The best startup metrics for pirates
Growth metrics for Product Managers
Dave McClure, venture capitalist, angel investor, founder of startup accelerator 500 Startups, introduced the world to a 5-step framework for growth. That framework was called AARRR, or the Pirate Metrics for startups.
What is AARRR?
AARRR stands for Acquisition, Activation, Retention, Referral, and Revenue and is pretty much the bee’s knees when it comes to understanding your customers, their journey, and optimizing your funnel well as setting some valuable and actionable metric goals for your startup.
Let’s jump into each category and see some sample metrics -
Acquisition
“Where Are Our Users / Customers Coming From?”
The acquisition is all about measuring how you are acquiring your customers. It often helps answers the following questions -
What channel is driving the most traffic (#)?
What channel is driving the most valuable traffic; in other words, it performs best (%) in terms of customer conversion?
What channel has the lowest customer acquisition cost ($), i.e., cost per customer converted?
Activation
“How good is the user’s / customer’s first experience?”
Activation tells you how the users are signing up for your product/service. Facebook profile completion is an example of activation.
% of unique signups/total named users
% of users completing the profile information etc.
Engagement
Engagement metrics are the indication of how your users are using your products.
Daily Active User (DAU) — the number of active users per day. An “active user” is one who signed in to an account and performed some valuable activities.
Monthly Active User (MAU) — the number of active users who complete valuable activities per month.
This KPI is applied to mobile apps, online games, websites, and social networks. A unique user is defined by ID and login. In identifying the “stickiness” of a product, apply the DAU/MAU ratio.
DAU/MAU(in %) = # of Daily active users / # of Monthly active users
Session duration
This KPI is the easiest way to track digital product usage. The best way to measure it is to take the total time users spend on your product, divide it by the number of users, and take the mean value. Google Analytics calculates this number for you.
Retention
“How many of your customers are you retaining, and why are you losing the others?”
Retention rate
Customer retention rate (CRR) is the percentage of customers who stayed with the company after a certain time period. You can base your calculations on several downloads or first logins to the app.
Retention rate = Customers at the end of the calculated period - New customers / Customers at the start of the calculated period x 100
Churn rate
Customer churn rate = Customers lost / Total customers
Referral
“How can you turn your customers into your advocates?”
Net Promoter Score(NPS) -
This metric measures the number of loyal customers who are likely to recommend a product (promoters) and those customers who hate it (detractors). To calculate NPS, ask users to rank your product from 0 to 10. Detractors would give it from 0 to 6 points, users with 7–8 points are neutrals, and those who gave it 9–10 are promoters. The NPS formula is:
NPS = % of promoters — % of detractors
Bain and Company, who initially introduced the metric, identified that high NPS leads to 20–60 percent of organic growth. The same goes for negative NPS — a high number of detractors results in economic penalties.
Customer Satisfaction Score (CSAT) -
It measures the overall level of content or discontent about a specific product or service feature. Usually, users are asked to rank a product or service on a scale of 1–3, 1–5, or 1–10. It’s calculated by summing the score and dividing it by the number of respondents. Unlike NPS, CSAT is directed towards evaluating satisfaction with a particular feature. Customer experience is measured with other metrics: Customer Effort Score (CES). Measured like the CSAT, you need a customer survey where users rank how easy it was to find necessary information about a product.
Revenue
“How can you increase revenue?”
Customer acquisition cost (CAC)
This metric covers all the costs spent on attracting customers: marketing spendings, sales teamwork, advertising. Sometimes these costs include salaries of marketing and sales professionals. Usually, customer acquisition cost involves setting a specific period of time and total revenue. There are several formulas to calculate CAC, but the simplest one is:
CAC = Sales & marketing spendings for a period of time/total # of customers generated for a period of time
Annual Recurring Revenue (ARR) = MRR *12
Product’s annual revenue.
Monthly Recurring Revenue (MRR)
Product’s total revenue in one month. To calculate them, consider the MRR at the beginning of the month, add gained revenue from new subscriptions, and subtract churned revenue from lost customers.
True MRR can be found from the following equation breakdown.
MRR = MRR at the beginning of the month +
MRR gained from new customers for the month +
MRR change gained from upgrading customers for the month -
MRR change lost from downgrading customers for the month -
MRR churn from the month
The average revenue per user (ARPU)
ARPU allows you to count the revenue generated per user monthly or annually. You need these metrics to define the future service revenue if you’re going to change the pricing plan or roll out a promotion.
There are two types of ARPU: per new account and existing account. ARPU per new account refers to metrics based on new accounts appearing after the subscription plan or product price was changed. ARPU per existing account involves the data from accounts established before the price change. This is the ARPU formula:
ARPU = Monthly recurring revenue / total number of accounts
Use ARPU to compare yourself to competitors, consider different acquisition channels or segments, which tier of customers brings more value.
Customer Lifetime Value(CLTV)
These metrics allow you to calculate how much money a user will generate in the long term. LTV displays an average profit from one user before they cancel a subscription. The point of this KPI is to show you how much you can spend to attract a new customer at an early stage, regarding the probable profit from one person. To calculate it, establish an average customer lifetime duration (how long a customer uses a product before stopping) and average revenue per user.
CLTV = Average Revenue Per User (ARPU) * Average customer lifetime
Sample KPI Dashboard for an early stage SAAS startup
Of late, I have been asked by some of my readers if I can provide any sample KPI Dashboard for an early-stage SAAS startup.
Here are some of the sample Dashboards that I have come across and have taken reference from in my work -
KPI Dashboard from Christoph Janz. You can download the Dashboard from here.
SAAS Metrics from David Skok
Sincerely,
Arkapravo
That’s all for this post. Thanks for reading. If you wish to read more, please check out some of my other posts -
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