The life of an entrepreneur is a bit like that of a pirate, since the course entrepreneurs must travel is also often beset by hidden currents that they must navigate. Let us not romanticize this process though. It might be a compelling image to see a pirate behind the wheel, staring off into the horizon, seemingly navigating through instinct alone. But they never did. They used specific tools to help them get from port to port. Similarly, great marketplace entrepreneurs use the right metrics to measure and improve the performance of their online platforms throughout the customer life cycle.
The pirates of the 1700s had an advantage over modern day entrepreneurs. Although pirates only used a few tools for navigation, they were generally effective in most circumstances. Entrepreneurs, on the other hand, have access to a host of metrics, but only some are right for their particular businesses. It is the challenge of the marketplace owner to not only interpret metrics correctly, but also to choose the right metrics.for their circumstances.
This post is going to dive into the murky sea of online marketplace metrics and teach you how to wrest free the treasure of improved performance from the briny deep. We’ll first introduce you to a crew of standard metrics. Next we’ll introduce you to the AARRR framework (aka Pirate Metrics) and how it helps you organize metrics so that you can get the most out of them. Finally, we’ll discuss how to apply the AARRR framework to an online marketplace so that your business can set sail for success.
Metrics Can Keep Your Online Marketplace From Sinking
It is important to disabuse the notion that successful businesses are built by intuitive savants who simply know what their customers need and how to get it to them in the best possible way. Maybe there are a handful of people like that, but there are a lot more successful businesses than a mere handful. So we need to account for the difference between the myth and the reality.
You cannot constantly ask your customers and stakeholders what is going on, whether they like your service, and how it can be improved. Even if you had the time and resources to do so, your clients probably won’t respond all the time or give you actionable information. Entrepreneurs need to be able to derive clear conclusions based on customer interaction with their marketplaces. In short, they need to be able to take surface level observations and use it to understand what is happening at a deeper level.
Metrics fulfill this function by converting observable information into customer insights. However, there are dangers to this approach. There is a risk in attributing the wrong motivations to observable phenomenon. For example, let’s assume a marketplace is not getting a lot of traffic. It might be easy to assume that the word is not getting out to people, e.g. the wrong marketing channels are being used. It is also possible that the right channels are being used, but the wrong message is being conveyed. Two possible causes with two very different remedies.
Metrics can help you see shortcomings in your strategies and suggest solutions, but only if you use the right ones for your business context. In the next section we will discuss a few of the more popular marketplace metrics and the insights they provide.
Your Crew of Marketplace Metrics
A metric is only relevant if it supports the profitability and customer growth of your marketplace. It doesn’t matter if a metric helped another platform. They need to measure your marketplace performance. Below are a few standard marketplace metrics, but be forewarned; they might not be the best for your business.
- Liquidity. This is not about how much cash you have in the bank, but how well you are matching buyers and sellers on your platform. Liquidity is an efficiency measure regarding how long it takes for your buyers and sellers to find each other. Often measured by how long it takes a listing to generate a sale, the perceived importance of liquidity is that it measures momentum. Low liquidity means buyers aren’t finding what they want and sellers aren’t finding customers. High liquidity means a company is ready to scale up.
- Customer Acquisition Cost is the total cost of bringing a new customer to your platform, including marketing. One way to calculate CAC is to take the total expenses for a given time period, such as a month or quarter, and dividing it by the number of customers acquired during that period. High cost of customer acquisition over a protracted period can kill a marketplace.
- Customer Lifetime Value is a measure of a customer’s total value to your marketplace over time. So a customer who provides repeat business has a higher long-term value than one who only uses the platform once over the same period. If your average customer lifetime value is lower than your customer acquisition cost, you have a business model problem.
- Net Promoter Score is a measure of a customer’s loyalty, which has an effect on their long-term value to your marketplace. Customer satisfaction is gauged by surveys after they have participated in a transaction.
This is just a small sample of the available metrics that can be used to evaluate a marketplace platform. It is one thing to understand these measures in isolation, another to combine them into a cohesive system that allows you to evaluate your whole business. That is where the Pirate Framework comes into play.
AARRR – a Framework for Contextual Metrics
The benefit of the Pirate framework is not as a list of metrics, but as a system to contextualise metrics. This distinction is crucial. Metrics are meant to evaluate customer behavior. But no single metric can ever capture the totality of customer behavior. Metrics only highlight aspects of why your customers do what they do.
