Last year on 12th October I was invited to the Great Lakes Institute of Management in Chennai to share my experience which will help the PGPM, PGDM (similar to MBA) students when they’re starting a new business.
I thought about it deeply and wondered what is it that I can teach them that’ll help them succeed. The thought process took me back to the fundamentals of how businesses work which lead me to my answer – the classic AARRR funnel given by Dave Mcclure.
Don’t worry if you’ve never heard of the AARRR funnel before, you’ll get a detailed understanding in this article.
The beauty of AARRR funnel is that it is easy to understand and remember, moreover, it fits in every business because it represents the core of how businesses operate.
I expanded more on it in my speech at the Great Lakes, here it is…
Good Afternoon everyone! A pleasure to be here with all of you.
I’m Pallav and I head the marketing at Inc42 Media which is one of the largest media platforms in India, focusing on tech startups. We’ve been around for the last 4 years and have so far published over 13,000 stories which now touch the lives of over 10 million people every month.
It’s especially a great moment to be part of this startup conclave because a similar event like this changed my life.
Not a very long time ago I was in your shoes. I was pursuing an engineering degree and like many students, I was enjoying my time in college.
Parallely, I also had a constant nagging feeling in my head and I knew why that was… I had no ambition, no goals and absolutely no plan in hand for what I’m going to do next. That proverbial sword of confusion and cluelessness was dangling over my head and I kept ignoring it.
One day, while roaming in the corridors of my college, I came across an announcement on the noticeboard about an entrepreneurship seminar being organized in my college. My mind instantly cooked up a devious plan – I’ll skip the regular classes to attend the entrepreneurship seminar and then I’ll skip the seminar and utilize this time to do my next favorite thing – go home and sleep. I loved sleeping at that time, still do.
Finally, the day of the seminar arrived and I had my plan ready, I’ll attend the first session and then leave to do my favorite thing. But what actually happened was quite the opposite, I ended up attending all the sessions of the three-day seminar… sitting in the front row and curiously asking questions from the guest speakers.
That was the day I accidentally opened the pandora’s box.
That seminar changed my whole perspective about the business world and busted a lot of myths about how to start and run a business. And since that day I’ve always been in the startup world.
Most of you must have heard the stats about the success rate of startups. As they say, for every 100 startups, 95 will fail. *2-3 second pause*
That gives a very bleak picture of the startup world and I can’t even count how many aspiring entrepreneurs must have given up on their dreams just by looking at these stats.
But if you think about it, why do so many startups fail? *2-3 seconds pause*
If you dig deeper, you’ll find that most startups fail because the first time entrepreneurs don’t have a clear idea of how to build a successful startup since there’s no standardized playbook to follow. And rightly so because every business is unique in its own way and what worked for one company might not work for the other.
So today, I thought instead of sharing tactics, I’d share with you a startup framework which will significantly improve the chances of your startup’s success… if you ever start one.
Now let me be very clear, I’m not going to tell you how to find the next billion-dollar business idea. But what I’m going to show you today will help you turn YOUR idea into a potential billion dollar business.
I use this framework at Inc42 Media where I head the marketing of the company and it has been used by pretty much every successful company out there be it Flipkart, Amazon, your local heroes like Zoho & Freshworks and even big corporates.
Pick a successful company, study it and you’ll find this framework at the heart of the company.
And the Framework is called the AARRR framework.
And that’s what AARRR stands for – Acquisition, Activation, Retention, Referral & Revenue.
Now all you have to remember about this framework are these 5 keywords. That’s all, nothing big right?
So let’s dive in and explore what these 5 keywords mean…
Acquisition basically refers to how you acquire your customers. Or in other words, what are those places and channels from where they find you.
They might see a billboard of your service on the street and they decide to give it a shot or they might have searched for their problems on google and your website showed up or they might have heard about you from their friends.
Broadly speaking, there are about 19 different marketing channels through which a potential customer can find you or in other words, you have 19 different ways to reach your targeted customers.
And what are these 19 channels? Here they are…
Now the best part is you don’t need to use all of these 19 channels. When you’re starting out, you just need to dominate 1 or 2 of them in your industry and you’ll be off to a fabulous start.
With a quick show of hands… how many of you have ever tried to find discount coupons for Dominos or Flipkart or any other service before you’re about to place an order?
********** Almost 90% people raised their hands ***********
When you search for discount coupons, you come across a lot of coupon websites. Have you ever wondered what’s the business model of these websites and how do they work?
They use one of these 19 channels. Can you guess which one?
********** 2-3 people were able to guess ***********
Yes, it’s the Affiliate marketing.
The idea is simple, the coupon websites know that people will try to find coupons before placing an order. Once you land on their website and click on a coupon, they redirect you to the Dominos or Flipkart website and automatically apply the coupon code using the link with which they redirected you to the brands’ website.
These coupon websites are an affiliate or a partner of these brands, and every time they redirect people to the website of these brands, they get paid for it.
There are hundreds of other examples of these 19 acquisition channels.
