Download Last Version KJ Pirate Activator
Cre Wallace
Most small-but-growing SaaS companies focus first on acquiring users and getting them into the funnel. Then, they focus on retaining those users and turning them into loyal, long-term customers. That's great.
Helping new users reach their first aha moment and find success with your product early on has huge downstream effects. In order to understand how best to optimize your customer journey, you need to first understand exactly how much activation affects your growth.
Pirate metrics is a fun name for a serious set of SaaS metrics that make up a 5-step framework for SaaS growth, first envisioned by angel investor and the founder of 500 Startups David McClure.
But a free-to-paid revenue model, in which companies offer a free trial and then convert users to paid plans, is becoming increasingly popular. Subscription SaaS users are often acquired through some form of free plan or free trial. Then, monetization happens when these users sign up for paid subscription plans and become paying customers.
We chose to calculate MRR rather than ARR because for startups and growing businesses, small changes can make a big difference and it's useful to keep a pulse on frequent, incremental changes in business activity.
In this model, we're imagining that we can control all of those other factors and isolate each pirate metric one by one. Of course, in a real company these changes wouldn't happen in a vacuum and would influence each other.
It's also important to note that the relative importance of each metric will change depending on your vertical, your product, and your stage of growth. For example, if you already have a massive customer base, percentage increases in retention will have a much larger effect than the same incremental increase in a smaller customer base. Because we're using a percent difference as the equalizer, the relative importance of each metric is not absolute.
You can use this benchmark for your own calculations, or pull data on your monthly percentage of activated users. Activation look different for every product, depending on each product's aha moment. Make sure you define exactly what determines an activated user, so you understand what to do with the data that you're looking at!
In our free-to-paid model, activation directly determines how much revenue is coming in the door. That makes activation an important upstream metric that impacts not only revenue from new users but also recurring revenue from existing users.
What constitutes an activation event is different for every product. To truly understand which action leads to the user's first aha moment, you'll need to study your user journey map closely, talk to your users, and implement tracking around that action.
Examples of activation: When a user completes their first ride with Uber or Lyft, when a customer receives a grocery delivery from Instacart, when a new Gmail customer sends their first email, etc.
To keep things simple, we modeled a mid-sized subscription contract for an SMB SaaS company and set revenue at $100. In your own calculations, you can input your own average contract value for the revenue benchmark.
A 25% lift in revenue corresponds to a 25% lift in MRR.
In our model, revenue serves a similar function to acquisition: Both metrics are fixed numbers, not percentages like the other pirate metrics. They have similar one-to-one impacts on the bottom line. Acquisition sets the size of the funnel in terms of numbers of users, and revenue sets the Funnel Size in terms of dollars.
We're using a 97% benchmark for monthly retention for SMB companies, as observed by Redpoint VC Tomasz Tunguz and affirmed by Point Nine Capital VC Clement Vouillon. If you have monthly customer retention data for your own company, you can input this metric as the benchmark in the calculator.
In our model, payment occurs at activation. If payment was occurring at the retention cohort, activation would have less of an impact on revenue. If your business uses a free-to-paid model, you can try this out with your own data to see the relative differences in activation improvement and retention improvement.
Run a cohort analysis to dig into your retention and churn rates to find out where drop offs occur. Depending on your business model, you may wish to measure daily retention rates; for most products that don't depend on daily engagement, monthly retention and churn rates are more useful.
We did some math based on referral benchmarks, and determined 22% to be a good referral rate benchmark for successful SaaS companies. You can always substitute your own referral rate for the benchmark if you have this data.
As you can see, a 25% lift off of our referral benchmark resulted in an underwhelming 7.4% MRR increase. For growth-minded folks that believe that viral loops are the holy grail, that number might come as a bit of a shock.
These values are dependent on the benchmarks we chose in our simplified model. But when comparing each pirate metric's impact on MRR, it's clear that activation has huge downstream effects on your bottom line. If you're still overlooking this SaaS metric, you're missing out on untapped revenue and opportunities for growth.
For starters, you can take another look at your user onboarding. Ask yourself: Does this first-time user experience drive new users to their aha moment? Could we help them get there faster with better in-app messaging or a more streamlined onboarding flow? (The answer to that last question is almost always "yes.")
If you aren't already, consider using a third-party tool like Appcues that lets you create and iterate on your in-app messaging quickly and often. That way you can experiment with different messaging without putting pressure on your dev resources.
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