It cannot be overstated that the value of a metric is directly tied to whether it provides insight on how to find, convert and retain loyal customers. The Pirate framework allows entrepreneurs to contextualise metrics by linking them to their marketing funnel.The ‘pirate’ epithet is derived from the ‘AARRR’ acronym which stands for the following stages in the customer journey:
- Acquisition – how to make people aware of your platform. This is a crucial first step in any business analysis. Customers don’t just appear from the ether. You need to go out and find them. Then you need to interact with them on some level to encourage them to buy your product. A well recognized acquisition tactic is content marketing; in exchange for a whitepaper or blog post, you get a potential user’s attention.
- Activation – how to ensure that your customer’s first interaction with your product is great. Assuming you are finding the right customers, the next step is ensuring that you are giving them a reason to stay and use your platform. There is no second chance at a first impression, and the activation step is to ensure that your platform is taking full advantage of those opportunities.
- Retention – how to keep your customers coming back. You can’t just deliver an initial good experience and then expect that to be enough for your customers to stick around. You have to not only provide an exceptional experience every time, but your platform needs to evolve as your customers do. The Pirate framework’s retention step addresses these important factors.
- Referral – how to make your customers your marketing team. It is almost a cliche, but it is still true, word of mouth is the most powerful tool a business can use to build its customer base. People trust their peers more than advertising. People also tend to associate with others who are like them. Happy customers will therefore spread the word of your product to people who are like them and are more likely to appreciate your services. Word of mouth is contingent on getting your customers to talk about you. This step in the Pirate framework addresses how you are going to convert your happy customers into zealous advocates.
- Revenue – how you can increase revenue. The big question, and it should go without saying. But all too often in their haste to maximize performance in certain metrics, some entrepreneurs lose sight of the goal – which is to generate revenue. They become so sure that improvement in isolated metrics will also increase revenue, that they don’t monitor to see if that is actually the case. This is why this step in the framework is so crucial.
The framework sounds great in theory, but how does it work in practice? The next section will look at utilising the framework to measure marketplace performance.
Anchors Aweigh! Setting Sail with Pirate Metrics
When applying the Pirate framework, it is vital to remember that you have two classes of customers – buyers and sellers. So when identifying metrics, you need to ensure that you are monitoring both sides of the equation. If you only look at buyer or sellers in isolation, it could be incredibly misleading. Buyers and sellers obviously have a symbiotic relationship on any marketplace platform, so something that influences one will have an impact on the other. Be sure to structure your metrics so that both buyers and sellers are monitored.
- Acquisition. This is all about the cultivation of new leads. Consider this a sort of ‘first date’ measurement. Can you get a potential buyer or seller to give you their contact information so you can make further contact down the road? Unlike dating, the goal is quantity as well as quality. Metrics for this stage includes the number of subscribers to your newsletter, how many people are viewing your blog posts, and how many are downloading your e-books.
- Activation. If acquisition is about building a relationship with content, activation is about deepening the relationship with a user by getting them to use your marketplace. Strategies for generating activation include deep discounts (loss leaders) that get people to start using your platform. The goal is to get feedback on the user experience and to measure how many people are taking advantage of the discount. If no one is buying your service or the goods of the sellers on your platform, even though it is dirt cheap, you have a business model problem.
- Retention. Once you get a customer to buy that first discounted product or service, you need to convert them to someone who will pay full price. This is the retention stage. How many of your first time customers are you able to retain? This is where churn metrics, or the number of users (buyers and sellers) who discontinue using your platform, are so crucial. This is also a good stage to review your platform’s customer acquisition costs.
- Referral. As described above, referral marketing is crucial but it can also be difficult to measure. By definition, your customers are discussing your service off-platform with non-users. It is difficult to measure something that occurs in an area you don’t have control over. One way around this, is to offer a referral code. When a new client uses your service, they can use the code to mention that someone referred them. The person who did the referral then receives a benefit, such as 10% off their next purchase. These sorts of programs can provide you with the data necessary to develop relevant referral metrics for your marketplace. You can also monitor social media to see how often you are mentioned there.
- Revenue. At this stage the customer lifetime value and net promoter score metrics discussed above come into play. You also want to evaluate the first non-promotional purchases, i.e. purchases that occurred without the enticement of a discount. An important area to monitor is your shopping cart function. You want to minimize the number of people that fill their cart just to abandon the purchase. Ensuring you don’t lose customers at this last stage is a key element in maximizing revenue.
You Need an Experienced First Mate for Great Marketplace Performance
As you can see, it can be difficult to identify and implement the right metrics, but it is absolutely vital. Frameworks like AARRR together with an experienced development partner can boost your chances for marketplace success.