Pirate Metrics is the term used to describe a specific set of measurements popular among tech businesses, particularly SaaS companies.
It was originally coined by Dave Mcclure, founder of 500 Startups, and outlined in the slide deck below (now over a decade old, but just as relevant today as it was then).
It has become one of the go-to models for SaaS companies for measuring their performance and growth. The overriding principle is that these core measurements are reflections of the true performance of a business and avoid ‘vanity metrics’ which may look good but do not speak to how well a company is actually doing.
The popularity of pirate metrics in testament to its value and simplicity. But what are pirate metrics and how do you use them to accelerate your startup’s growth?
What are pirate metrics and AARRR?
Pirate Metrics are so-called because the acronym of the five types of measurement spells out AARRR – everyone’s favourite pirate noise.
These metrics comprise of: Acquisition, Activation, Retention, Referral, and Revenue. We will look at these from the point of view of a SaaS company as they can have slightly different implications for different types of business.
Acquisition: Getting a new user to your site/product and converting them into a sign up or customer.
Activation: Broadly, how a user is interacting with your product.
Retention: Are you able to keep your customer using your product or service.
Referral: Do customers recommend you to other people? Are they advocates for your business?
Revenue: All of the above should lead to customers spending money with you, giving you revenue.
The original slide deck explaining this is here:
Let’s look at these five metrics in more detail.
The acquisition element of the pirate metrics approach can be thought of as the traditional top of the marketing funnel through to conversion. Essentially: driving people to your website or product and getting them to register or buy.
There are, of course, various component parts of the acquisition process (all of which need to be measured). This will vary from company to company, and even from user to user. For example, the acquisition journey might look something like: new visitor -> ebook download/email subscriber -> attend event -> registered user or it might just be new visitor -> registered user.
Either way, each of these mini-conversions are an important step in acquisition process and companies should monitor journeys and where potential users are dropping off. By focusing on Acquisition as a metric, your collective mind should be focused on this end goal rather than vanity metrics such as traffic which mean very little on their own. As several teams can be involved across the acquisition process, such as marketing and sales, it can also be useful in ensuring that different functions do not become siloed.
This will obviously vary for different businesses but for our SaaS model, this is typically making sure that users are actually using your product after sign up and getting the most out of it.
Some companies like to think of activation as starting immediately after sign up has occurred: the transition from convincing your customer to try the product to convincing the customer your product offers them value.
Other companies prefer to see overlap between the acquisition and activation stages, with a well-designed conversion process contributing to users’ understanding of how they can get the most out of your service.
However you approach activation, it is important to have key metrics in place to measure success, whether that is number of times a user logs in per week or completion of set up process.
Often companies are able to establish one single point during activation which is the ‘Aha moment’, after which the majority of users will continue to use the product. They can then tailor their onboarding appropriately to push users towards completing this action. For Dropbox, they saw that once a user had uploaded a file they were much more likely to come back, so they included file upload in the onboarding process. Similarly, Twitter recognised that once a user followed 30 people they were far more likely to continue using the service, so included suggested accounts to follow immediately after sign up.
Retention is the natural continuation of activation and, for many, is the most important part of pirate metrics.
Retention, or ensuring that customers continue to use and pay for your product, is perhaps the biggest indicator of the quality of your service and thus the overall quality of your business. The opposite of retention is churn: the proportion of customers who stop using you each month, and this is typically the core measurement for retention.
A proactive approach is usually best when working towards improved retention: automated emails to keep customers up-to-date with relevant new features, account manager check-ins, noticing when there is a drop off in usage from a user and quickly working to establish why.
You will always lose customers for a variety of reasons outside your control but minimising churn is key to growing your business. If churn is higher than, or even close to, rate of sign ups, then you have a problem – quite possibly your product quality of market fit. If it is much lower than sign ups, then you have a growing business on your hands.
It is well known that, for many companies, referral is a key growth channel. Trusted individuals recommending a product is always going to trump marketing messages, no matter how well refined they are.
Most businesses use Net Promoter Score (NPS) to measure how likely it is that their customers will recommend them to someone else, on a scale of 0-10, where 0 is ‘not at all likely’ and 10 is ‘extremely likely’. The NPS is calculated by subtracting the percentage of detractors (who score 6 or below) from the % of promoters (9-10).
As referrals are such an important (and cost-effective) driver of growth, companies often put in place programs of incentivisation to nudge users towards recommending them. To use the Dropbox example again, they offered additional free storage space to users who got friends to sign up.
Referrals can also be measured using the viral coefficient: the average number of users that each user refers to you.
This is the output of all your work developing the machine of AARRR. Safe to say, if the other aspects of your pirate metrics are functioning well: you are acquiring users, keeping them, and they are recommending you to others, then revenue should follow.
But when measuring revenue is it good to dig below the headline figure to fine-tune the machine. What is the life-time value of your users (LTV)? How does that compare to your customer acquisition cost (CAC)?