The year 2001. PayPal Headquarters.
It was the time before the IPO and eBay acquisition.
A demand generation era in marketing started…
… good old times.
A new Director of Marketing was introduced.
His name is David McClure. He started and led the PayPal Developer Network program, a community of 300,000 web and e-commerce developers using PayPal.
In 2010, he founded 500 Startups, a global venture capital firm headquartered in Silicon Valley with >$500M AUM and 100+ employees in 20 countries around the world.
- 500 has made investments in over 2,500 companies across 75 countries resulting in over 20 unicorns and IPOs.
Later in 2019, he founded Practical Venture Capital.
The rest is well-known startup history. But, this isn’t another success story.
Well, at least, not yet. And, to be honest, It’s not even about him.
It’s about you. And your business.
How? Stay with me.
He designed a framework to cut a company in pieces and show you where to focus your attention. The funnel is further developed and widely used. It’s called the Pirate Funnel because the first letters spell out AAARRR for Awareness, Acquisition, Activation, Retention, Referral, Revenue.
The Pirate Funnel… AAARRR!
If you’re not sure where to begin, the pirate metrics are a great place to start.
The AARRR framework is one of the most widely used models for measuring growth and success in startups and SaaS businesses.
It divides the customer life cycle into six phases and correlates them with relevant metrics, beginning with the first point of contact and finishing when a potential customer becomes a paying customer.
You can see where you lose the most people by filling in all of the AARRR steps in a Pirate Funnel Canvas.
This will give you a good picture of which parts of the customer life cycle are working well and where the conversion funnel could be improved.
What is the AAARRR framework?
Growth hackers use the Pirate Funnel to identify the weakest point in a company and see where they should concentrate efforts. The AAARRR framework (also known as the A3R3-funnel) divides a business into six steps.
The 6 metrics of the Pirate Funnel: AAARRR
- Awareness – How many people do you reach?
- Acquisition – How many people visit your website?
- Activation – How many people are taking the first step? (For example, sign up, download an app, or submit their first comment.)
- Retention – How many people come back for a second/third/tenth time?
- Revenue – How many people start paying? And how much do they pay?
- Referral – How many people recommend your company to their friends?
There are, however, other options…
The Pirate Funnel is interpreted differently by various experts and businesses.
For instance, depending on the business model, you might want to swap Retention and Revenue because getting a repeat customer is more valuable to you.
Acquisition and Activation are both open to interpretation because some people consider Acquisition to be the acquisition of a new customer rather than a site visit, and Activation to be the AHA-/WOW-moment rather than simply signing up.
The Awareness-step was not included in Dave McClure’s original Pirate Funnel (it was still just the AARRR framework), but it was later added by Growth Tribe in 2016.
What’s unquestionable is that customers must pass through each of these steps, and by filling in this structure, you will be able to identify any gaps in your business.
For example, you might already recognize that you don’t have enough customers, but what should you do to increase your customer base?
- Maybe you should increase your marketing efforts to reach a wider audience?
- Or maybe you should optimize your website?
- Could there be a specific feature you can work on to make it more appealing to people?
Well, the Pirate Funnel can help you with all of this. If you fill in all of the numbers in the steps below, you’ll be able to see which part of your funnel is causing the most problems for your customers.
As a result, you will know that this is exactly where you get the most “bang for your buck.”
Each time you improve one of the steps in your Pirate Funnel, you improve your ‘North Star Metric,’ and thus your long-term growth.
I’m damn sure you are prepared to begin your Growth Hacking journey.
Let’s get this party started with:
Awareness: How do people learn about you?
Awareness is the first stage that your customers discover you and know that you exist.
This step was not included in the original pirate metrics system, but not only completes it, but also turns it from a funnel to a cycle.
The last step, revenue, which I’ll be talking about in detail later, needs to be fueled to be sustainable. Therefore, feeding your customers with innovation becomes essential. The more features and innovations you add to your service, the more their cycle will start over.
Questions to answer in the awareness phase:
- What are the advertising channels that will lead directly to the product’s target audience?
- What platforms do your users engage with the most?
- What channels can you use to spread word-of-mouth virality?
Metrics to measure in the awareness phase:
- Podcast impressions
- vanity metrics
- Landing page bounce rates
- Site visits
Acquisition: Where are your customers coming from?
The second phase of the consumer life cycle is acquisition and it’s about making potential customers engage with you and your service.
The key to acquisition is to find the right customers, not just as many as possible.
It takes two steps to find the right customers.
