AARRR Metrics for e-commerce
The AARRR startup metrics model developed by Dave Mcclure is a collection of metrics and techniques that handles real growth combined with the power of data analysis. These 5 metrics represent all of the key behaviors of our customers:
- Acquisition – users visit the site; you have their attention
- Activation – the user performs some key activity that indicates a good first visit
- Retention – the user continues employing that key activity indicating he/she likes your product
- Referral – the initial user gets other users to join
- Revenue – the user pays for your service
This is usually a funnel process and for some cases Revenue comes first than Retention and Referral. For e-commerce, these are described in detail as:
The acquisition is basically how you attract and “acquire” visitors. These days, most of the traffic comes from search engines (Google, Bing), social networks (Facebook, Twitter, Pinterest) and pay-per-click ads through advertising giants like Google AdWords and Facebook Ads. Whatever your acquisition strategy is, make sure you are measuring how each and every traffic source (channel) performs and moves through the AARRR funnel.
Currently, tools as Google Analytics allows you measuring the number of transactions and revenue that your website generates. On a typical e-commerce site, once an user clicks the “purchase” button in the browser, the user’s purchase information is sent to the web server, which carries out the transaction. If successful, the server redirects the user to a “Thank You” or receipt page with transaction details and a receipt of the purchase. You can use the analytics.js library to send the e-commerce data from the “Thank You” page to e-commerce tracking for Google Analytics and record a successful transaction for the goal.
Acquisition is often misused as a vanity metric: “We receive 10,000 visitors per month!” but unless you are in the publishing business of selling pageviews to advertisers for CPM rates, saying those things just sound like it was a massive tool with possible huge waste.
Your acquisition numbers should be the starting point to analyze which of your marketing channels are working better. Where are the big spikes coming from, where are the slow and steady streams. And at this point, low volume is not always a bad thing – we will follow acquisition sources throughout the whole AARRR funnel and low volume can often surprise you by being the most profitable.
Many people break down Acquisition into two general stages: landed and engaged. Until a visitor has completed the engaged or Activation criteria, they are stuck in the landed category.
Basically, two kinds of strategies emerge more than any else.
- Creating a strong brand identity and a captivating concept; bidding on advertising to generate traffic and attract your targeted audience straight to your products. This is called “Pull” strategy, as the customer will come to the product himself
- Pushing the product itself to prospects, using retargeting, offering promotions and special offers on a particular product and part of the inventory, sampling … This is called, “Push” strategy, as the seller will put that directly as a bait to attract visitors.
Common acquisition tools used on the web: SEO, SMO, Adword, targeted advertising, mass mailing. “The client comes to your website, either by typing your name or URL directly (because you use a Pull strategy) or by using a search engine (because you use a Push strategy).”
- Cost of Acquiring Customer (CAC) means the price you pay to acquire a new customer. In its simplest form, it can be worked out by: Dividing the total costs associated with acquisition by total new customers, within a specific time period.
- Bounce Rate is the percentage of visitors who navigate away from the site after viewing only one page.
Activation for SaaS means either signing up for the product or subscribing for a newsletter. For e-commerce, activation can be “measured” through a few key visitor activities that could be part of the activation criteria:
- Signing up several online stores still require and encourage creating accounts with them to provide better business value to their customers.
- Subscribing for a newsletter some e-commerces offers the content first to interested parties, in order to create passionate customers that belong to a community with shared interests.
- Starting the checkout process. This is the key process for every e-commerce. If that could be tracked and monitored to identify abandoned carts in different status is a key indicator for identifying UX problems.
- Adding a product to their shopping cart which usually indicates a purchase intention.
- Browsing at least a few products or product categories. These should be used with special attention to not be considered as a vanity metric.
Although the last 3 activation points give you a very limited opportunity for further communication in case the visitor leaves, they are a clear indication that the channel from where your visitors come from is worth diving into, since it shows purchase intention.
To improve activation, you can invite people to subscribe for your newsletter that includes special discounts or access to exclusive deals or content. That way, even if people abandon your online store, you can reach out to them later and remind them to get back.
Poor user experience, a complex UI, incoherent terms, conflicting messages… these can all lead to your newly acquired users from bouncing as soon as they see the inside of your e-commerce.
