In 2007, angel investor and now head of 500 Startups Dave McClure gave a talk at Seattle Ignite about a 5-step framework for startup growth he called Pirate Metrics.

A former employee of PayPal, Dave used a simple mnemonic to help drive home what he was talking about it. And he borrowed the oldest pirate joke in the book to do it.

Acquisition, activation, retention, referral, and revenue, or AARRR, are now widely accepted as the five areas most crucial for startups to focus on. The system Dave devised for understanding it is still in widespread use. It's Page 1 in the Lean Startup playbook, and for a very good reason. It works. Here's how:

1. Optimize Your Acquisition

Acquisition is the first and most important step for any app. If you don't have users, your product will fail. But you also need to define the right metrics so that you know you're tracking acquisition the right way--without that, you don't know if you're really improving. You won't know if you're spending money on the right channels and you won't know if you're reaching the right audiences.

To really track the success of your acquisition numbers, you need to track how many people you convert into customers. Once you're on top of the numbers, start testing and tweaking everything from your landing page to your ad images to find out what messages are leading to real activity.

One of the most powerful platforms for tracking acquisition is Facebook. With access to Facebook's insane trove of user data, you can define hyper-specific groups of users you want to reach and then analyze how you're doing. Setting up lots of these tests can be time-consuming and difficult, so consider using a tool like AdEspresso that makes it easy to set up multiple ad campaigns and get immediate, easy to interpret reports in real time.

2. Speed Up Your Activation

Activation is that magical time between when a customer discovers your product and when they fall in love with it. It's the "AHA!" moment where the value of your product clicks, where ambivalence becomes habit and you have a real user on your hands.

To find your app's AHA! moment, you don't need your gut. You need:

To track every single action
Then, you need to segment your users
Over time, your analytics will show you

That's the only way to really figure out your app's AHA! moment.

Actually building and testing new user flows to bring users to those AHA! moments faster and more efficiently, however, is one of those frustrating blends of marketing and software development. That's why tools like Appcues are so powerful. They let you construct, block-by-block, whole new journeys for your app's users. There's no coding required, and you can access all the relevant data without having to bother a single member of your technical team.

3. Retention Is King

Customer retention, or keeping people around after they sign up or download your app, is how you turn your success with acquisition and activation into growth. With low retention, or a "leaky bucket" of a product, you're going to lose more and more customers the more you ramp up your acquisition efforts. You'll also burn massive amounts of money in the process--Bain & Co. estimated that it was 7x more expensive to get new customers than it was to keep one around.

The most powerful tool for encouraging retention is well-timed, targeted emails. The inbox is one of the last places where you can reach out to customers in a personal, meaningful way. Few marketers get it right, which makes email a massive opportunity for those willing to put in the time to really personalize their messaging.

To do that, you need to both collect data and have the right tool to use it. Customer.io is an email marketing platform with powerful segmenting and analytical capabilities, but it's also simple enough to use that you don't need to get your developers involved. You can analyze your users by how they behave within your product and how often they visit, then use that information to craft the right email for the moment.

4. Build A Referral Machine

One of the most powerful ways to drive your company's growth is through referrals. That's because referrals are frictionless--users are happy to exchange them if they're getting something out of it--and because the new customers you get come pre-qualified. A friend has told them your product is worth trying out, and that will encourage them to stick around and try it out longer than your average new user.

Lots of entrepreneurs think the only valid kind of referral is the kind where each new customer you acquire refers more than one, or viral coefficient k > 1 referral. That's the Holy Grail of referral, the Dropbox-style exponential growth curve kind. And it's totally unnecessary to shoot for that.

As referral marketing technology platform Extole writes on their blog, "a solid Refer-a-Friend program will lift all of your non-viral customer acquisition channels and provide the foundation for sustainable, long-term growth from word of mouth." In other words, even a modestly successful referral program can be a massive boon to your bottom line because it will act on every channel you're using to acquire customers.

5. Create More Revenue

The best way to increase revenue is to get more value from your customers than it costs to acquire them. This is governed by the LTV:CAC ratio. Lifetime value (LTV) is how much you earn from your customer over their entire time spent using your product. Your customer acquisition cost (CAC) is what you spent on sales, marketing, meetings, steak dinners, etc. to get that customer.

Profitwell, a SaaS for tracking and analyzing your financial metrics suggests an LTV:CAC ratio of at least 3:1 if you want to see sustained growth in your company. To set a value metric that scales with your customers and optimize your LTV and CAC, there are three basic strategies:

Funnel optimization
Pricing optimization
Engagement optimization

Execute on these strategies, and you can achieve an LTV:CAC ratio of 3 to 1 or more, getting more value for each customer, earning more revenue, while maintaining the great experience that made them customers in the first place.

If It Ain't Broken

McClure was one of the first to proclaim that most of the things that internet marketers were measuring--page views, downloads, registrations--were totally bunk. They were vanity metrics, numbers that did little more than make us feel good for no real reason. What marketers needed to do was break down their business into its constituent parts, like a mechanic would an engine, and analyze how well each part was working together.

No matter what new trends or fads pop up, no matter how marketing or advertising end up changing, these are the numbers that actually drive your business's success. They're how you can understand whether a company is actually a well-oiled machine or just a puff of hot air. For that reason, they will not cease to be relevant.

Published on: May 15, 2016