June 7, 2022
Everything you need to know about the Pirate Funnel (AAARRR) and more! In this article you'll learn everything there is to know about the pirate funnel, we'll show you how it's structured, what the most important aspect is in each stage and how you can use it for your company!
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I can hear you thinking: “what does the pirate funnel have to do with pirates?”. The answer is, somewhat disapointingly, very little. It’s an acronym for a funnel framework in which the first letters of the stages form the famous pirate expression “AARRR”:
It was Startups500 founder Dave McClure who introduced the framework back in 2007. Although the pirate funnel is a relatively new framework, it has been around for 15+ years. And while it has taken silicon valley by storm, I still see the look of confusion in our clients’ eyes when we show them the framework.
That’s why we created a comprehensive overview of what the pirate funnel exactly is, what its different stages are, and how you should use it.
Ready to dive into it? Then weigh the anchor, mateys! (I promise this is the first and the last pirate joke I’ll make in this article!)
The pirate funnel is a customer lifecycle framework that’s designed to help you to focus your attention on the parts of the marketing and sales funnel that really matter. By using the pirate funnel, you can prioritize the initiatives you take to optimize your marketing and sales funnel.
It’s an essential framework for growth hacking but the idea of funnels isn’t new. Back in 1898, E. St. Elmo Lewis created the first funnel in marketing and sales history: the AIDA framework. Hailed as revolutionary back then, the AIDA framework breaks down the customer journey into four steps:
The AIDA framework is probably one of the most well-known frameworks in marketing and sales. Even though it’s over 100 years old, it’s still being used in many businesses as the leading framework for their customer journey. Before 2007, it was uncontested.
In 2007, Dave McClure found that many startups were focusing on the wrong metrics to measure their success. They were focusing on vanity metrics, like the amount of capital raised. Not on metrics that really attribute to actual company growth.
With the pirate funnel, McClure wanted to make sure that startup founders and business owners were using the right data to make strategic growth decisions. It allows you to track your actual growth performance while allowing you to create forecasts and mitigate risks for a decline in growth.
You might want to take a look at his presentation at Ignite Seattly in August ‘07:
Before we dive into the nitty gritty from each stage of the pirate funnel, we must ask ourselves one question: why would you want to use the pirate funnel?
The answer is twofold:
The pirate funnel is a great framework to help your company become more data-driven. By tracking the right metrics in function of your company growth, you focus on the right metrics from the get-go. This allows you to set a baseline for your business growth on which you can start building. Alternatively, the pirate funnel can also operate as a warning system to see which phases are lagging behind.
It’s important to keep in mind that you should want to do a pirate funnel exercise every year or so. This way, you keep your data as a basis for strategic decision-making.
So, what does this pirate funnel exactly look like? While McClure’s original pirate metric framework only mentions five stages, most pirate funnels have this structure:
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The first metric, Awareness, has been added by Growth Tribein 2016. They noticed that the original Acquisition stage was tracking two different metrics. Dave McClure defined Acquisition as: “getting people to visit your website and not abandon it”. Together with the observation that the pirate funnel was mostly created for SaaS companies, they decided to split the two metrics into Awareness (visiting the website) and Acquisition (not abandoning the website).
So how does this translate into real life? Every stage of the pirate funnel can be summarized in one actionable question:
Let’s dive a little deeper into each stage of the pirate funnel.
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As we mentioned earlier, the Awareness stage was the latest stage that was added to the pirate funnel. It’s also the stage where there’s the most confusion about. Let me explain.
Most growth consultants will define the Awareness stage as the stage where you measure how many people know your brand. We think of metrics like impressions or likes on social media.
The thing is that it’s very difficult to actually monitor those metrics. Aside from that, these metrics are vanity metrics: they don’t actually measure company growth (which was the reason McClure created the pirate funnel for in the first place).
