What pirates and their metrics have to do with measuring success?

What are pirate metrics?

Pirate metrics (named for the acronym AARRR – sounds like a pirate, right?) were developed by Dave McClure, founder of Silicon Valley business accelerator 500 Startups (source). The acronym refers to key stages in a product’s customer/user journey: acquisition, activation, retention, referrals and revenue.

The goal was to create a set of product-market fit metrics that any startup or organization can use to model user behavior and therefore guide a product’s development and marketing strategy. A key element of pirate metrics is their focus on how user behaviour connects to business growth, thus avoiding the use of vanity metrics which may make you feel good but offer little useful information for product development.

Pirate metrics – stage by stage

The five stages of pirate metrics are often likened to a marketing funnel, representing a version of the user’s journey with your product. Below you will find a breakdown of each stage with examples of metrics.

AARRR Stage #1 – Acquisition

Acquisition takes place when users discover your product and download it or otherwise access it. It presents how users get to know about your product and where they come from. To be ‘acquired’ your product should stand out in the market from the competition.

A key question is, which channels are you using to market and raise awareness about the product? “Where are our users / customers coming from? Which channel should you use? Whichever one gives you a balance of maximum traffic, maximum value, and minimum cost per conversion.

Start by assessing the pros and cons for your product of each of the 19 channels outlined in Gabriel Weinberg’s “Traction” (source). As for the acquisition metrics themselves, the following list is a good starting point when considering which would suit your particular product:

Visit-to-lead conversion rate – site visitors who become leads.

• Contacts generated – over a given time period.
• Leads generated – over a given time period.
• Number of users entering free trial
• Email click-through rate – email recipients who follow the hyperlinks.
• Cost of acquisition – the cost of acquiring a single user.

Acquisition metric helps evaluate the Return on Investment (ROI) of their marketing campaigns and make data-driven decisions to optimize customer acquisition strategies. Here marketing strategy and tactics are important. When the acquisition is low, it’s important to work on tactic and optimise it. Experiment with new channels (web ads, emails, events, social network, blogs, social media campaigns).

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AARRR Stage #2 – Activation

This is where you ‘activate’ the user – which is to say, the first time they use your product, you’re hoping for some kind of ‘aha’ moment, a realisation that the product has clear value for them.

Having someone to sign up is only the first step. There will be many people who will sign up and never use the product (eg. app). Activated users are people who are using app. They logged in and started to use it. Activation metrics measure when a user takes the desired action or next step once they’ve encountered/downloaded the product. Those metrics can include:

• Number of subscribers.
• Number of first purchases.
• Number of first bookings.
• Social media engagement – including likes, shares and comments; whether per post or looking at a platform in general.

The step forward here is that the user is actively engaging with the product or its features. This can mean visiting additional pages on a website, trying out new or extra features, spending a certain time using the app or website, or signing up for a free trial or further information. Define what it means for a user to be “activated” – for every product it is different. Eg. in social media platform, activation might be defined as a user creating a profile and making their first post.

There is also a metric called activation rate – calculate it by dividing the number of activated users by the total number of users who have signed up. Eg. 100 users sign up and 20 completed the activation step, the activation rate is 20%. If the activation rate is low, it may indicate that the activation process is too complicated or that users are not receiving enough value from the product or service, or it’s hard to find the main value.

AARRR Stage #3 – Retention

They found your product, they used your product, the big question now is, will they return? Retention is about users who come back to your product and use it repeatedly. The exact definition of retention – how often and to what extent use is repeated – depends on your product, its features, and what seems a reasonable time period in which to see users return.

For a SaaS business, that means that people who are subscribed to your software keep using it and stay subscribed. For an e-commerce business that means someone not only buys from you once, but multiple times. Retention metrics might include:

• Usage levels – how often and how much is the product used?
• Payback – how long does it take for revenue to balance out the cost of acquiring a user?
• Retention rate - the percentage of users who continue using your product or service over a given time period.
• Churn rate – the opposite of retention rate, measuring users that your product loses over a given time period.

When working with retention validate if the value proposition is what the user needs (market research, user testing, testing your business model). If the retention rate is low, it may indicate that users are not finding enough value in the product or service, or that there are barriers preventing them from returning.

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AARRR Stage #4 – Referral

The next stage of a user’s journey with your product is when they recommend it to others. When people refer other people to your product, they are saying they are willing to endorse it. One option to boost referral rates is to set up a system that rewards users who do so (e.g. promotions, bonuses, etc.) Metrics to measure referral rates include:

• Social media shares – how often are users sharing your content (and by extension, effectively recommending your product) on social media platforms?
• Reviews – what kind of reviews does your product receive from users, and how often?
• New business/users – whether through word of mouth of a more formal referral scheme, the new users you gain.
• Number of your active and retaining customers send invitation to the product, or recommend it to others
• Number of new customers started using your service by others’ recommendations
• Net promoter score (NPS) – ask users how likely they would be to recommend your product to others.

To calculate the Net Promoter Score, you subtract the percentage of detractors from the percentage of promoters. The result is a score ranging from -100 to 100. The limitation of NPS is that it only takes into account customers, while also a lot of non-customers can act as detractors and generate bad word-of-mouth publicity.

AARRR Stage #5 – Revenue

Put simply, revenue is about whether or not your product is earning money for your business. What is your minimum desired level of revenue? Where is the break-even point (compared with the cost of acquiring a user in the first place)? Metrics that can help answer these questions include:

• Average revenue per user.
• Monthly recurring revenue – the average monthly financial return on your product as a whole.
• Annual recurring revenue – as above but for the whole year.
• The revenue you earned from single customer during the path of this funnel
• Subscription model / number of users subscribing product month by month
• Customer lifetime value – the average revenue received per user during their engagement with you and the product.
• ARPU – average revenue per paying user. It quantifies the amount of revenue generated on average from each customer. The implied ARPU can be calculated by dividing the total amount of revenue generated by the company by the total number of users.

Optimizing revenue requires a holistic look to all aspects of the business, from customer acquisition and retention to pricing strategy and operations.

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Using the pirate metrics framework with product-market fit

The product-market fit stage of your product’s development is all about refining the product’s features and design to more directly address your target market’s user needs. It’s clear that AARRR pirate metrics all, in some way, provide information that confirms whether or not you’re at the right point to be refining your product’s offering, and indicates how to do so. The benefits of using AARRR metrics is the information they can bring you, such as:

• A better understanding of your users’ behaviour.
• Early identification of issues or opportunities within your product strategy; allowing you to flex or pivot accordingly.
• Decisions are based on solid data.
• Provision of more finely-tuned features and services to users.

The key is identifying metrics or performance indicators that tell you – for each of the five stages – how your product is doing. Interpretation is important and, depending on your product and its users, may be more involved than simply aiming as high as possible across your dashboard of metrics.

For example, for a SaaS product, if your user acquisition rate is falling but your user retention rate is rising, that may indicate that your product is now firmly-established in the market and has achieved product-market fit with a solid user base.

Pirate metrics – AARRR!!!

By following the typical or ideal user journey with your product, pirate metrics are ideally structured to gather useful information for your product’s next phase of development; especially in terms of maximizing your product’s utility and appeal on the market.

Each product will have different user-focused metrics, depending on its nature and user needs, but those metrics will almost certainly map across to the five stages: acquisition, activation, retention, referral and revenue. What’s more, by categorising your metrics the pirate way, the resulting data will clearly show which areas of development (or marketing) are your priority focus for sustainable business results.