Master your SaaS Growth Flywheel (AARRR Funnel)
Acquisition, Activation, Revenue, Retention and Referrals - learn how to master each of those steps for your B2B SaaS growth.
When you look at the growth of your SaaS business and want to know where the bottlenecks and weak points of your growth strategy are, it’s super helpful to have a clear framework that helps you analyze your performance.
In this article, we will have a look into the 5 steps of a powerful SaaS Growth Flywheel and how to master them.
I will highly recommend having a look at Dave McClure’s AARRR Funnel methodology which is a simplified model to understand the stages of the user towards becoming a happy customer and referral of your company. The steps in his funnel include Acquisition, Activation, Revenue, Retention, and Referral.
What is a Growth Flywheel?
Similar to the AARRR model, the growth flywheel is a framework to visualize the key steps of a successful growth strategy. It basically takes the steps of the AARRR funnel by Dave McClure and repositions them as a flywheel (rather than a traditional funnel). I came across this SaaS Growth Flywheel on TK Kader’s SaaS Marketing Guide: 5 Strategies for Business Growth Video, where he is visualizing the AARRR model as a flywheel.
The flywheel, in comparison to a funnel, is a closed loop. This means once you’ve acquired a new customer and made them happy, they help you to acquire new leads (new fuel for the flywheel) and ultimately grow your business. Especially for product-led companies with a high viral coefficient (check out the 5 types of viral features) you see your growth suddenly accelerate when you’ve mastered all steps in the flywheel.
We all know the picture of the hamster in the flywheel 😉.
Master your SaaS Growth Flywheel
In order to get the flywheel (your growth) going, you need to work on your ideal customer profile (ICP).
Knowing and being specific on your ICP enables you to work on your acquisition. What are the pain points of your ICP, what are their challenges, goals, and demographics? Where do you find them? Learn how to create your powerful ideal customer profile (ICP).
The first thing you should spend your time and energy on is your acquisition strategy. Don’t spend time on implementing a referral program or adjusting your upselling, if you don’t get enough leads in the flywheel. So step one obviously needs to be to focus on acquisition first and then move on to the next stage.
For product-led startups, the goal is to get free trials (new sign-ups) for the product. For sales-driven startups, the goal is to get new leads into the sales pipeline.
If that’s challenging for you, you probably didn’t have a powerful go-to-market strategy (GTM) for your business. So you should spend time with your GTM strategy and adjust it in order to acquire more leads.
The most common problems of a powerful go-to-market strategy are:
not having a clearly identified ideal customer profile which leads to:
unspecific targeting; being too generic
not knowing their pain point(s)
sales messaging that’s not tailored to the ICP
wrong positioning in the (competition) landscape
focusing on feature selling instead of value-selling
sales messaging focuses only on the product, not on the main problem and value of the product
the landing page is more a product description, not a marketing/sales page
problems with the growth channels:
not enough/too little activities (#call, #emails, #ads...)
focusing on the wrong growth channels
no testing of new growth channels
too many growth channels at the same time (with low quality)
Once you’ve mastered the 3 key elements of your go-to-market strategy (Ideal customer profile (ICP), Messaging & positioning, and Growth activities), you will get enough new leads/free trials and can move on to the next stage - activation.
Getting new leads is not enough. Now you want them to experience (for product-led) or see (for sales-led) the value of your product. This is what you need to achieve in the activation stage.
For product-led, activation is the phase where you want new leads to take meaningful action in your product (getting active), for sales-led you want them to book a sales demo with you so you can show them the power of your product and how it solves their pain. Benchmarks for healthy conversion rates vary from industry to industry, but you should be worried if your conversion rate is lower than 10% (for product-led & also sales-driven).
To analyze, if the activation of your product-led business is healthy, track how many of your free trials become active users, which means they are taking meaningful action in your product (AHA moment). Make sure that your definition of active is really meaningful. It does not help you if you define an active user as someone who just logged in to your product but didn’t do any relevant activities in the product. Meaningful actions can be for example:
started to design the first landing page (for a website builder)
uploaded the first leads (for a CRM tool)
wrote the first email (for an email marketing tool)
For a sales-driven business analyze how many of the new leads book a sales demo with you.
If most of the new leads are not getting active, this means you have a problem in your activation stage. Key elements to review in your activation strategy are:
What actions are you taking to activate them (email sequences; phone calls; webinars...)?
How do you present your product (value proposition; value-based selling; sales demo)?
Do you overload them with too much (detailed) information too early?
How do you communicate the value of your product (your language; design)?
Do they trust you (testimonials; social proof)?
Depending on your sales strategy (sales-driven vs. product-led), getting them to pay for your product looks completely different. But for both strategies, to know if you are doing well, you should measure your win rate.
For product-led you want your active users to now buy your product and become paying customers. For sales-led, this means that after your sales demo you want to close the deal and get them to sign the contract.
The win rate for sales-driven businesses is normally the conversion rate from new opportunities (sales demos) to paying customers. Depending on the industry and company size of your customers, you should aim for a blended win rate of at least 20% for B2B SaaS.
If you have low win rates, you should work on the following:
How do you approach your potential customers? What does the sales process look like (inside sales vs. hybrid sales vs. field sales)?
What is your sales communication (especially how to demo the product, email sequences, how do you communicate your values, value-based selling vs. feature selling...)?
How do you prioritize, segment, and handle new opportunities?
How do you use your CRM tool?
What touchpoints do you have with customers and what is their quality (amount of meetings, type of meeting (e.g. demo meetings, onboarding calls, training webinars...), timing & response rate)?
What does the customer journey look like? What are the touchpoints customers have within the product, with your sales team, support team, and your marketing activities)?
