“Dave McClure, the well-known venture capitalist who founded 500 Startups, put together a talk called “Startup Metrics for Pirates,” where he came up with a general approach to metrics for an entire product, called AARRR metrics—although he put it together for startups, where the success of a company depends on one product, it’s useful for any product. The acronym stands for the following:
- Acquisition: How the user comes to your product.
- Activation: The user’s first visit to your product and her first happy experience.
- Retention: The user liked your product enough to use it again (and hopefully again and again…).
- Referral: The user likes it enough to tell someone about it.
- Revenue: The user finds your product valuable enough that she pays for it.
McClure suggests breaking down the key behavioral steps for your product into these buckets (each bucket might have more than one metric within it) and using this funnel to see how users go from discovering your product to being willing to pay. Each large dip is a potential opportunity and a metric to flag, and the ones towards the top of the funnel are the ones to address first.
“Note that the part(s) of the funnel you focus on will depend on your company and product goals. If your current goal is growth, you’d focus on the activation step rather than the revenue step.
It’s also important to note that not every dip in a funnel is bad. For example, the Nigerian spam emails asking you to provide your bank account to a prince (or something similar) have only a 0.1% click-through rate—meaning only 0.1% of the people who receive it click the Send Money link. But this turns out to be an excellent filter for gullible customers, as 70% of the people who click the link actually send money. If they optimized the click-through rate and 90% of people clicked the link, it’s more likely that the site would be reported or taken down, and the spammer would make less money overall.
It’s also reasonable to combine segmentation and cohort analysis and funnels. For example, you might want to look at a funnel with cohort analysis if your product were featured on Shark Tank. You could track how many people went from clicking the checkout button to completing the purchase before you went on Shark Tank, compared to how many people complete the checkout funnel after you were on TV.
Ultimately, no matter how you look at your analytics, your goal is to find a metric you believe is worth improving in order to achieve your product and company goals”
Excerpts From: Josh Anon. “The Product Book.” Apple Books.
Dave McClure
The Product Book
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