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Feb 2013

Learn how to guide your business by following key actionable metrics.

Lean Startup & Science

Metrics for Pirates, AARRR, by Jordi Romero

Defining a strategy for a product startup is both exciting and hard to do objectively. Most of the times the founders are guided by instinct and passion, and that’s great, but can lead to follow false hypothesis.

The Lean Startup is this whole movement and set of best practices that can reduce uncertainty by making the founders validate their hypothesis one after the other. It’s all about validated learning, which means applying science to decide if the company is going in the right direction.

And by science I mean metrics.

The video

This week I gave a presentation in the Barcelona Lean Startup Circle titled Metrics for Pirates. Itnig was kind enough to record and upload a video, so if you don’t feel like reading you can watch it here. Not even half an hour.

But moving on our subject, we were talking metrics…

Actionable metrics

Drawing by Jordi Romero, showing an acquisition funnel generating revenue

The secret to make smart and fast decisions in a startup is having metrics for everything. Actionable metrics. An actionable metric is one that tells you that some relevant business indicator (revenue, I’m looking at you) will increase by a known factor if some strengh is applied. This means that if you have a 2.0% conversion rate and you can increase that by 20%, your revenue will be affected proportionally. Of course there are variables that affect this formula because the whole process is not rigid, but you get the point.

Customer Acquisition Funnel

Another concept to talk about before going to the actual metrics is the Customer Acquisition Funnel. We’re talking business here. And specifically we want people to pay money for stuff. Let’s call these people customers. I wish there was a tree that grew customers, but as far as I know, there’s no such thing. So we have to go get them. Out in the wild.

There are many kinds of customers and many ways of finding them and converting them into paying customers or any kind of revenue-generating users. We’ll not get dirty discussing them, though I’d love to hear from you if you want to discuss any specific case.

Customer acquisition funnel drawing

Here’s where I say: AARRR! Acquisition, Activation, Retention, Referral and Revenue. That’s what you do to your customers in order to make your business work.

I hope the image next to this paragraph is clear enough, but in case it’s not:

  • Acquisition is where you get the attention from somebody in your customer segment. Let’s say you get him to visit your landing page.
  • Activation is when you make this user not regret his visit. She likes what she sees. She’s happy. She clicks through your links (if you know what I mean). She signs up for a newsletter, free trial, WHATEVER.
  • Retention is when this user shows repeated interested in your product. Either by coming back to your website a couple of times a month or by keep using your free trial, opening the newsletter, reading the RSS feed, …
  • Referral is a little bit out of the loop, because that’s when you get your best users (the promoters) to recommend your product to other users. This one is a sexy one.
  • Revenue is when you generate money out of a user/lead/visitor or however you call the people in your funnel. If referral is sexy, this is getting laid.

So there’s your funnel, pirate. Go make money with it. I’ll warn you: this funnel is leaky. And your job (as a CEO, founder, or whatever kids call themselves this days) is to patch the leaks and oil the machine. You want big volume at the beginning of the funnel and high conversion through it.

Acquisition

Acquisition is the first step in this process. It means feeding the funnel so you can afterwards convert these people into revenue (paying customers, revenue-generating users, …).

How to get people into the funnel? Ask your marketing guy. A few concepts that should ring a bell: SEO, SEM, PR, E-mail marketing, Social Media, Affiliation platforms…

How to measure each of these channels? Try to segment well and go deep in the funnel, then measure the revenue each of them is generating. That’s the best way to set the dollars per user for each channel. Also, keep in mind that good channel is one that can give high volume, high conversion and low cost. Acquisition, metrics for pirates

Activation

Once you get someone’s attention, you better keep it. So create killer landing pages for a product with killer features. You need to make the user happy about finding you.

How do you measure this happiness? Depends on the business, but bounce rate (or the lack of it), visit duration, usage feature, newsletter subscription, free trial signup, etc. are a few examples of activated users behavior. Tools like A/B test are really valuable in this step. Don’t abuse them, remember to look at statistical significance, use it in conjunction with your common sense and do short cycles. My favorite tool here is Visual Website Optimizer.

Also, remember tagging your users (via URL, via your own custom system, whatever) so you can then look deep down in the funnel and see what version of the split test is working better, etc. Most of the analytics systems that we’re going to use understand Google’s way of tagging links. Activation, metrics for pirates

Retention

They say it’s cheaper to keep a customer than to get a new one, and they both generate the same amount of revenue. And, true story, most people often forget to take care of their own user/customer base. How do you measure people using your product or staying as a lead for a long period of time? Repeated visits (% of users that come 3 times a month to your website), active usage of your software-as-a-service, open-rate in the weekly newsletter, RSS feed view-rate, …

If you can get your user’s e-mail, do it! Then use some e-mail marketing software such as Mailchimp. With Mailchimp you can nourish a user database that you can use for your weekly/monthly newsletter but most importantly you can setup Autoresponders that will let you automate e-mails given user behavior patterns such as: days of inactivity (one after 3d, 7d, 1m, …), key feature usage (or the lack of), and many other creative ways of ensuring your users are doing what you want them to do.

If you don’t get our user’s e-mail, then you can try with Google AdWords remarketing/retargeting campaigns. You should of course track all this activity through Google Analytics or KissMetrics. Retention, metrics for pirates

Referral

Who doesn’t want their product to go viral? This is in itself a science or an art, I’m not sure, but we’re not going deep in this subject here. Maybe it deserves its own article. Quick tips: don’t try to go viral unnaturally. If your product rocks, it will go viral organically. If your product has some kind of virality in its nature, then try to enhance it by offering your promoter users (people who would vote your product with a 9 out of 10) the right tools to spread the word. Don’t push virality tools or reward programs to just everybody, that could go against you. Referral, metrics for pirates

Revenue

You made it! Someone’s willing to pay you money, or do actions that will lead to revenue indirectly (such as: active readers in a publication that makes money via Google AdSense or other usual suspects).

There’s nothing for me to tell you about your revenue strategies or how to measure it, because I don’t know your business, but, remember, measure everything, segment your revenue reports by user acquisition channels, user behavior, etc. Then try to put more efforts in the best performing channels or try to fix what’s wrong with the others.

Enjoy!

Revenue, metrics for pirates

The big-ass flag

CEO holding a flag with metrics

You see the little guy holding a big flag? She’s the CEO. She has a great team of 1 to tens of people working real hard to deliver great product to a huge customer segment with a growing market. Who doesn’t.

Good news is that now she knows what business indicators (our old friends, the metrics) should be following and basing her decisions on. Bad news is that this alone is a full-time job. And as the company grows CEOs have to delegate work and responsibility to new executives. Delegating the ownership of these metrics is crucial. In this example I wrote possible departments that could own each metric. Read Marketing, Product, Growth Hacker™ (f*ck yeah buzzword), Biz Dev, …

So go build a dashboard with all these metrics and try to make all your decisions as data-driven as you can. And if you’d like to discuss your particular company or how does all this thing apply to it, don’t hesitate and contact me.

Credits: This whole pirates thing is nothing new, Dave McClure has a great presentation about it from back in 2007. If you’re interested in the subject, you should definitely go check him out. All the drawings from this post are carefully done by the author, Jordi Romero, using a Montblanc pen with a black fineliner refill, then scanned and vectorized to give it a more digital look.

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