We all love entrepreneur Dave McClure’s pirate metrics funnel, a simple methodology for SaaS marketing he introduced at the 2007 Ignite Seattle conference.
McClure’s “A.A.R.R.R.” pirate metrics model—Acquisition, Activation, Retention, Revenue and Referral—is a straightforward way to make sense of a complicated topic and a great way to make sure your marketing operation isn’t missing any key elements.
But how does McClure’s five phase pirate metrics model map onto the most important and commonly measured SaaS metrics?
Meet the Pirate Metrics Matrix:
Acquisition and Activation Phases
This is McClure’s way of talking about the top of the marketing funnel, i.e. the process that turns views, clicks and site visitors into paying customers.
Most SaaS businesses measure traffic, visits and conversion. Most marketing funnels are usually divided into several conversion steps: visit, sign up, activation, purchase, and the conversion rate is measured for each step.
When you’re measuring these metrics, what you’re really doing is figuring out how good your business is at acquiring and activating customers.
On the cost side, a business might measure customer acquisition cost (CAC) and trial support costs to CAC. That’s why they’re somewhere between the acquisition and activation phases in the Pirate Metrics Matrix.
The cost of service and average cost of service (COGS or ACS), on the other hand, lies somewhere between the activation and retention phases.
Monthly recurring revenue (MRR), average revenue per user (ARPU), average revenue per paying user (ARPPU) and customer life-time value (CLTV, CLV, LTV) are all revenue phase metrics. In other words, they’re focused on the part of your marketing funnel where engagement turns into revenue—a one time purchase, a subscription, etc.
Note: We’ve noticed that most SaaS use simple customer life time value (CLTV) metrics that don’t take into account the discount rate or include costs. Although this seems to be established practice in SaaS, this shouldn’t really be called life-time value, since no costs are included.
The retention phase of McClure’s pirate metrics funnel maps on to one of the most important metrics in SaaS—churn, i.e. the percentage of your customers who leave every reporting period.
Measuring churn is a bit more complicated than taking the number of customers who unsubscribe and dividing it by total customers. You’ve also got to take into account things like involuntary churn, figure out what to do with your trial users, and measure real customer activity, to name just a few.
You can read more about churn and how to control it in our guide to churn.
The referral phase of the pirate metrics model is all about the effect of word of mouth and sharing on your marketing—in other words, the virality of your operation.
The most common virality metrics are the viral coefficient—how many more users each additional user brings into the funnel—and cycle time, i.e. how long it takes each user to complete one referral.
Does your SAAS have the whole funnel covered?
Making sure you’ve got every part of the SaaS funnel covered can be tricky. There’s no one right way to build a funnel, but it’s also possible to build one that’s incomplete and leaky.
One of the most useful things about McClure’s “pirate” metrics is that they encourage you to think thoroughly and systematically about your marketing operation.
Worried you might be missing one of his five steps? You might be missing out on key metrics that could provide important insights into the profitability and sustainability of your business.
Hey, why don't pirate metrics for startups include "profit"?
So we’ve gone over a simple pirate metrics definition, reviewed why pirate metrics for startups are important, and explained how the pirate metrics model maps onto a typical SaaS marketing funnel. But what about profit?
When coming up with this chart, we were tempted to add another phase for profit and cash-flow. That’s where we’d put CAC, COGS, ACS and CLTV (the “real” CLTV, with costs).
But we wanted to follow the original pirate metrics funnel as closely as possible, so instead of being in a seperate “profit” category, the costs appear at the point at which you incur them, in the acquisition phase.
McClure’s framework isn’t a perfect one, and like any SaaS marketing advice it isn’t one size fits all. If I were coming up with a new one, I’d make sure to include a sixth “Profit” category.