It is important to focus on your Activation performance long before you invest heavily into any further Acquisition, and especially before you start spending valuable developer hours on new features.
A user is unlikely to enter credit info and subscribe to your product if they have not activated yet. This is because they need to appreciate the full value of your product first and need to be confident that the value is greater than the cost.
Value > Cost = $$ + Time + Focus
Once users have invested their time and focus into your product, they will have gained a perception of the value of your product and then they will be willing to (hopefully) give you cash to continue experiencing that value.
One more thing, retargeting, that converts window-shoppers into buyers. Generally 2% of shoppers convert on the first visit to an online store. Retargeting brings back the other 98%. Retargeting works by keeping track of people who visit your site and displaying your retargeting ads to them as they visit other sites online.
Common web activation tools: Real-time automated one-to-one e-merchandising (Build a personalized path scheme, based on intelligent and real-time technologies that will enable the user to use the e-commerce specificities). “He finds what he wants, makes a specific valuable action and leaves the page satisfied”
- Shopping Cart Abandonment (SCA) or Abandonment Rate (AR) is the ratio of the number of abandoned shopping carts to the number of initiated transactions or to the number of completed transactions. The typical shopping cart abandonment rate for online retailers varies between 60% and 80%, with an average of 67.91%.
- Time on Page is the amount of time spent by one unique visitor on a given page of the e-commerce.
- On-site Searches is the number of searches performed on the e-commerce.
Revenue is pretty straight forward for e-commerce, that basically means placing an order (either first-visitor purchases, second-visit purchases or repeat customer purchases).
To improve your Activation to Revenue conversion rate, make sure your checkout process is flawless, absolutely clean and clear and optimized for mobile. Approximately 29% of online purchases in 2014 were done with mobile phones and tablets and the number is rapidly growing each year.
It can be really dangerous if you get tempted by revenue too early. Not only can integrating revenue functionality be expensive (relative to your total MVP effort cost) but also can distract you from properly achieving product market fit.
Common increasing revenue tools: cross-sell, up-sell and personalized product pushes and margin enhancers. “This time he buys a product with accessories. And still leaves the page happy.”
- Cross-sales, those are the actions or practices of selling an additional product or service to an existing customer. Unlike the acquiring of new business, cross-selling involves an element of risk that existing relationships with the client could be disrupted. For that reason, it is important to ensure that the additional product or service being sold to the client or clients enhances the value the client or clients get from the organization. A specific case of cross-selling is bundling accessories for the current purchase.
- Up-sales, those are a sales techniques whereby a seller induces the customer to purchase more expensive items, upgrades, or other add-ons in an attempt to make a more profitable sale. Upselling usually involves marketing more profitable services or products but can be simply exposing the customer to other options that were perhaps not considered or upgrades to the current purchase.
- Conversion Rate (CR) is defined as the percentage of visitors who end up buying from your store. The higher the conversion rate, the better. When it comes to conversion rate, you always want it to be going up. Regardless of how much effort you spend on driving traffic to your store, if most visitors do not end up buying, it is all wasted. That said, it is really important to make sure you know what your conversion rate is at all times and keep tabs on whether it is improving and if you should stay the course or not.
- Monthly Recurring Revenue (MMR) is a measure of the predictable and recurring revenue components of the subscription business. For subscriptions business models, MRR is all of your recurring revenue normalized into a monthly amount. It is a way to average your various pricing plans and billing periods into a single, consistent number that you can track the trend of over time.
- Lifetime Value (LTV) or Customer Lifetime Value (CLV) is a prediction of the net profit attributed to the entire future relationship with a customer. For product business models, LTV can also be defined as the dollar value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship.
- Average Order Value (AOV) is the average size of an order on your store. The higher the average order value, the better.
Contribution margin or dollar contribution per unit is the selling price per unit minus the variable cost per unit. “Contribution” represents the portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed costs.
- Return Rate is the percentage of items returned from the total items sold in a period of time.
Retention is a huge challenge for most e-commerce. Having repeat customers is amazing for every business. At the end of the day, you already went through the effort of acquiring, activating and converting those people into customers. Why not keep them around and improve their LTV to your business?