If you skip these steps, you’ll end up with a service that no one wants.
Step 1: Figure out who your customers are.
You must understand your customers to provide a compelling solution.
Start focusing on individual buyer personas instead of offering a service for “everyone.” This will help you save money while also allowing you to communicate effectively.
Answer these powerful questions to learn more about your target group:
• What keeps your customers up at night?
• What drives your customers to find solutions to their problems?
• What’s the desired future state for your customers?
Personas are the foundation of every successful service and will assist you in making well-informed decisions.
As a result, you must understand what your target group is trying to accomplish and what success means to them.
Step 2: Figure out where your customers are.
Customer acquisition is hard, and many SaaS and startup businesses fail due to a lack of new customers. But, it’s necessary to identify traction-generating marketing platforms.
Just for further clarification, the term “traction” refers to the momentum that occurs while your strategy is working.
Gabriel Weinberg’s “Bullseye Framework” is one of the best frameworks for identifying traction channels.
Gabriel has discovered the following 19 traction channels:
- Viral marketing
- Public relations
- Unconventional PR
- Social and Display Ads
- Offline Ads
- Content marketing
- Email marketing
- Engineering as marketing
- Target Market blogs
- Business development
- Affiliate programs
- Existing platforms
- Trade shows
- Offline events
- Speaking engagements
- Community building
Each of these channels have previously produced good results for SaaS and startup companies, but not all of them will produce the same results for different companies.
At least one channel, however, will help your company gain traction. There are 4 steps in the Bullseye Framework…
4 steps to find your best marketing channels:
- For each marketing channel, brainstorm ideas and place them in the outer ring.
- Given your expertise or information, transfer possible traction channels to the middle ring.
- Determine which of the middle ring’s channels will move the needle by testing them.
- Focus on the channel that is performing best and transfer it to the inner ring.
Answer the following questions about each traction channel to get a holistic view of it:
- How much does it cost to acquire a customer per channel?
- What is the maximum number of customers I can reach via this channel?
- Am I targeting the right customers on this channel?
To sum up, in the acquisition phase, define your customers and concentrate on marketing channels that have the lowest customer acquisition cost and the highest return.
Questions to answer in the acquisition phase:
- What keeps your customers up at night?
- What drives your customers to find solutions to their problems?
- What’s the desired future state for your customers?
- What can you do to make it easier for potential clients to find you?
- What is the cost-per-acquisition (CPC) for each marketing channel?
- Can this marketing channel reach a large number of customers?
- Is this marketing channel bringing you the right customers?
Helpful frameworks in the acquisition phase:
- Personas = identify your target audience.
- Bullseye Framework = find marketing channels with the most traction and the highest return on investment.
- PVP Index = identify the most promising market segment.
- Journey Maps = identify customer touchpoints and the customer journey.
Metrics to measure in the acquisition phase:
- Customer acquisition cost (per channel)
- Conversion rate
- Traffic driven to the website (per channel)
- Click-through rate
- Cost per click
- Dwell time on the website
- Bounce rates
- Quality of leads
Activation: How fast can customers find value in your service?
The AHA moment happens when consumers realize the value of your service for the first time. This point determines whether your customers stay engaged or leave.
The AHA moment is a powerful emotional experience that should occur early in the customer’s journey. Remember that the longer your time to value is, the more likely people are to leave.
How to find your services’ AHA moment
To find your service’s AHA moment, first, reach out to your most valued customers and ask them what they value most.
However, keep in mind that each persona is going to have their own AHA moment.
Create a list of behaviors that are related to customer retention after reviewing customer feedback.
Feel free to use this list to define your activation metrics and keep in mind that metrics are unique to each service and differ from one another.
Examine if customers who use your service regularly
- complete the onboarding process,
- interact with the main feature,
- get in touch with other customers.
It should be obvious where customers find value in your service once you combine customer feedback with analytics data.
Onboarding is one of the most effective ways to quickly get consumers to an AHA moment.
Well I know you’ll ask ‘’how?’’
Questions to answer in the activation phase:
- What can you do to give your customers an unforgettable experience?
- How quickly can consumers recognize the value of your service?
- What do customers value most about your service?
- What steps should an ideal customer take?
- What are the habits that are linked to consumer loyalty?
- What does activation mean for your service?
Helpful frameworks in the activation phase:
- Personas = figure out what your target audience values most.
- Journey Maps = identify the onboarding process.
Metrics to measure in the activation phase:
- How many customers used a key product feature?
- Time to value
- Visitors to registration ratio
- Conversion rate
- How many customers have an “Aha!” moment?