For product-led SaaS businesses, the win rate is defined as the conversion rate from free trials (new product sign-ups) to paying customers. For product-led B2B SaaS, you should aim for a 10%+ win rate.
In product-led businesses, customers do not have any contact with sales. You give them straight away access to your product and want them to experience the AHA-moment of your product (they see the value in your product) as fast as possible (shorten the time-to-value —> more info in this article). Core elements of your product-led strategy to review are:
How do you present your product (product tour; training videos; help center & academy)?
What does the communication look like (in the product, email, chatbot, marketing)?
How easy/fast do they experience the AHA moment of your product?
SaaS businesses rely on recurring revenue, meaning your customers pay you monthly or yearly for your product. So in order to grow your business, it’s not only important to onboard new customers, but it’s also crucial to keep your existing customers and even grow (your revenue) with them.
So retention has mainly two objectives:
Retain your customers
Increase the revenue per customer
Retention (keeping your customers) and churn (losing customers) go hand in hand. So measure your retention rate (& churn rate) to know, if your business is healthy. It can also help to do monthly cohort analyses to see how different customers behave (e.g. analyze how all new customers from 12/2021 behave compared to new customers from 12/2022). Cohort analyses help you to figure out if changes in the product and marketing have a (hopefully positive) impact on your business.
To retain your customers and make them happy, implement a proper customer success strategy:
Measure customer satisfaction (NPS)
Work on all touchpoints with your customers (product onboarding, support center, invoicing webinars, upselling...)
Product updates & training
Upselling program & Pricing Strategy
Once you’ve retained your customers and have happy customers, you should think about ways, how you can increase the revenue per customer over time. Happy customers are willing to spend more money. Selling new products to them is easier (and therefore also cheaper) than selling to new customers. So your customer acquisition costs (CACs) will go down and your customer lifetime value (CLV) goes up. This is especially very healthy for CLV to CAC ratio (an important SaaS metric).
Here is what you should think about when you try to upsell your existing customers:
What are you upselling? (new features, higher pricing tiers, yearly contracts; any additional services...)
What is the right timing?
How do you sell it (on which communication channel; what is your sales messaging...)?
How do you technically do upselling and cross-sell?
Who is in charge of it? Is it sales? Is it the product team? Is it customer success?
Adjust your pricing (increase your pricing; how to communicate it; how it works (grandfathering or not?)
There are 2 main sources on how to get referrals in your flywheel - number 1 is asking your customers for referrals (using a powerful referral program), number 2 is making use of viral features in your product.
Number 1 - Referral Program
A referral program is a super powerful growth channel. Not asking your existing customers for referrals is one of the most common mistakes in B2B SaaS Growth. This is especially bad because growing with referrals is cheaper and more effective than acquiring completely new customers. When your existing customers refer others to you (for free or for a small referral bonus) they mostly refer peers to you, which means they fit your ideal customer profile. Referred leads normally have a higher trust in your business, belong to your ICP, and therefore also show higher conversion rates.
So make sure you frequently ask your customers for referrals and even incentivize them to do so.
What’s important about a referral marketing program:
customer segmentation: Track your customers’ NPS score and product usage and only target your happy customers
timing & frequency: ask your customers for referrals at the right time (not straight after the signup, give them some time to experience your product and become a happy customers). Think about triggers in your customer journey where customers are happy with your product and willing to refer your product.
referral incentive: What is the referral bonus (cash vs. free product usage vs. other perks) and who gets the bonus when? Make sure it’s transparent and use a two-sided referral program and incentivize both parties (the referrer and referred) - check out some referral program examples
communication & messaging: Figure out the right messaging and best channels (in-product, email, phone...) to ask for referrals; create rules on when (triggers) and how often you ask for referrals
technical implementation & tools: referral tracking and referral bonus payout
So referral marketing can be a powerful acquisition channel to get new leads in your funnel (or better in your flywheel).
Number 2 - Viral Features
Depending on the type of product (usage just within a company like an ERP software vs. cross-company usage like an email newsletter tool) you should think about how you can use product features to drive referrals.
Olof Mathé (How to master product virality) gives you a great overview of the different types of virality features:
Network effects —> The more users of the product, the higher the value of the product. Good examples are Social media platforms (Linkedin or Facebook) or Chat Apps (Whatsapp, Slack), or peer-to-peer payments (Paypal).
Value virality —> Users spread the word about your product but simply use the product. Good examples are e-signature tools (Docusign, Hellosign) or collaborating on design boards (Miro), or sending emails (Mailchimp, Superhuman)
Exposure Virality —> Your users show your product to others to show off (because it’s cool and social status). Good examples are NFTs (e.g. Cyrptopunks) or education badges (e.g. Hubspot Academy, Udemy Courses).
Invites & Referrals —> Your users get rewarded to invite others to your product (mostly used with discount codes or free usage). Good examples are Dropbox (free storage) and Uber (free rides).
Of course, you can (and probably should) not only use one of the different types but better combine more of them.
Personal recommendation for 2022
As this is the first newsletter in 2022 and I guess many of you set new intentions and goals for 2022, I want to share with you a personal recommendation for goal setting, keeping focused in life, and being grateful.
❤️ If you enjoyed the article, please click the heart icon below, share it with other SaaS professionals who can benefit from it as well, and comment below with your questions and thoughts!
References: This article is inspired by Dave McClure (Dave McClure’s Pirate Metrics: The AARRR Funnel In A Nutshell), TK Kader (SaaS Marketing Guide: 5 Strategies for Business Growth), Productled.org (The product-led growth flywheel), Sinduja Pk (The Secret to Scaling your SaaS Product with Product Led Growth), Userpilot (The Best SaaS Growth Strategies of 2021 – with Aaron Krall, Sujan Patel and Natalie Luneva), and Olof Mathé (How to master product virality)
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