In order to do that, make sure you understand your customer’s needs. When you try to pro-actively invite them to purchase again, make sure you are always offering something relevant to each one of them. Also, special discounts work like a charm. We all love feeling like a business truly appreciates us and wants us to stick around by offering us a few percent off.
The selected metric for retention should reflect that a customer has repeated the revenue criteria, that usually means a new purchase.
Common loyalty enhancing web tools: Dashboard and analytics, product offer personalization and customer recognition and knowledge, personalized e-mail, newsletters with interesting content. “One week after, he/she thinks about buying a product to go with the other product that he/she bought. He/she remembers your brand and comes back to your e-commerce.”
- Churn Rate (CR) is the percentage of customers who end their relationship with a company in a given period. Churn is the percentage of your customers who do not come back to your site. The lower the churn, the better. One minus the churn rate is the retention rate (RR). For subscription models, refers to the proportion of contractual customers or subscribers who leave a supplier during a given time period. It is a possible indicator of customer dissatisfaction, cheaper and/or better offers from the competition, more successful sales and/or marketing by the competition, or reasons having to do with the customer life cycle.
- Retention Cost (RC) is the amount of money a company has to spend in a given period to retain an existing customer. Retention costs include customer support, billing, promotional incentives, etc.
- Repeat purchase rate is the percent of the customers that have purchased more than one time.
Once again – you have already acquired these customers. Chances are, they have friends and family that could also be interested in your products or services. You can either make it easy for them to invite somebody else to your business, incentivize them to do it, or just be absolutely amazing and making them happy. Then let the “word of mouth” do the work.
Word of mouth marketing is the best performing ROI you will ever have. Referrals, particularly between 2 people who know each other, are the highest conversion rates you will get in your e-commerce and have the potential to grow your userbase exponentially.
Getting users into the referral stages means they not only like your product, but they think that their contacts and friends could also benefit from that value. They want to be the person responsible for them discovering that value.
There are other drivers for referral’s too – they can be more transactional. Dropbox is a great example of this: refer a friend and we’ll give you more storage space on your account for free. Direct transactional rewards work great in consumer products.
Once you start looking at the referral stages, it is important to ensure you have some viral mechanisms in place. Share buttons, promo codes, affiliate links, “powered by”, invite a colleague… etc. Once you have a few of these, you can start A/B testing and monitor the performance of your referrals.
You can break your referral metric into 2 stages:
- How many views did they bring to our product?
- How many customers did they bring to our product?
If they post on twitter and 200 people click their link and view your landing page, that is great. But if only 1 person creates an account, that is not so great. Compare that to if they invite somebody to review your products. That is a lot more valuable, particularly if they convert to paid.
Generally, lots of eyeballs are great for exposure, brand, and PR, but be sure to track how those referrals actually end up as paying customers.
Another great tip is to add “referred_by” properties to users on registration, and then break down all your metrics by this property later if you really want to identify your key influencers and evangelists.
Common tools to transform you customers into recommenders: unique customer path, ergonomic and customer experience, live chats. “Your loyal customer tells his friend, who is secretly jealous of his style, ‘go to this website, good design, good experience, good quality products’. His friend buys a product then.”
- Referral Rate (RR) is the rate at which your users refer new friends to your site.
- Net Promoter Score (NPS) measures, in aggregate, the likelihood of your current customers to refer your product or service.
- Viral Coefficient (VK) measures the viral growth rate and spread of your idea, app, or site.
- Average Number of users referred is the number of new users you’ll gain from each existing user, on average.
- Referral conversion rate is the rate at which sent referral invitations are accepted by their recipients.
AARRR as a Framework
AARRR is quite possibly the simplest growth model you will ever come across. There are far more complex models with much, much more academic and clever methods. Huge complex customer funnels, flow charts to fill a whiteboard, business dashboards with 30 KPI’s that can predict next quarter’s revenue.
But the chances are, you will use those models when it really, really hurts. Usually when something has gone wrong. And even worse, you might need to employ a consultant, or a full-time data analyst in your team who just runs those daily and weekly reports for you.
But the power of AARRR comes from it is simplicity.