- Dwell time + viewed pages
- Drop-off rate
Retention: Why should customers come back to you?
People will eventually churn if you can’t consistently provide value. The majority of SaaS businesses place a high priority on customer retention.
There’s a simple explanation for this: acquiring new customers is much more costly than keeping the existing ones.
How to fight customer churn in the retention phase
To fight customer churn, it’s important to pay attention to early warning signs.
For example, here are some early warning signs of customer churn:
- Logging in less frequently than average customers
- Taking significantly longer to complete tasks than average customers
- Shorter visit times
Additionally, use the Net Promoter Score to complement the customer churn insights. This will give you a comprehensive picture of how people feel about your service and whether or not they will recommend it to others.
How to keep retention rate high
Sending valuable emails daily has shown to increase retention rates.
Your email campaign is a good way to create a relationship with customers and help them see the value in your service. Use these 4 tips to create better email campaigns:
- Make it personal.
Addressing customers personally is the best way to connect through email. For example, in the sign-up form, you could ask for the customer’s first name. But, avoid asking for too many details right away. Drop-off rates rise with each additional form field.
- Sell benefits, not features.
People buy benefits, not features! And yes, I know you’ve probably heard this before a thousand times, but it’s true.
- Send emails based on customer behavior.
Since they help clients on their journey, behavior-based emails have a significant effect on retention.
- Have a clear call to action in every email.
Every email should guide customers to the next phase of their journey and help them achieve their specific goals.
How to identify benefits
Customers enjoy the service because of the benefits they get, and not because of the features.
The Kano Model is one of the most effective models for identifying features and benefits. The Kano Model assists you in ranking your feature ideas based on their potential to improve customer satisfaction.
There are three main types of features in the model:
Basic features are taken for granted and are required to compete at all. Basic features that are badly executed can result in massive dissatisfaction.
Performance features will increase customer satisfaction based on how well they’re implemented. Phone storage space is a good example of a performance feature. Customer satisfaction is higher because there is more storage space on the phone.
Excitement features – If you don’t have any excitement features, your customers might be disappointed, but if you do, they’ll be absolutely delighted. These features can set you apart from the competition.
Ask your customers the following two questions to determine which feature ideas belong to which category:
- Dear customer, how do you feel if the feature is implemented?
- Dear customer, how do you feel if the feature is not implemented?
Following that, the customers should choose one of the following answers:
- I like it
- I expect it
- I’m neutral
- I can tolerate it
- I dislike it
Then, match the results of the questionnaire to the Kano Evaluation table.
The Kano Model is a fantastic tool for figuring out which features the target audience loves the most. This framework will help you provide more value to your customers and keep them for a longer period of time.
Questions to answer in the retention phase:
- How long are customers using your service?
- What does customer retention mean for your service?
- What is most valuable to your customers?
Helpful frameworks in the retention phase:
- Kano Model
Metrics to measure in the retention phase:
- Retention rate vs. churn rate
- Open rate of emails
- Click through rate of emails
- Customer churn
- Month to recover CAC
- Average customer retention length (time people stay active customers)
- Net Promoter Score
- Infrequent logins
Referral: Why should customers recommend your service?
People who like your service enough to refer it to others are known as referrals.
When existing customers use word of mouth, your customer acquisition cost for referred customers will drop to zero.
This strategy has a proven track record and can generate massive growth!
So, how to increase the number of referrals?
Well, by using viral loops.
How viral loops help your SaaS company to immense growth.
The viral coefficient is the amount of new customers you get for each existing customer, and can be used to assess the effectiveness of your referral phase.
Viral loops are made up of three steps:
- A customer comes across the service and decides to use it.
- A customer recommends the service to a friend.
- The friend also becomes a customer.
Viral Loops work especially well for services that become more valuable, the more people use them.
They are already built-in to communication and social media platforms such as Facebook, Instagram, and Skype. The main reason is that if you are the only one who uses them, it makes no sense.
This is how the viral coefficient is calculated:
For example, if your customers send out 5 invitations and only 3 people respond, the math goes like this:
Exponential growth is indicated by a viral coefficient greater than one. Social media sharing buttons and the well-known Dropbox bonus, which rewards you for each friend you invite, are two best practices for massive growth.
Keep in mind that just because a strategy has succeeded in the past doesn’t mean it will work in your case.
Consider various ways people may want to share your service before adding generic social media share buttons.
The viral cycle time, in addition to the viral coefficient, is an important component of viral loops.
