Product Management Metrics Series | Part 1 | How Netflix uses the AARRR metric to measure its success!

Hello to the Medium community! Have you ever wondered how major businesses like Netflix achieve success? Having a fantastic product is not the only important thing. After launching a product, a very important task is to measure how it is performing. And this measurement is done using ‘Metrics.’

I’m not here to bore you all with just definitions from the sites. I’m delving further into the real deal and how these measurements function in the real world. I will explain how three digital products use metrics to measure their performance. With this three-part blog series I will take you through the stars of product management — AARRR, HEART and the North Star Metric.

In this Part 1, I will cover AARRR. Let’s get started!

The AARRR metric, also known as Pirate Metrics, is a framework used to track the customer journey. It consists of five stages: Acquisition, Activation, Retention, Revenue and Referral. These stages represent the crucial actions a customer or user takes while using a product. By analyzing each stage, and understanding the user interaction with the product, the product owners can identify the areas of improvement in the product which can lead to performance improvement.

I’ll now use Netflix as an example to demonstrate AARRR. Therefore, as a user progresses through their life cycle, their activity may be tracked to determine how well the service is performing at each stage.

Acquisition
How does Netflix acquire its customers? First, it raises awareness through various channels, including collaborations, social media exposure, and digital marketing efforts including search engine visibility. Netflix has a sizable following on Instagram, with 9.1 million people following its Netflix’s India account. The bulk of Netflix’s Instagram posts consist of photos, behind-the-scenes videos, and actor interviews, along with short clips from TV shows with interesting captions to spark discussion. They aim to attract the audience through their original content and productions. The audience becomes interested as a result, and they visit their Netflix platform (website or application).

Relevant metrics for measuring success during the acquisition phase include -

1. Social Media Engagement Rate - To determine audience engagement and interest sparked by social media exposure, track the amount of interaction (likes, comments, shares) with Netflix’s Instagram posts.
2. Website/App Traffic - To determine how effective social media platforms, partnerships, and digital marketing initiatives are at generating traffic, keep track of how many people visit Netflix’s website or application.
3. Click-Through Rate (CTR) - Track the proportion of individuals who click on links or ads pertaining to Netflix content in postings on social media or online marketing campaigns to assess how well these initiatives are generating user interaction.
4. Customer Acquisition Cost (CAC) - To determine the effectiveness and return on investment of these acquisition channels, compute the cost of obtaining each new client through partnerships, social media exposure, and digital marketing initiatives.
5. Conversion Rate - Determine the proportion of users who arrive at the website or application from different acquisition channels, sign up for a Netflix account, or begin a free trial, in order to evaluate the efficiency of these channels in converting interested audiences into paying customers.

Activation
After acquiring the audience on their platform comes the onboarding phase. To use Netflix, users must first sign up. Getting users to interact with the platform and begin utilizing its features is the goal of the activation phase. The users set up their profiles, browse the content and start watching the videos. Making the user’s experience as beneficial and positive as feasible is the aim of this phase. The user should be satisfied with their decision to use Netflix throughout the entire onboarding process and video viewing experience to encourage them to return to the platform.

Relevant metrics that can measure success during the activation phase include -

1. Customer Conversion Rate - This statistic expresses the proportion of visitors to the site who are able to successfully create an account or begin using Netflix. It shows how well the onboarding procedure worked to turn site visitors into engaged users.
2. Drop-off Rate - This measure indicates the proportion of users who leave the onboarding process early. A high drop-off rate may indicate problems with the platform’s usability or obstacles keeping users from participating to the fullest.
3. Dwell Time - This is the amount of time that users spend interacting and getting to know the Netflix platform during the onboarding process. Extended dwell periods indicate that users are interacting with the platform and discovering its features, which is a sign of a satisfying activation experience.

Retention
When the users are engaging with Netflix and watching its videos. retaining subscribers is crucial for Netflix’s business model. Netflix has to employ strategies to keep users coming back to the platform and continuing their subscriptions. This involves offering a vast library of high-quality content, releasing new movies and TV shows regularly, and personalizing recommendations to match users’ interests. Based on the person’s previous watch history, recommending them to watch other content is an important activity.

Relevant metrics to measure success during the retention phase include -

1. Churn Rate - The percentage of subscribers who end their subscriptions within a given time frame is measured by this metric. A lower churn rate indicates higher customer retention and reflects the effectiveness of Netflix’s efforts in keeping users engaged and satisfied with the service.
2. Login Frequency - The frequency with which users access their Netflix accounts is measured by login frequency. Increased login frequency indicates active involvement and utilization of the site, which increases the chance of retention.
3. Retention Rate - This metric determines the proportion of subscribers who stick with their plans for an extended length of time, usually year over year or month over month. A greater retention rate suggests that Netflix is doing a good job of holding onto its users and keeping them happy with the service.

Revenue
The main source of revenue for Netflix is subscription fees. To appeal to diverse user categories, they provide several subscription tiers with varied features and pricing alternatives. Additionally, Netflix provides exclusive content that is exclusively accessible to subscribers, giving it an advantage over users who want to watch particular kinds of content. With new, upcoming films, series and shows Netflix is increasing both the amount and quality of its offerings.

Relevant metrics to measure success during the revenue phase include -

1. Customer Lifetime Value (CLV) - CLV represents the total revenue a customer is expected to generate over their entire relationship with Netflix. It helps Netflix understand the long-term value of acquiring and retaining customers, guiding decisions on marketing, acquisition, and retention strategies.
2. Expansion Revenue - Expansion revenue measures the additional revenue generated from existing subscribers upgrading to higher-tier subscription plans or purchasing additional services, such as premium content or add-ons. It indicates Netflix’s success in upselling and cross-selling to its existing customer base.
3. Monthly Recurring Revenue (MRR) - MRR calculates the total revenue generated from Netflix’s subscription fees on a monthly basis. It provides insight into the company’s revenue stability and growth trajectory, allowing for more accurate forecasting and strategic planning.
4. Revenue Churn - Revenue churn measures the loss of subscription revenue over a specific period due to customer cancellations or downgrades. It helps Netflix assess the effectiveness of its retention efforts and identify areas for improvement in reducing customer churn and preserving revenue streams.

Referral
Netflix does not depend on conventional referral schemes. However, any new profile made by a Netflix member who shares their account with others who also create profiles and use Netflix might be regarded as a referral since it increases Netflix’s user base without additional marketing costs. Social media sharing and word-of-mouth advertising are also advantageous to them. Satisfied customers frequently tell friends and family about Netflix, which naturally expands the number of subscribers.

Relevant metrics to measure success during the referral phase include -

1. Purchase Rate of Referred Customers - This indicator shows what proportion of new users join Netflix as a result of referrals from current users. It shows how well word-of-mouth recommendations work to increase the number of new subscribers.
2. Viral Cycle Time - This is the amount of time it takes for a new user to recommend other users, and then those recommendations recommend even more people, therefore starting a chain reaction of referrals that keeps growing. A shorter viral cycle time translates into faster organic growth via word-of-mouth recommendations.

In conclusion, we can understand the user journey from acquisition to referral and the critical metrics that measure the success at each stage by using the AARRR framework to Netflix. Netflix sustains its development trajectory and enhances the user experience by measuring, analyzing and optimizing the key KPIs.

I now wrap up Part 1 of the series. I’ll discuss the next metric, HEART, in the next one.

I appreciate you reading this far. Since I’m constantly learning and growing, any encouraging comments and positive feedbacks are greatly valued. Watch this space for the next one!