the most important measurement tools. So you want to increase your revenue – what’s the best way to do it? By increasing your Customer Lifetime Value (CLV) and decreasing your Customer Acquisition Cost (CAC). Customer Lifetime Value (CLV) is the total revenue that is generated by customers throughout their lifetime. Simply put, it’s the amount of money that a customer will spend over time with you. You should focus on maximizing your CLV because it takes into account how much you spend to acquire these customers, as well as the revenues they generate for each additional year they stay with you. Customer Acquisition Cost (CAC) is the total amount of money spent to acquire one customer. To ensure growth, a 3:1 ratio between customer lifetime value (CLV) and customer acquisition cost (CAC) is often recommended. A great way to reduce CAC is optimized funnel design.
In conclusion, the AARRR is a good framework to measure and optimize every step of the customer buying process. The framework helps any business that wants to excel in all stages of the funnel and allows for overall better success for companies who want to be better by remaining focused throughout their journey.