The viral cycle time indicates how long it takes for a customer to refer another customer to your product. The shorter the viral cycle, the better.
How likely are customers recommending your service?
The Net Promoter Score is a great way to figure out how likely customers are to recommend your service. The NPS measures customer loyalty and the likelihood of churn.
Start by asking your customers, “On a scale of 0 to 10, how likely are you to recommend us to a friend?” to evaluate your NPS. After that, divide the respondents into three categories.
- Promoters 9-10
- Passives 7-8
- Detractors 0-6
Calculate the net promoter score like this:
Follow up with open-ended questions about the “Why” for more comprehensive insights (“What was the reason for your score? What could have changed your score?“).
You will gain valuable insights into how to maximize the probability of recommendations as a result of this.
Provide value, make it easy to invite friends, and shorten the viral cycle time.
To sum up, the referral phase provides value, makes it easy for customers to invite friends, and shortens the time it takes the customers to invite friends.
Questions to answer in the referral phase:
- What would be the best incentives for consumers to invite their friends?
- Which aspects of my service do customers appreciate the most?
- When are consumers most likely to invite friends to join them on their journey?
Helpful frameworks in the referral phase:
- Kano Model = find out which features are most valuable to customers.
- Journey Maps = identify at which point of their journey customers would most probably invite friends.
Metrics to measure in the referral phase:
- Percentage of customers who refer friends to your product
- Referred customers
- Percentage of total purchases by referred customers
- Lifetime value of referred customers
- Positive reviews
- Social media shares
- Sent invitations & successful invitations
- Viral coefficient & viral cycle time
- Net Promoter Score
Revenue: Why should customers pay for your service?
The last Pirate Metric in the AARRR conversion funnel is revenue. Customer lifetime value is one of the most important metrics in the revenue phase.
This metric describes a customer’s total revenue over the course of their lifetime.
And I also have a formula to calculate the customer lifetime value:
If your monthly average revenue per customer is 100€ and your turnover rate is 5%, your customer lifetime value is 2000€ (100 * (1/0,05)).
Make sure you don’t mix annual and monthly subscriptions. You could be lulled into a false sense of security if you do.
Customer lifetime value vs customer acquisition cost
The customer lifetime value indicates how much money you can spend on acquiring new customers.
When you compare the customer acquisition cost to the customer lifetime value, you will get a good idea of whether your company will succeed or fail.
A 3:1 consumer lifetime value to customer acquisition rate, for instance, is a good rate.
Apply the Bullseye Framework, which you already know from the acquisition phase, to find the channel with the lowest CAC and highest return.
Well, the majority of SaaS businesses depend on monthly recurring revenue (MRR). As a result, it’s essential to figure out which features and benefits would entice potential customers to pay for your service.
The Kano Model, which we discussed earlier in the acquisition phase, can help you with this too.
Define the quality of revenue and find out which customer segment is best for your company.
Not all customers are the same, and not all revenue is generated in the same way. It is important to determine which customers are the most valuable to you.
The PVP index, created by Allan Dib, the author of the 1-Page Marketing Plan, is a great framework for identifying your best customer segment.
The PVP Index assists you in identifying consumer segments that provide personal fulfillment, value your work, and generate revenue. Determine each market segment and rank them on a scale of 1 to 10 based on the PVP Index.
- Personal fulfillment: Do you enjoy working with this type of customer?
- Value: How much is your work valued in this market segment?
- Profitability: How profitable is this segment of work?
When you identify your ideal customers, you’ll be able to make better use of your marketing budget and increase the quality of your revenue.
Questions to answer in the revenue phase:
- What percentage of the customers convert to paying customers?
- What is the average order value per customer?
- How many repeat customers do I have, and how often do they make purchases?
Helpful frameworks in the revenue phase
- Kano Model
- PVP Index
Metrics to measure in the revenue phase:
- Customer lifetime value
- Customer acquisition cost
- Monthly recurring revenue
- How many free customers become paying customers?
- Average order value per customer
- Repeated purchases
- Revenue churn
- Expansion revenue
Get started on Growth Hacking with the Pirate Funnel
What’s the best way to get started with Growth Hacking? Well, as we said, the Pirate Funnel is a great place to start. Let’s dive a little deeper.
1. Define the steps
The steps can be interpreted in a variety of ways, and each business model would have its own set of steps. So we need to start with:
How can you define the steps in your Pirate Funnel?
Begin by taking a look at the company and writing down the most important steps customers take, such as signing up, adding an item to their checkout page, or adding a new task to their dashboard.
