By Mark Harrison
What’s a pirate’s favourite letter of the alphabet? Obviously, it’s the C, but if you’re running an eCommerce business, it’s the AARRR that should interest you.
Pirate metrics is a fun name for a handy system created by Dave McClure, the founder of tech company incubator 500 Startups. Named for its acronym AARRR, (Acquisition, Activation, Retention, Referral, Revenue) this system is designed to help you measure the success of your business using comparative metrics at different stages of the customer lifecycle.
Most often used for start-up companies and Software-as-a-Service (SaaS) companies, these metrics can be harnessed in order to help you understand the user experience of your site, whether they only click on your site once or they are fully recognised as one of your regular customers.
The nature of selling products or services online is such that you’ll usually have far more visitors who don’t buy anything than those who convert all the way to bringing you regular revenue.
Think of your site as a funnel, where the greatest volume is at the top, and it decreases as you go through each metric.
However, if you create a strategy that optimises growth at all levels you’ll be able to create more customers from your leads and even accelerate that lifecycle.
Using pirate metrics, you’ll be able to get answers to the key questions you have about your eCommerce site and learn how to maintain and improve your performance. Let’s take a closer look at those metrics:
|A||ACQUISITION||How did your customers find your business?|
|A||ACTIVATION||Has the customer completed a transaction?|
|R||RETENTION||How many customers come back? Why are you losing the others?|
|R||REFERRAL||Will your customers recommend your business to others?|
|R||REVENUE||What can you do to decrease costs and increase revenue?|
Simplicity is the key here. The more of these stages a customer hits, the more you can learn about their usage.
Too often, businesses are taken in by vanity metrics, boasting the most visitors even if it leads to a meagre amount of full conversions.
By contrast, McClure’s system is based around using and applying data to improve efficiency, rather than just looking for the answers you want to hear.
Even if you’re not hugely well versed in analytics, pirate metrics serve as an excellent introductory framework that will help you figure out how to grow your business online.
How did your customers find your business?
It takes time and money to attract new customers. In terms of metrics, acquisition covers everything from your potential customers finding your sites up to the moment they first engage with your products or services.
Whether it’s a social media strategy or a flyer campaign, your marketing will be focused on grabbing the attention of potential customers. In a competitive market, it may seem wise to use a multi-platform approach, ensuring you are represented across all channels.
There’s nothing wrong with this in principle, but we’ve found that it’s better to excel in one channel and scale up, rather than waste energy trying to keep on top of several platforms unsuccessfully.
If you find that some channels aren’t working for you, it’s sensible to drop them and concentrate your efforts elsewhere. Alternatively, if one channel is working really well, see what you can learn from your success.
It’s not only a question of which channels are helping users to find you but also where your conversions are coming from. Measuring acquisition entails looking at everything that fits between these two points and seeing what you can learn.
This is where the difference between qualified and unqualified leads becomes important. While vanity metrics permit some to boast about their site’s average browsing time or unique impressions, the percentage of conversions provides crucial context for site traffic figures.
For instance, did you know that most mobile browsing on eCommerce sites never leads to the customer buying something? With this in mind, you need to spend money effectively in order to foster engagement.
It doesn’t have to be a full conversion. Any kind of engagement with your site, be it signing up for email updates or following your social media account, is more likely to lead to someone making a purchase down the line. These micro-conversions are all examples of a transaction with a lead, even if no money changes hands.
The criteria for your most successful channel are always going to be centred around three factors – site traffic, conversion rate, and the cost to you. You’re looking for the highest value for the highest traffic, at the lowest cost per conversion.
By finding your ideal channel, you’ll get an idea of what works about your marketing strategy and you’ll be able to focus your acquisition efforts in that area, experimenting further to create growth.
Has the customer completed a transaction?
This step is about the moment that a site user changes from a lead to a customer. This signifies that your customer understands the value of your products or services and has decided to buy.
Rather than just subscribing to email updates or using your free resources, they have become activated. That first sale is a basic goal for your eCommerce website, especially in the wake of a micro-conversion.
A simple way to activate registered users is through email updates. If the user has subscribed to receive email updates, you can easily capitalise upon their interest by providing more information about what you are offering.
To use a highly successful example, the people behind Twitter discovered early on that once a user had followed more than 30 people, they were more likely to come back to the site to check for updates from those accounts.
That’s why they introduced a feature suggesting popular accounts at sign-up, to scale up the number of activated users.
Measuring activation is a question of what the customer was doing before they clicked through to the checkout. Learning what parts of your site work well for users will allow you to optimise the browsing experience for faster conversions in the future.
Lead with your best foot forward and you’ll convert more of your unqualified traffic into qualified leads.
Whether it’s a great homepage or a helpful GEO-targeted landing page, finding out what activates your customers is not only useful in acquiring more users but also a great way of retaining them.
How many customers come back? Why are you losing the others?
Did you know it costs at least 5 times more to attract a new customer than it does to retain an existing one? That’s why you should always keep track of how much repeat business you are bringing in.
While acquisition and activation are important in and of themselves, customer retention is a key performance indicator for your eCommerce site. Using pirate metrics to inform your retention strategy will help you to reduce the number of customers who jump ship after the first sale.
