An introduction to Funnels
Let’s start with something we already know: for any online business or startup, customer acquisition, and retention, are critical aspects of success.
But today with the ever-changing landscape of the digital world, it's even more important to have a roadmap that can help you navigate through the challenges of entrepreneurship and reach your goals!
For you, that roadmap can be the AARRR framework, also known as the "Pirate Metrics"!
So what is this AARRR? Let’s start with the basis!
AARRR framework is a “funnel”, a marketing concept where the customer journey is modeled as a series of stages that lead to a desired outcome, such as purchasing or signing up for a service. The funnel is often visualized as a pyramid shape, with a large number of potential customers at the top narrowing down to a smaller number of conversions at the bottom… but there are different types of funnels!
AARRR and all of its components
AARRR (Acquisition, Activation, Retention, Referral, Revenue), also known as the "Pirate Metrics", is a popular framework used by online businesses and startups that breaks down the funnel into five stages, allowing companies to measure and understand every step the users take, and also allows them to make informed decisions about how to optimize and improve the same funnel.
The framework consists of five KPIs (key performance indicators) that represent each stage of the customer journey: Acquisition, Activation, Retention, Referral, and Revenue.
These KPIs provide a clear method for measuring and improving customer acquisition, but they must be used correctly:
- Acquisition. As the first step in your customer journey, it is a critical KPI that measures the number of new users or customers your business can attract through various channels.
A company that excels in the "Acquisition" KPI is Zoom, a company that provides video-conferencing solutions: its “acquisition” best move has been its focus on providing a user-friendly platform that is easy for individuals and organizations to integrate into their daily workflow.
Whether it's through social media, search engines, or referral programs, understanding where your new customers are coming from is key to continuing to grow and attract new prospects: identify the most effective marketing channels and optimize your strategy!
- Activation. Once you've acquired new customers, the next step is to activate them with your product or service, ensuring that they are fully engaged and experiencing the total value of your offering.
A great example of a company that excels in activation is Dropbox, which provides a seamless and user-friendly onboarding process that allows new users to quickly start using the service and understand its value: you need to create an engaging and compelling customer experience that effectively showcases the benefits of your product or service!
- Retention. As we already said customer retention is critical for long-term success and this KPI measures exactly that: your company's ability to keep its customers active and engaged over time.
Companies like Amazon have built their success on exceptional customer retention, offering personalized recommendations and a seamless customer experience to keep users coming back.
To maximize retention, you need to do just that: understand your customer's needs and preferences, and continuously improve your customer experience to keep them engaged and loyal to your brand!
- Referral. Encouraging existing customers to spread the word about your product or service to their friends, family, and colleagues is a powerful way to drive new customer acquisition and growth!
This is where the referral KPI comes into play: companies like Airbnb have leveraged their referral program to great effect, creating a network of loyal customers who are willing to recommend their products to others.
It’s no easy thing but to have success you should: maximize referrals, and create a clear referral program that incentivizes and rewards your customers for promoting your brand to others!
- Revenue. Finally, the ultimate goal of any business is to generate income from its products or services.
This KPI measures the amount of money your business can generate and companies like Uber have used the AARRR framework to understand their customer acquisition and retention process and grow their business, leading to incredible revenue growth.
That is what every business owner should do, to maximize the revenue you need to: have a clear understanding of your customer's buying behavior, continuously improve your pricing and product offerings, and always make your customer experience better to drive conversions and sales!
AARRR and SAAS Companies
SaaS stands for "Software as a Service", which refers to a type of software delivery model where a software application is hosted by a third-party vendor and made available to customers over the Internet, typically on a subscription basis, rather than selling a license for customers to install and run the software on their servers.
"SaaS Metrics" are key performance indicators specific to SaaS companies, which measure the success and growth of these types of businesses giving insights into their performance, identifying areas for improvement, and enabling data-driven decisions to drive growth and profitability.
Some typical SaaS metrics are:
- Monthly Recurring Revenue (MRR): the revenue a SaaS company expects to generate from its clients each month.
- The Customer Acquisition Cost (CAC): the cost a business pays to attract each new customer.
- Churn Rate: the frequency at which customers discontinue using a service or cancel their subscriptions.
- Lifetime Value (LTV): the total amount of money a business anticipates making from a client over the length of their relationship.
- Gross margins: the remaining revenue a business has after deducting the cost of goods sold (COGS).
SaaS metrics and the AARRR framework are deeply related as they both provide a way to measure the success and growth of a business.
In essence, the AARRR framework provides a high-level view of the customer journey and how it contributes to business success. In contrast, SaaS metrics provide a way to track the specific key metrics of SaaS businesses, as well as a more granular view of specific performance indicators tracking the health of online businesses and allowing informed decisions on how to grow and improve!
Both are important tools for SaaS businesses, and the combination of both insights can help businesses make informed decisions and drive growth!
The Limits of the AARRR model: Rapid Growth and Growth Loops
"Rapid growth" refers to a substantial increase in a company's growth rate, usually over a short period: this can be achieved through a variety of means, including growth loops, effective marketing and sales tactics, or a successful product-market fit!
Products that experience rapid growth often have "self-sustaining" growth loops…but what are they exactly?
"Growth loops" refer to a self-sustaining cycle of growth, where one action leads to another that amplifies the initial increase and these loops often get exponential, as opposed to linear growth.
For instance, network effects are essential to the expansion of social media platforms: they grow in value for current users as more people use them, which encourages new people to sign up and perpetuates the circle of growth.
As long as a self-sustaining growth loop is maintained, a product or service can grow quickly and exponentially…but, not all goods or services, lend themselves to this kind of development!
Developing a self-sustaining growth cycle frequently calls for careful planning and design.
- AARRR funnel is a useful tool for modeling and measuring the customers’ journey, but the problem is that it is limited since it assumes that growth is linear and so it may not fully explain the rapid growth experienced by certain products and startups.
- Growth loops, on the other hand, are self-sustaining patterns of growth achieved by identifying and creating positive feedback loops within a product or service that drive user engagement in a non-linear way.
So, by fostering these loops, businesses can achieve rapid growth and increase customer acquisition and retention more sustainably and efficiently.
Growth loops have become a more effective way of driving expansion and success compared to funnels, quickly gaining traction as the preferred method for SaaS companies and their exponential growth!
So, in a nutshell, the AARRR framework is a very useful tool for businesses and startups to track their customers' journey and grow their success.
By breaking it down into 5 simple stages - Acquisition, Activation, Retention, Referral, and Revenue - you'll be able to pinpoint where improvements can be made and tailor your strategies to bring in and keep more customers!
And if you're in the SaaS industry? Well using the AARRR framework with some SaaS metrics and features, such as “Growth loops”, will give you a well-rounded view of your performance and help you make smart decisions for your business.
Whether you are in a business, startup, or Saas company, follow each step and get to really know your customers’ needs and tastes!