In this stage, we’ll focus on finding the right channels that drive traffic to your website. In his book ‘Traction’, DuckDuckGo co-founder Gabriel Weinberg describes how there are 19 traction channels:
Using Weinberg’s ‘Bullseye framework’, you easily prioritize the channels which will help your company gain traction. This iterative process has helped many companies to find the right channels to drive traction to their website.
Key awareness metrics: click-through rate (CTR), cost per click (CPC), MoM website visitors, …
Once you’ve found the right channels to attract website visitors, you want your audience to do something on your website. That’s where landing page optimization and A/B testing come in.
Landing page optimization is the process of using user data to improve your landing page experience for your target audience. Ideally, this ends in them taking action on that same page.
There are many tools that help you analyse user behaviour, but we believe that Google Analytics and Hotjar will cover most of your questions.
Google Analytics is a great tool to quantitatively analyze website performance. You get insights into who your website visitors are, while also learning how long they stage on each page, which journey they have, and which actions they undertake.
Hotjar adds an extra layer to this by providing you with user heat maps, user click maps, and even recordings of real user sessions. In other words, you can exactly see how your website visitors interact with your website. Based on these insights, you can change your landing page layout or define A/B tests.
A/B testing is the process of experimenting with different landing page variations to see which one performs better. Let’s say that you have 2 value propositions and you want to see which one gets more sign-ups. You run an A/B test with two identical landing pages, but with two different value propositions. If version A outperforms version B, you can conclude that value proposition A resonates better with your target audience.
There are many rules of engagement when it comes to A/B testing, which we won’t cover in this blog post. But this should help you get a better understanding of how A/B testing works and how it fits into the acquisition stage of the pirate funnel.
Key acquisition metrics: cost per acquisition (CPA), sign-ups, downloads, registrations, trials, form submissions, …
Ok, so let’s quickly recap: you’ve managed to find the right traction channels and you’ve optimized your website experience for your audience to convert. Great! Now, you can sign off the leads you’ve acquired to the sales team and you’re done for the day.
Not quite! This is where the pirate funnel shows its true power: it works across all company departments. You really have to work together with all company teams to make this work. And the activation phase of the funnel is the perfect example of that.
The activation phase is all about defining the WOW-moments within your customer journey. You want to turn your website visitors into engaged users. Take a look at how these companies defined the actions to ‘upgrade’ a new user to a returning user:
Even though these companies all have a freemium or advertising business model, B2B companies can also implement lead scoring. Lead scoring is the process of determining whether a lead is the right fit for the sales team to approach these leads for a sales call. Typically, you segment them into hot, lukewarm, or cold leads.
The idea is simple: every time a lead undertakes an action on your website or via one of your marketing channels, they get a number added to their score. The same goes for negative actions. These result in a number being subtracted from their score.
What kind of actions can you use for lead scoring? Email opens, reply rate, resource downloads, events/ webinars attended, and so on. The possibilities are endless.
Like we said earlier, it’s crucial for marketing and sales teams to work together in this phase. Depending on your metrics, some leads may need to get discounts or special offers to get them to sign with your company.
Key activation metrics: conversion rate, avg. pre-deal actions per lead, …
Money is to a business like water is to plants: necessary to grow. Without a clear business model or a stream of revenue, your business will eventually fail. That’s why we believe that the revenue stage is the most important phase of the pirate funnel.
While there are many business models out there, we’re not going to elaborate on those. Our focus will be on finding product-market fit.
Product-market fit is a concept that’s popularized by Marc Andreesen, an American entrepreneur and co-founder of venture capital firm Andreessen-Horowitz. Here’s how he defines product-market fit:
“The customers are buying the product just as fast as you can make it -- or usage is growing just as fast as you can add more servers. Money from customers is piling up in your company checking account. You're hiring sales and customer support staff as fast as you can.”
In other words: when you can’t keep up with the demand for your product, you can rest assured that you’ve found your product-market fit.
