The Light at the End of the Funnel
Earlier this year, I had the pleasure of moderating a panel event with the growth leads from WeWork/Airbnb and Grab. Looking at the scale and reach of these super-startups, telling you these guys know their shit about growth is a blinding understatement.
In the ninety-minute back and forth, they kept emphasising this: “If you want growth, understand the funnel and know your metrics.”
There are many funnels/revenue models floating around in the business textbooks of the world, but the only one any entrepreneur should be looking at is the Marketing Funnel.
Although it can be awfully technical, present and future growth must be measured through each of its five stages: Acquisition, Activation, Retention, Referrals & Revenue. These checkpoints for growth and the mechanics within them are otherwise known as Pirate Metrics (because… AARRR).
Despite adding another unnecessary mascot to the Ninjas and Jedis of Startup Land, Pirate Metrics have turned out to be a catchy and useful framework for entrepreneurs. It emphasizes the importance of stopping at certain strategic checkpoints and gather data for decision-making instead of just deploying a few campaigns and hoping for the best.
Like everything related to business and startups, growth metrics are unique to the business and the timeframe. It may be possible to seek inspiration from the metrics of wildly successful startups, but it is very unlikely that the same metrics will work their magic for you.
Before defining metrics to adequately measure and drive growth, you have to fully understand the characteristics and potential of each stage of the funnel:
acquisition
The quality of the leads generated at this stage will determine the overall quality of the funnel. It is now crucial to engage your target users by making sure your value proposition(s), messaging and content are clear and that they add value. Depending on the product, the definition of ‘acquired’ can range from users signing up for blog updates with their emails (largely for ecommerce or SaaS) or simply by browsing your content and not bouncing (largely for content creators/platforms).
Take note of your cost-per-acquisition (CPA) and your bounce rate. It is very important to note that each user’s CPA has to be lower than its estimated Lifetime Value (LTV). The goal is to keep the CPA as low as possible compared to the LTV – if your average CPA is higher, you are making a loss. Also, the lower the bounce rate the better, and generally, anything higher than 35% is a cause for concern.
activation
After pre-qualifying the traffic that has landed on your website and successfully engaging your target users, they should now try using your product. It is likely to be the first time they’re using it, your product must be easy to pick up and use, and your users must be able to perceive its value almost immediately. The user on-boarding process, user experience (UX) and user interface (UI) have to be seamless and intuitive or the users will bounce.
In order to accurately gauge the user experience and product usage, breakdown your entire usability process into a series of tasks/actions and track each user’s completion rate — the higher the completion rate, the better. If a user fails to complete a particular task and bounces, the sequential nature of the user process will allow you to immediately identify the feature that needs tweaking.
retention
Track the users’ return activity. There is no common benchmark for the timeframe of return as the type of and frequency of usage is entirely dependent on the product. The average person will open their Facebook app a million times a day, but it is unlikely that their Uber app will experience the same volume of usage. If the user doesn’t return within your defined timeframe, however, start sending push notifications (if you have an app) or deploy a drip campaign to remind them about you and what they are missing out on (for any business that has previously acquired emails).
To find out what is the best trigger for your users, test different types of messages for push notifications and different subject lines and copy for emails. Track and compare pre- and post-notification logins and activity for apps, and open and click-through rates for emails to identify what works best on your target users.
referrals
If your customer base is engaged and active so far, it is time to bust out your referral strategy. Peer validation and recommendations have never had more influence than they do now, and they have the potential to trump all other forms of user acquisition in terms of performance. Users must be able to derive value from referring a friend — this could be in the form of credit or recognition on social media or in-app.
To assess the success of a referral strategy, track the total number of views generated and new users acquired after its launch. If your product has a social aspect, it would also be useful to track the number of referrals generated by each existing user – this will help you identify your ‘star users’ or ‘key influencers’ that you can collaborate with to continue driving acquisition and even retention.
revenue
Many startups think they have ‘made bank’ with vanity metrics, and love talking about the several hundred thousand users acquired or the millions of views generated. These numbers don’t mean anything unless each of these users provide adequate value in return (most of the time, that means recurring revenue). Like many of the strategies discussed previously, deciding when to ask for cash depends entirely on your business model. Follow the sequence of this funnel, and ensure your users are actively using and able to derive significant value from your product before you ask for anything, be it feedback or cash. Asking too soon will result in user churn, and asking too late will result in a lot of work done for zero returns.
The metrics in this stage will be able to provide more of an overview of your overall growth strategy compared to the ones in previous stages. Tracking positive and negative growth of Monthly Recurring Revenue (MRR) (more applicable for SaaS or other businesses with subscription models) and Lifetime Value (LTV) (applicable for all businesses) will be able to tell you if users are satisfied with your product, and if your various tactics or experiments are working well or not.
