Redefining Pirate Metrics
It’s been just over nine years since Dave McClure first shared his Pirate Metrics with the world. That same year, Dropbox and Hulu were founded, T-Mobile had just IPO’d, and a share of Apple stock cost $12.
Over nearly a decade, every tech startup founder has referenced Pirate Metrics in a deck, recited them in a meeting, or come across it in some way at least once. Yet if you asked someone to name and define each step in the model today, they’d be hard pressed to get it right.
Pirate Metrics is a poorly cribbed and arguably outdated model for SaaS. While much of it still holds up, we’re overdue for a better definition of one of the least understood steps in Dave’s model: Activation.
Need a refresher on Pirate Metrics? This is verbatim from Dave’s slides:
- Acquisition — users come to the site from various channels
- Activation—users enjoy 1st visit: “happy” user experience
- Retention—users come back, visit site multiple times
- Referral—users like product enough to refer others
- Revenue—users conduct some monetization behavior
What Exactly is Activation?
If you’re like me, your inner monologue after a second or third read of that list is going something like this:
Wait, why is “happy” in quotes? What counts as a happy time, one so remarkable that they come back for seconds? That’s a high bar…
The description of activation is oddly ambiguous. Here’s my definition, largely based on the one by Kissmetrics:
Activation is the first point where users achieve the value you promised.
I like this description because it identifies several key attributes about the activation event:
- It happens once—someone cannot activate again—and is a “state.”
- It denotes real value, one that users knowingly attained.
- There is a start and end, and both are defined intentionally.
For most products, a user’s path to activation will be made of multiple activation steps—tasks that a user should or must do in order to achieve value. Fewer steps is generally better.
Because there is a start and end, funnels are a great way to visualize activation. The start is the number of people who come through the acquisition funnel, and the end is the activation event, thus you can calculate an activation rate:
activation rate = activated users / acquired users
Activation in Practice
If we look at this through the lens of a SaaS product, activation includes the onboarding experience, but it only ends when a user has reached the activation event. Here are examples of notable activation events (these are my interpretation and may not be what they measure internally):
- Dashlane—you log in with a saved password
- Quora—your question is answered
- Airbnb—you complete a stay (guest) or checkout a guest (host)
- Dropbox—you access a synced file from the cloud
- Canva—you share or download your first design
- Uber — you arrive at your destination
Let’s dive into Uber as an example and pretend they have a funnel that looks like this:
- 50,000 new signups per week (acquisition)
- 4,000 first rides completed per week (activation)
- 50% become repeat riders (retention)
- 2% refer a friend (referral)
- $5 median ride value (revenue)
I’m oversimplifying, but this means their activation rate is 8% and this week’s cohort revenue is $20k. The revenue for a subscription business compounds, so activation can play an even bigger role in net revenue.
Why is Activation Important?
Acquisition isn’t free, so every user who doesn’t complete their first ride is essentially wasted money. In fact, that lost cost is often factored into customer acquisition costs, making a paying user appear more expensive. Unless your app randomly throws money at users, each sign up has an equal, prepaid opportunity to convert to a paying customer.
Activation rate has a massive effect on recurring revenue businesses.
Any incremental improvements to activation trickle down, so your hard work in areas of retention, referral and revenue pay off even more. In essence, increasing your activation rate from 8% to 10% results in 25% more revenue without impacting your marketing costs.
Adopting an Activation Strategy
The single most important part of a successful activation strategy is defining your activation event. From there, you can calculate your baseline activation rate and identify the activation steps necessary to improve that metric.
Once you’ve laid out a funnel, it’s a matter of finding ways to improve each step along the way. This is by no means easy, but frameworks like High Tempo Testing and a tool like Appcues can help you experiment quickly.
Your activation event should be the north star metric adopted by your product team, so getting it right is crucial. If you hold yourself to the promise of delivering true value to your end-user, you’ll be in great shape.
Don’t Overdo It
Pirate Metrics is just a model, like Jobs to be Done or Value Chain Modeling. It’s a goal-oriented approach to problem solving that encourages a concrete a plan of attack. Maybe you serve multiple personas or your activation path is non-linear. Maybe your product is actually a suite of smaller products, or you’re only focused on activating users on a specific feature. You don’t fit the mold perfectly.
That’s OK. What’s important is setting a goal and going after it with a measurable plan.