Email updates are a popular method of retaining customers once they have been activated. If they have consented to you emailing them, you can send targeted emails to either ask for feedback on their purchase or notify them of other related products or services you offer.
It’s also worth including “sticky features” on your site. A blog is an ideal example of a consistent content delivery system that will encourage users to return to your site again in the future, as well as offering additional knowledge that adds to the value of your services.
Sometimes, retention is not so much about boosting return customers as reducing customer churn. The only way to achieve growth is to keep more customers than those who go overboard, which is why it’s important to monitor churn.
If you lose a potential customer at any stage of their experience on your site, you must ask questions about why it’s not working. Because of the way we shop online, abandoned shopping baskets are not common for eCommerce sites that haven’t nailed down their retention strategy.
When troubleshooting for this metric, it’s important to observe that the problem could equally be with your product or service, rather than your marketing. Is it overpriced? Have you given enough information about it? If these factors are making you lose business, then fixing them should help to reduce churn.
As ever, negative feedback can be helpful as positive feedback, so it’s equally useful to reach out to unqualified leads wherever possible.
Will your customers recommend your business to others?
Build your reputation within your field and service area by encouraging reviews. Referrals from existing customers are immensely valuable when it comes to attracting new leads, as they help to corroborate your own marketing efforts.
Your referrals are proof that you offer a great service that your customers can’t help but rave about to their friends. That’s why you should motivate and incentivise your customers to refer others to your business wherever possible.
In terms of incentives, this could be as simple as Hotmail’s strategy of adding a line saying “Get a free email account with Hotmail” to the signature of every message sent. Facebook, Twitter, and Dropbox are all examples of other platforms that grew through the use of an “invite your friends” option.
Tactics like these enable you to convert customers into influencers and promoters, with no additional cost to your company. The metric for this is known as the Viral Coefficient, which is the number of users that each customer refers to you. In order for your business to grow through referrals, your Viral Coefficient must be greater than 1.
Additionally, while negative feedback can be used in a constructive manner, you only want positive referrals. Welcome all kinds of reviews, but as a rule, you want to engage customers who score your services in the top 20% to recommend you to others.
On a scale of 10, customers who give you 9 or 10 are your most likely Promoters. 7 or 8 is regarded as Neutral and those who score you 6 or below must have enough significant reservations with your service to be considered Detractors.
Using this data, you will be able to calculate your Net Promoter Score, (NPS) a metric that allows you to figure out how satisfied your customer base is with your services. This is far from the be-all and end-all of your market research, but it provides a bar that you will surpass by implementing further changes as you develop.
Examples of changes that engage customers are competitions and campaigns, which have proven an especially effective way of earning likes and shares while also incentivising customers to promote your business.
What can you do to reduce costs and increase revenue?
Ultimately, it goes without saying that you’re looking for your eCommerce site to generate revenue for your business. With that in mind, the relationship between cost and revenue is one that must be carefully observed.
This means you have to keep two key values in mind. First, Customer Acquisition Cost, (CAC) defined as any money you spend acquiring a customer. In order to generate a net profit, the sum of this cost must be lower than the Customer’s Lifetime Value, (CLV) or how much a customer spends throughout their entire relationship with you.
Although applying pirate metrics will enable you to optimise your sales funnel, saving you time and money on ineffective features, this isn’t purely a cost-cutting exercise. You should endeavour to increase value throughout the customer lifecycle.
This is why Average Order Value (AOV) is also a factor. This can be calculated by dividing your total revenue by the total number of orders taken, but for more qualitative analysis, you should identify repeat customers who make small orders in order to boost value.
For instance, you could use targeted email updates to tell these customers about products and offers related to their last order. One popular tactic is to offer free delivery or money off a future purchase for high-value orders, e.g. “10% Off Your Next Order When You Spend £50”, in order to motivate customers to spend more.
Still, AOV should be monitored on a regular basis as and when you make any changes to optimise the rest of your site. Any fluctuations could indicate whether or not your strategy has been successful.
If the average decreases after a change in formatting, or dramatically increases when you introduce a new special offer, you will be able to see how these changes have affected your revenue. Likewise, if the value stays constant, it may show these changes are ineffective.
Combined with the aforementioned metrics, this information allows you to hone your approach accordingly. If it’s helpful, think of pirate metrics as your treasure map, providing all the data you need to help you increase revenue while keeping costs low.
Conclusion: Does X mark the spot?
Unlike treasure hunting, business is not a finite pursuit. Instead, pirate metrics provide a useful and straightforward guide to optimising your users’ experience of your eCommerce site.
It’s not a checklist to go through once and then forget about. For the best results, you need to set key performance indicators for your specific needs and purposes and make sure you return to these objectives over time.
By understanding how you convert leads into customers, you’ll get better at it. Perhaps even more importantly, you’ll learn which tools and features don’t necessarily work for you, allowing you to work more efficiently over time.
Furthermore, despite what the name suggests, this system is about honesty. It is imperative that you don’t use pirate metrics selectively and instead take full advantage of the qualitative and comparative data provided.
Finally, like any full-throated pirate yell, the R’s in AARRR keep rolling into a whole bunch of other steps that will help you to improve your site.
Make this system part of a continuous strategy to maximise your customer lifecycle and you’ll find that you gain an in-depth perspective on how your customers experience your site, your products or services, and in turn, your business.