As you go from Acquisition to Revenue during the process, less and less clients remain on the different levels. As a consequence, the diagram of the process forms a funnel; that’s where the name funnel analysis comes from.
A little funnel analysis history
The model is built on advertising psychology and its main purpose is the analysis of offline marketing tools. Right until around 2000, the use of the model was extremely popular among marketing professionals, however, due to the spread of online communication and websites, a new model appeared which was created in 2007 by Dave McClure. This was the AARRR model, also known as AARRR funnel analysis.
Of course all this doesn’t mean that the AIDA model is no longer in use (on the contrary!), it’s just that it approaches the process from another aspect. Due to the rapid changes of the online world and because of the experiences gained based on these changes, newer and newer models and ideas are born.
The AARRR model focuses mainly on online marketing and data-driven marketing, and it’s also ideal for the monitoring and optimization of conversion (mainly transactional) processes.
The AARRR model analyses the users through 5 measurable dimensions:
- A: ACQUISITION ‒ Where do visitors come from? How much does the acquisition of a visitor cost (e.g. CPC, CPA)?
- A: ACTIVATION ‒ Have the clients gained a sufficiently positive experience when visiting your online shop? Have you managed to turn them into users?
- R: RETENTION ‒ Will they return to your communications channels? How often do they use your product/service? How often do they purchase from you? How high is the churn rate?
- R: REVENUE ‒ Do users purchase as well? How high is the cart value? How much is the revenue per user? What kind of profit increasing tools do you use (cross-sell, up-sell)?
- R: REFERRAL ‒ Do users like the site and/or product enough to recommend it to others? Are the customers satisfied?
Different indicators measurable by measuring tools can be defined in each dimension of the AARRR funnel analysis. After the definition of the indicators, you will be able to measure and then to optimize these quantified and scaled values, thus increasing your efficiency.
According to McClure, these measurable data may be the following:
- competitive – it allows comparison with the data of the competitors.
- comparative – it allows comparison with your own data.
Diagram of the AARRR model
The model can be illustrated in several ways.
Log into Google Analytics and then to Reporting Suite. Here you’ll find the illustration options of the model defined by you under the menu Conversions/Targets/Channel illustration (it’s necessary to create properly set targets and access routes for the channel illustration).
Example for Google Analytics channel illustration
Another kind of illustration is the bar chart illustration. The majority of the analysis software applications give preference to this.
Example for bar chart channel illustration
You can use various free of charge (Google Analytics) and paid (Kissmetrics) pieces of software in order to increase the efficiency of your website (generating more registrations or higher revenue). After choosing the most appropriate analytical tools, you will by all means have to integrate the code of the measuring tools into the ecommerce store. This step is essential because this way you will be able to measure all the indicators and levels of the funnel model.
Now let’s see the dimensions of the AARRR funnel analysis in more detail
The first dimension of the AARRR funnel analysis collects the data in terms of the acquisition of visitors. You will certainly have to determine the channels for the acquisition of visitors. Such channels may be for example social media, organic searches, email campaigns, display campaigns and the channels of the different advertisements.
After having determined the channels, continuous auditing of the obtained results is indispensable. The number of acquired visitors and the cost of the visitor acquisition determined on the basis of the channel, may be appropriate indicators. The purpose of this stage is to have as many relevant visitors on your website as possible, and to achieve that with the lowest possible marketing costs.
After the users have found your online shop, the second dimension of the model, activation, comes in, the purpose of which is the increase and the measurement of their activities. You can measure the activities of your visitors (and later your users) with various analytical measurement tools. Such tools are Google Analytics available to everyone, and the different heat mapping analytical tools (e.g. Mouseflow).
Key indicators of the activation stage may be: number of page views, time spent on the given page by the customers, or the number and cost of conversions targeted by the company.
Conversion indicators may be, but not limited to, for example the following (depending on the company and the profile):
- logging in to the online shop account,
- subscription to the newsletter,
- launching the payment process,
- viewing certain product pages,
- adding the product to cart,
- viewing videos.
Even if the 80/20 principle, elaborated by Vilfredo Pareto, (according to which 80% of the effects come from 20% of the causes) will not necessarily be valid for your company, still, the visitors and the users of your ecommerce store who showed some sort of a commitment and loyalty (in the scope of the already mentioned conversion indicators) and returned to your online shop play a vital role.
You can measure for example the following key indicators in the third stage of the AARRR funnel analysis: ROI (Return on Investment) indicator of remarketing and email campaigns, churn rate, and the rate of returning visitors compared to the total number of visitors of your website.
The most important indicators from the point of view of all companies may be revenue, and the amount of the realized profit.
In this dimension of the model the measuring tools help you determine the scaled values of the customers. Such values may be:
- average cart value,
- the cost per acquisition of one customer,
- income per one user,
- the time elapsed between the first visit on the website and the purchase
- and the amount of the monthly revenue itself.
The fifth and last dimension of the funnel model is based on the viral spread, the meaning of which is that your visitors or clients share their views and the pieces of content and/or products offered by your ecommerce store, in the form of Facebook posts and/or YouTube videos for example.
Then later these pieces of content reach the other users without involving additional costs (that’s what’s called viral spread). Important key indicators of this stage may be:
The number of shares on Facebook and the numeric value (from 1 to 5 stars) of the ratings,indicators of customer satisfaction,viral indicator (how many new customers arrive thanks to the referral of your already existing customers), viral cycle (how long it takes until the person to whom the online shop was recommended becomes a customer thanks to the referral.)
The referral stage does not necessarily have to be the last one, since the visitors can share their opinions on the ecommerce store or on one of its products even during the first visit.
The order of the dimensions of the funnel analysis presented in this article is not set in stone, however, it looks like this in most of the cases (based on observations).
In addition, it provides guidance concerning which points are worth defining and analysing with the help of the metrics and key indicators (KPIs) determined based on the goals of the company.
In general, elements of the AARRR model interact; they are connected in a coherent system with each other, and you can analyse the results of this connection most efficiently with a cohort analysis showing the data of several months.
One of the disadvantages of the model is that it is primarily suitable for the illustration of linear processes. On the other hand, its advantage is that it has recognized the macro steps which the visitors take towards the purchase.
However, the order of these changes vary according to both the type of business and the target group, but the order of the steps can be completely customized to the company profile/target group.