These AARRR steps should now be defined as equally measurable steps. I always use the number of people/users who complete a specific step.
For example, the number of visitors to your website, the number of people who logged in each week, or the number of people who recommended us to a friend.
Since it usually gives out better results, I always go for the longest period possible, or more exactly up to a year, unless there have been significant improvements to the company, such as a redesigned website, new user onboarding, or a product change.
Check to see if you’ve assigned a number to each step of the AAARRR Funnel. More steps between them are usually better, but I wouldn’t use more than ten because you want to keep your focus and avoid getting into too many details right away.
2. Fill in the AAARRR-steps
Take your time to figure out the right number for each step of the Pirate Funnel. The majority of the data can be found in Google Analytics and your ad platforms, such as AdWords or Facebook Ads.
If you’re stuck because you can’t find or don’t have the exact number, I’d recommend going for a rough estimate if you think it would be close.
Remember, “Progress over perfection!” when it comes to growth hacking.
3. Find your bottleneck – needs rework – edit pullquotes
The next step is easier than you might expect. One of the most important growth hacker skills is data analytics, which doesn’t necessarily mean it’s difficult.
You can look at the percentage of people who make it through the gap to the next AARRR step.
If you’re not a math wizard, divide the number of step 2 by the number of step 1, then divide step 3 by step 2, and so on.
You’ll be able to see which percentage is the lowest if you do this with all of the steps.
And guess what? You have just found your bottleneck!
4. Dive deeper from problem to cause
You’ve discovered the source of your customer loss, and now it’s time to figure out why it happens!
This is the point where you move from hard to soft data.
This is where you’ll need resources like Hotjar to see what people are doing.
You may even need to send out a survey or get out of the office to speak to customers and interview them about how they’re dealing with this stage of the customer journey.
5. Pick your focus and OMTM
Once you’ve found the main cause of why you’re losing customers, it means that you’ve identified One Metric That Matters (OMTM).
So, now that you’ve found a point of focus thanks to the Pirate Metrics, it’s time for your next step.
Think about what needs solving and then go out there and make some pirate magic happen!
If you want to take it a step further…
You have two options:
Make your steps even smaller
There are steps between your steps. (Sorry if this gets a bit meta…)
For example, you may already know that your website’s conversion rate is your company’s bottleneck, but I’m sure you can get much more specific within that one step of the AAARRR framework.
On which pages between landing on your site and signing up do you lose the most customers?
Or, if your referral phase is your biggest bottleneck, you should focus on how many people are even aware of your referral option, how many of them send an invite to a friend, and how many of those friends visit your website.
These questions will help you narrow down your problems even more.
Segment your numbers per channel, persona, or behavior
I often see that different people act very differently. Therefore, it’s useful to fill in separate Pirate Funnels for different channels.
In Google Analytics, for example, you can create a user segment for people who came through search or email.
You could also separate people into groups based on their behavior.
The device they use has a significant effect on their conversion rate because your website looks different on different devices or because the user’s attitude differs; mobile users are always on the go and less patient, while desktop users are more patient or have a work-related mindset, or other behaviors such as frequency of use or NPS-score.
Lastly, you could look at the different customer personas based on their location, job title, or technological knowledge.
Creating different AARRR funnels for different types of people could give you a better idea of where you should focus your efforts.
The AARRR framework is the simplest and most effective way to optimize your business and measure growth.
If we basically break down a typical customer life cycle of a SaaS company, we’ll have 6 key phases that are the:
A potential customer reads your blog and discovers that your app is valuable. After that, the potential user goes to the app store and searches for your app.
The potential customer installs the app and goes through the onboarding process.
In the first month, a potential customer opens and uses your app more than ten times.
At least one friend is referred to your app by a potential customer.
The potential customer becomes a paying customer.
Every metric has deeper layers to it and I encourage you to look further into optimizing each.
Frequently Asked Questions
What is a Pirate Funnel?
The AARRR framework is one of the most widely used models for measuring growth and success in startups and SaaS businesses that divides the customer life cycle into six phases and correlates them with relevant metrics, beginning with the first point of contact and finishing when a potential customer becomes a paying customer.
Why use a Pirate Funnel?
Because you’ll see the biggest bottlenecks with a Pirate Funnel, you’ll know where to focus your time and effort. As a result, for most growth hackers, it’s a great place to start.
What does the abbreviation AARRR / AAARRR stand for?
These are the first letter of every step of the Pirate Funnel: Awareness, Acquisition, Activation, Retention, Referral, Revenue.