One tactic for finding out whether you have product-market fit is surveying your existing customer base. While most surveys focus on how much people love your product, Sean Ellis (author of ‘Hacking Growth’) turned this upside-down.
Ellis believes that you should ask your customers whether they would be disappointed if your business would stop selling your product/service. If 40% of your customers define your product/service as a ‘must-have’, you’ve found product-market fit.
Key revenue metrics: customer acquisition cost (CAC), average order value, annual contract value (ACV), …
Now that you’ve found product-market fit, you might want to keep your customers happy to increase their lifetime value. That’s where the retention phase of the pirate funnel comes into play.
It might shock you, but acquiring a new customer is 5 to 25 times more expensive than keeping your existing ones. Even more so, if you only increase customer retention with 5%, your profits increase by 25% to 95%.
But how exactly do you retain your customers? There are actually 3 growth tactics you can apply to increase your retention rate:
Knowing why your customers choose your company over the competition is crucial. More importantly, you want to know why your product/service is so useful to them. That’s why you should incorporate feedback loops into your customer journey. Not only to learn what you’re doing right, but also to understand what you can do better for your customers.
Another tactic to increase your retention is to increase cross- and upsell opportunities. And if there’s one company that does this very well, it’s Apple. Let’s take a look:
In the olden golden days, you’d buy an iPhone and you’d get a power brick and a pair of EarPods with your phone. That was the package. But nowadays, you only get the iPhone and a cable. You need to buy your power brick and your EarPods separately.
That’s a great example of how Apple deconstructed their initial offer into an cross-selling opportunity: you’re spending money on both the iPhone and the supplementary products (power brick and EarPods).
Upselling, on the other hand, looks more like this: you have an iPad, but you see that the new iPad Pro has been released. It’s looking sleak and the performance is way better than your old iPad. It’s time for an upgrade. Now you’re spending money on a premium product or a more luxurious version of your old product.
Calculating your churn rate is another great way to increase customer retention. Churn rate is the percentage of your customers that decide to stop using your product/service. You can calculate your churn rate with the following formula:
While your churn rate is a quantitative metric, you should also take into account qualitative customer feedback. In order to decrease churn, you need to know why your customers decided to stop using your product / service. Checking in with your customers or sending out an offboarding survey can help you understand their reasoning and how you could improve your product or service.
Key retention metrics: churn rate, average cross- and upsell value per customer, customer lifetime value (CLV)
Once you’ve acquired and retained your customers, you should try to leverage their network. Your customer’s OPN (short for Other People’s Network) is probably the most valuable asset for creating a viral coefficient.
Your viral coefficient is the number you get to determine how many users, referrals or conversions you might need to go viral. It shows you how many new customers your existing customers could bring in. Here’s the formula:
How exactly can you achieve a positive viral coefficient? There are a number of ways to get there. In this section, we’ll cover the two main ones: referral programs and affiliate programs.
Anyone who’s Googled ‘growth hacking example’ has probably encountered the Dropbox growth case. It’s a perfect example of a referral program gone right. In a slide deck Drew Houston made, he explained how Dropbox’s referral program helped them to gain 60% signups. With Sean Ellis’ help, they learned a ton from analytics, split tests, and user surveys.
Another way of getting people to share your product or service with their network is by setting up an affiliate marketing program: someone (affiliate) shares your website with their friends, family or even their own website. In return, they get a percentage as a commission.
A great example of this is HubSpot’s partner program where people or companies that partner up with HubSpot get a one-time or lifetime commission on the sale of a new software package to their network.
Now that we’ve covered all parts of the pirate funnel, we can safely say there’s a lot to unpack. And while we’ve tried to be as extensive as possible, there’s a lot of information that we haven’t touched upon.
With this article, we wanted to give you an extensive overview of what the pirate funnel exactly is, as well as show its potential for your business. We hope that you are now excited to get started with building your own pirate funnel. And know that if you ever need help, we’re here for you. Just get in touch with our team through the contact page or on LinkedIn. We’d love to hear from you!