AARRR: Pirate Metrics for Startups Defined and Explained

Pirate metrics are a modern approach to business growth commonly found among start-up businesses, especially online and Software as a Service companies. It is considered to be a framework for financial success and scalability that focuses on a “funnel” consisting of the following stages:

What Does “AARRR” Mean?

Pirate metrics represent a customer-lifecycle framework that focuses growth strategies and performance indicators into major categories. These categories - Acquisition, Activation, Retention, Referral and Revenue, or AARRR for short – are often spoken of as a “pipeline” or visually depicted as an inverted pyramid, with Acquisition at the top, and Referral at the bottom.

The presentation reinforces the philosophy that underpins the framework, which is that customer lifecycle is a pipeline through which customer relationships should be moved to maximize business success.

While many of the measurements on which pirate metrics are built, such as revenue per user, have been popular in business and technology for decades, the terms pirate metrics, AARRR and pirate funnel are relatively new. These terms are most utilized in startup businesses and cutting-edge technology businesses. With that in mind, entrepreneurs, marketing professionals, business and technology employees and Software as a Service companies would be most likely to speak in the language of pirate metrics.

Understanding AARRR

Pirate metrics are an increasingly popular approach to business growth commonly found among start-up businesses, especially online and Software as a Service companies. In these industries, aggressive customer acquisition and retention strategies are necessary for success against industry competition.

The categories considered as part of the pirate metrics framework, and the questions they seek to address, are as follows:

• Acquisition – How many potential customers visit your company website or engage in information-seeking about your specific product or service?
• Activation – How many users make a purchase, sign up for an email list or become otherwise active in your customer base?
• Retention – Overall, how many of your customers return for more services? Do they come back regularly or subscribe for ongoing service?
• Referral – How many people refer friends or family to your company?
• Revenue – What revenue is being generated by your customers? Is it subscription revenue, add-on purchase revenue, etc.?

According to the philosophy represented by the pirate metrics approach, moving customers through the pipeline from Acquisition to Referral creates an ongoing customer life cycle that will grow and sustain a business.

Pirate Metrics: Deep Dive

1. Acquisition

Acquisition is the first step in the pirate metrics process and where the growth funnel in this business philosophy begins.

As part of the Acquisition stage, businesses should ask themselves how consumers come into contact with their product or brand. Often, these initial contacts are made through channels such as banner ads, social media, SEO and other advertising. However, generally speaking, any means by which someone can potentially find a business or service can be considered an acquisition channel.

Unique website hits, newsletter sign ups and customer acquisition costs are some of the considerations that a business owner might wish to track in this stage of the funnel.

2. Activation

In this model, successful acquisition efforts lead to activated customers, sometimes called an “activation conversion.”

This stage is the beginning of a company’s relationship with a customer, and the value and satisfaction the company brings will determine if the relationship continues forward in the funnel.

Activation can be measured by number of users who take a particular action such as requesting more information, subscribing to a YouTube channel or buying a product.

One formula that would be valuable in this stage would be to determine conversion rate by dividing the number of activated users / customers by the total number of visitors who visited the website, etc.

3. Retention

For any business that aspires to longevity, retention is central to business success.

This is because retention is the most important indicator of the perceived value of your product or service. Depending on the price-point of your product, getting initial purchases or consumer may not be difficult – impulse purchases happen every day. However, a repeat purchase or engagement indicates that the consumer had a positive experience and that the product or service met their needs.

The methods for tracking retention can vary from business to business, but for some companies Annual Recurring Revenue, Monthly Recurring Revenue, Customer Churn, Repeat Purchase Ratio and Time Between Purchases may be ways to measure retention in a businesses customer base.

4. Referral

Referrals are one of the last parts of the pirate funnel. However, it is important to note that, in many visual depictions of the funnel, there is an arrow that circles up from the bottom back to top, Acquisition. This is because, ideally, the funnel is actually a loop, or a customer cycle, that continues to produce new customers, while retaining loyal users.

Successful referrals can be especially important because they are a less expensive means of customer acquisition than traditional marketing and, because of the influence of family and peers, they are often predisposed to brand loyalty, if those in their circle are already users.

While some measurements, like Number of Active Users Sharing Invites, can help a business begin to track referrals, there are no perfect measurements in place for this metric. In many cases, users do not indicate that they were referred or a user that is “invite” by a friend, may not become activated for months or years. Nonetheless, overall program success, reduced customer churn and ongoing growth can be indicators of a successful referral program.

5. Revenue

Revenue is often depicted last in the pirate funnel because, while money is exchanged earlier in the customer life cycle, without successful completion and measurement of the preceding steps, business’ revenue may be unreliable. If a company’s goal is growth, then rapid revenue generation is less fundamental than strong marketing and customer retention / referral efforts.

Tracking revenue effectively is critical for business success and, while awareness of overall revenue after expenses is important, it is only a fraction of the bigger picture. Evaluating revenue across many categories of users, products and services is necessary for establishing a clear picture of company success and making wise financial decisions.

Measuring revenue per user category and product line will help determine if the pricing structure is correct and if any products or services are not generating enough revenue. Only when those factors are understood can a business begin to create accurate budgets and financial projections for long-term success.

What are some examples of AARRR metrics?

Some examples of AARRR metrics can include:

• Annual Recurring Revenue
• Monthly Recurring Revenue
• Customer Churn
• Customer Acquisition Cost
• Repeat Purchase Ratio
• Time Between Purchases

Essentially, the objective of pirate metrics is to introduce a framework in which business success, and the customer life cycle, are visualized in a series of stages, each of which are accompanied by measurements. That said, the measurements and formulas may vary depending on industry.

For example, while annual recurring revenue is an excellent metric for a subscription business with annual contracts, monthly recurring revenue may make more sense for a business that offers pay-as-you-go programming.

The key takeaway from AARRR is the thoughtful and deliberate incorporation of data to make sure that the customers progress through the pirate funnel is not left to chance.

How to measure “activation” in AARRR?

Activation is the second step of the pirate funnel. It describes that category of user who take the next step after discovering a product, service or brand. Activation can be measured by number of users who take a particular action such buying a product or subscribing to a newsletter.

One formula that would be valuable in this stage would be to determine conversion rate by dividing the number of activated users / customers by the total number of visitors who visited the website, etc.

For example, if a YouTube video generates 30,000 views, and sells 6,000 ebooks, there would be a 20% activation rate.

A “good” activation rate will vary from one industry and business to the next, and it is important to note that, by itself, it is not an indicator of success. Customer retention, revenue per user, customer acquisition costs and other measurements are important to understanding the overall financial health of a businesses.

What is a pirate funnel?

Pirate metrics are often depicted visually as an inverted pyramid, or “pirate funnel.” This is because the intent of the pirate metric framework is to help businesses actively move customers through the stages of Acquisition, Activation, Retention, Referral and Revenue.

Metrics are an important part of this funnel and provide the information through which a business can understand if customers are progressing through the desired stages, as well as assess the company’s overall financial health.

Origina of the Term “AARRR”

Dave McClure, the founder of 500 Startups and well-known venture capitalist, coined the term “Pirate Metrics” in 2007. There term was featured in an Ignite Seattle presentation entitled Startup Metrics for Pirates.

Pirate Metrics, or “AARRR” were part of McClure’s philosophy to help startups turn prospects into customers.