It’s an almost mythical number that comes up in team meetings and budget discussions: donor Lifetime Value. When mentioned, heads nod. Everyone agrees – it’s important.
But when was the last time you calculated the Lifetime Value of your donors?
Lifetime Value (LTV) is a critical metric at the disposal of every fundraiser – one that I believe is the most important one available to us. But too often it is pushed off to the side of our desk, saved as a task that we’ll get to when we have the time. Here are 4 reasons to prioritize calculating your own file’s Lifetime Value and some tips on how to get started!
1) See the Forest Instead of the Tree
At various points of the year, it’s easy to get lost in the weeds of a current campaign or appeal. Did we hit our target? What is the test package showing? What is our projected revenue? These are great questions to ask and are important for keeping programs on track.
But they also zero in on a relatively short period of time. We need to remember that our beloved donors have oh so many things going on in their lives: family events, celebrations, vacations, and more. The latest letter you poured your heart and soul into? Well, it may just have landed on their doorstep on the wrong day. The brilliant digital integration? They decided to take a social media vacation for a month and won’t ever see it.
Lifetime Value takes every donor interaction into account and will present the total value of their giving over the 4 year period (or whatever time period you use).
2) Simple and Effective
Getting this big picture can appear daunting, but calculating it is anything but! At its most basic, Lifetime Value requires a donor’s average yearly gift and retention rate. That’s it.
As an example, let’s say your organization’s average direct mail donor makes one gift of $75 per year and renews her gift the following year 80% of the time. A basic LTV calculation shows that a 4-year value for this donor would be $221.
But keeping donors engaged and renewing their gifts is much more challenging than simply securing the first gift and waiting for the rest to follow. New donor acquisition and retention remain two of the biggest fundraising challenges. Luckily, Lifetime Value can take all of this into account.
3) Tailor Made for You
Let’s stay with the above scenario but apply it to the challenge of acquiring new donors at an acceptable cost. The initial LTV assessment above was calculated for donors already engaged to your cause and giving every year. But what if we were to use this to show the value of newly acquired donors?
Luckily, the calculation for this metric is extremely flexible – allowing you to seamlessly incorporate additional variables. Some factors that affect new donors’ value are their initial acquisition cost, their retention rate year over year, gift values, and the number of gifts made per year. For our example we’ll assume the following:
- Initial cost to acquire: $95
- Retention rate after year 1: 50%
- Retention rate all subsequent years: 80% (as per initial example)
- Initial gift value: $50
- All subsequent gift values: $75 (also as per initial example).
- Gifts per year: 1.1
Inputting these new variables gives us a 4-year net lifetime value of $55.65 per newly acquired donor. This presents a very different result than the basic lifetime value calculation, but still shows a positive outcome for the organization in its acquisition efforts.
Even this scenario leaves out details that may be important to your calculation. For example, how many other solicitations during each subsequent year is the average direct mail donor receiving? What percentage convert to monthly giving? You can take all these into consideration to provide a more holistic picture.
4) Utilizing this Powerful Ally
Now armed with this critical piece of information, how should you best utilize it? As with its calculation, Lifetime Value is also flexible in its application. However, it has a couple uses in which it shines particularly bright.
The first of these is getting a clear picture of your donors’ net contributions to your organization. By combining your various pieces of information, such as average gift values, response rates, and campaign execution costs, you can confidently state what the expected return on investment is for any period of time. You can then use this figure to build your own internal case for investment in a channel that may otherwise be ignored, due to decision makers’ opinions or biases (if you’re in this boat, check out my brilliant colleague Heather Brown’s piece on investing in direct mail).
Another way to harness LTV’s power is in comparing different channels. In a previous blog, I wrote about how the challenge in acquiring monthly donors lies in convincing them to change behaviours (read it here, if you’re curious). This formula allows you to quantify the value proposition of that question and determine which method of monthly acquisition works best for your organization.
What other ways do you utilize LTV in your organization? Let me know in the comments below!
This post was written by Ronen Tal, former Philanthropic Counsel at Good Works.