I won’t dive deeper into these channels but I’d encourage all of you to research more about them and by the time you’re done with your research, you’ll have a lot more clarity on how businesses can acquire more customers.
But bringing users to your service is only the first step. Your next goal is to activate these users.
Activation basically means that your customers have an initial happy experience with your service. But how do you do that?
It varies from business to business but the simple philosophy to activate any customer is – to eliminate their concerns and make them experience the core value of your product as soon as possible.
On an ecommerce website, activation could mean when a user finds the exact product they’re looking for and adds it to their shopping cart. Or if you’re playing an online game, it could be when you cross the first level. When you visit Starbucks, you’ll hear baristas greeting you with a warm welcome, that’s part of the activation process too.
Today, when there are umpteen number of products and services vying for consumer attention, you can’t just give your customers an okayish experience, you have to ensure that the first experience of your potential customer is nothing short of extraordinary, otherwise, someone else will come along and swoop them away with a better experience. That happens all the time.
There was a time when we all use to communicate via SMS and then WhatsApp came along. Anyone who used whatsapp was so impressed that they didn’t bother going back to SMS. That’s the power of activation.
Now once you’ve activated your customer, your next goal would be to retain them.
Retention essentially means that you bring your customer back to your service repeatedly after their first happy experience.
In fact, you’ll be shocked to know that it costs 5 times as much to attract a new customer than to keep an existing one. *With emphasis* I’ll repeat, it costs 5 times as much to attract a new customer than to keep an existing one.
If you keep acquiring new customers and not retain them, it’s like a ship with a hole and eventually, that hole will sink the ship. You don’t want to be on a sinking ship, so fix the hole.
And this is where most companies fail, they focus too much on acquiring new customers and not retaining them which ultimately sinks the ship.
You must have noticed that when you buy something from a company, they keep sending you emails, SMS and notifications telling you about their next sale or a discount or new products in their store. What they’re trying to do is bring you back to their service so you buy from them again.
Here’s a fun experiment for you… If you use Uber or Ola, stop using their service for a while (maybe use the other one) and you’ll see that you’ll start getting more offers from them.
Ola, Uber and many other companies have systems that track how frequently you use their service and if your usage frequency decreases, they’ll start reaching out to you with more offers to retain you. In competitive industries like these, retaining your customers can make all the difference between winning and losing.
Alright, so now you have a happy retained customer. What next?
Wouldn’t it be wonderful if these happy retained customers tell their friends about your service? That’s what the next step is all about.
Getting Referrals is the strategy to turn your happy retained customers to your brand evangelists, who will then go out and tell others about you and get you even more customers. This is a no-brainer to be honest. It’s almost like getting new customers for free and yet a significant amount of companies don’t leverage it.
Many companies have become successful on the back of well positioned referral strategies.
Take for example, Dropbox. Initially when Dropbox tried to acquire customers through advertising, it costed them almost $300 to acquire one new customer which is roughly 20,000 rupees. Then they introduced their referral program and all hell broke loose. They acquired 4 million users just by referrals in next 15 months.
Dropbox referral strategy was inspired from Paypal’s strategy where Paypal gave $10 of free money to people joining in through referral. That was first of its kind and since then many companies have been using referral strategies for their company’s growth.
Today, take a look at any of your favourite startup and most likely they’ll have a referral program which says something like “Refer your friends and when they sign up you’ll get xyz”. Now there’s another part to it.
Just creating a referral program is not enough. You have to constantly tell your customers about your referral program or else they’ll never use it. And this is a big problem in the industry that many companies introduce their referral program but fail to communicate it to their customers.
But ultimately, the point of any business is to make money and that’s where the last step of this framework comes in – Generating Revenues.
This one is simple – provide a ton of value to your customers and they would be more than happy to open their wallet for you.
The beauty of the AARRR framework is that each step builds on the previous one. If you’re acquiring a healthy number of new customers then activating a good percentage of those, and retaining the best of them while also generating referrals consistently, revenue will automatically follow.
This is what the AARRR framework is all about.
Now before using this framework, I also want to give you three very important pointers that you should keep in mind to increase the effectiveness of the AARRR framework:
Quantity vs Quality of users: There will be a significant drop off when your customers are moving through the different stages of this framework.
If you acquired 100 users, probably less than 5 will end up paying for your service. This is why it is important to acquire quality users who fall under the definition of your target audience. The more relevant the audience, the more likely it is that they’ll find value in your service.
Creating a balance in the AARRR framework: This is where most companies struggle. You need to focus consistently (if not equally) on every stage of the framework otherwise you’ll keep missing out on simple opportunities to retain, make money or getting more customers.
Use the Pareto Principle or the 80-20 Rule: Pareto principle says that usually, 80% of the results come from 20% of your efforts. While implementing the AARRR framework you need to be very critical to find that 20% of the things that will bring 80% of the results.
So finally before I open the stage for questions, I’d encourage all of you to dig deeper into the AARRR framework and my contact details are on the screen if you ever want to reach out.
And with that, I’m open to questions.