Business model of SAAS explained via AARRR framework

Dave Mcclure an angel investor based in the San Francisco Bay Area, founder of 500 startups is the man behind AARRR framework. 13 years ago, in 2007, he introduced the world to a 5-step framework for growth. That framework was called AARRR, or also the Pirate Metrics.

What is AARRR?

AARRR stands for: -

1. Acquisition: — Acquisition, the first A in the AARRR framework, describes how people find you and eventually turn into customers.

“How do users find you?”

2. Activation: — Activation is about the first experience customer has with the product. It is not enough to get people to download and install your Application or software, if they are going to stop using the app right after. The time between when the user signs up and realizes “Holy cow, I love this”. That is called activation in a nutshell.

“How good is the user’s / customer’s first experience?”

3. Retention: — Retention means people regularly come back to use your product. The opposite of customer retention would be customer churn

“How many of your customers are you retaining?”

4. Referrals: — The absolute best way to drive growth is through referral. This is one of the cheapest ways to market through people who trust your product.

“How can you turn your customers into your advocates?”

Drop box figured that out early on and their referral program was one of the main drivers of their growth.

Two metrics you want to keep a close eye on for referrals are the Net Promoter Score (NPS), an index that ranges from -100 to 100. It measures how willing customers are to recommend any company’s product or services.

Another one is the Viral Coefficient. The viral coefficient is the number of users a customer refers to a particular company’s product.

5. Revenue: — No matter what anyone tells you, revenue and figuring out a monetization plan is important for any startup or a newly launched company. Even Facebook and Instagram, which started as pure social, non-monetary platforms, are making money today because of huge advertising business behind them.

There are two best ways to increase revenue: — By increasing Customer Lifetime value (CLV) and decreasing Customer Acquisition cost (CAC)

Summarizing, the AARRR framework is the simplest and most effective way to look at optimizing startup business and measuring growth.

Understanding AARRR framework in a context of SAAS business (Sales force, Intuit, Service Now, Altassian etc.): -

Acquisition: — How do users find you? In SAAS, sign up starts with a free trial, free sign up or a demo, which allows a customer to experience the software and its usage.

What contributes to Acquisition: -

1. Inbound Marketing

2. Paid Advertising

3. Cold Outreach

Metrics for tracking acquisition of a SAAS: -

1. Number of Trial sign ups

2. Number of demos

3. Amount of traffic

4. Number of page views

5. Time on Page

6. Number of clicks

Activation: — How good is the user’s / customer’s first experience? Customers are now using SAAS product and as a product manager we want to make sure that customer achieves that “AHA moment”.

What contributes to Activation: -

1. In-app messages

2. Walkthroughs

3. Videos

4. Emails

Metrics to get this right are as follows: -

1. Completed their profile

2. Embed code snippet on the website

Retention: — How many of customers are you retaining? Customers are coming back to our product and logging in, they are considering buying the SAAS tool. One of the main goals for a healthy Saas company is to not only show the initial value, but also continue to deliver value.

What contributes to Retention: -

1. Net Promoter Scores

2. Viral Coefficient

3. Notifications or alerts

4. Customer Success content (blogs, newsletters etc.)

Key metrics to track successful retention of customer: -

1. Users login X times per day/week/month

2. Open rate or CTR for the messages or e-mail sent by SAAS company

3. High Net Promoter Score

4. High Viral Coefficient

Referral: — “How can you turn your customers into your advocate?” Customers loved the SAAS tool and start sharing it with their network of friends, colleagues and co-workers.

What contributes to referrals: -

1. Forwarded Emails

2. Affiliate Programs

3. Contests

Key metrics to track successful referral: -

1. No. Of invited friends total

2. No. Of invited friends per X (day/week/month)

3. No. Of Emails forwarded

4. No. Of Moves up or down a waitlist

Revenue: — “How do we make money”? Customer will subscribe to the SAAS tool and become permanent customers.

What contributes to Revenue?

1. Users Pay (Like monthly/Quarterly/Yearly subscription)

Metrics to track Revenue: -

1. Sign ups

2. Up-sells or Cross-sells

3. Affiliate or referral revenue

AARRR Dashboard for SAAS Business model: -