Understanding the concept of Lifetime Value can have an immense impact on your fundraising practices. Unfortunately, the nonprofit sector does not hold it in as high esteem as the for-profit sector, particularly the tech sector.
If you aren’t familiar with Lifetime Value, it can be described in the nonprofit sector as the total net contribution that a donor generates during their “lifetime” within your donor database.
In his excellent blog post entitled “Why Does LTV Matter?”, tech startup expert Brock Benefiel explains how commercial businesses can afford to invest in higher acquisition costs based upon lifetime value.
This concept has been expounded upon over and over by my good friend and nonprofit pundit Roger Craver. Here is a key statement from one of his (always strategic) blog posts:
“Whether you’re spending $1 or $125 to acquire a new donor, chances are you probably aren’t spending or investing enough. That’s because almost no one calculates acquisition costs with Lifetime Value in mind.”
What Roger is referring to is the inability to look past the first year revenue created by any donor.
Do the math
Let’s say your initial $25 donor first-year donor is properly nurtured and increases their gift by 50% for the next 5 years before lapsing. Their annual giving would look like this:
- Year One: $25.00
- Year Two: $37.50
- Year Three: $56.25
- Year Four: $84.37
- Year Five: $126.56
- Year Six: $189.84
In this scenario, their total lifetime value would be $519.52.
While spending even a $100 or more to acquire this particular donor may hurt in the first year, it ends up making financial sense over the long term.
The danger is that only about 29% of first-time donors give a second gift. Therefore, we must take the next step in personalizing the lifetime value formula to you own charity in order to be safe in not spending too much or too little during acquisition, especially since we must wisely use a portion of any budget to nurture and properly communicate with all donors.
Calculating your own averages
Before we outline calculating your averages, let’s pause for one of my favorite Seinfeld episodes where the math around cost structures becomes the key focal point.
Yes, it is the famous Michigan Bottle Deposit Scam:
Trust me; the math will work out!
In order to do this, you’ll need to pull some basic reports from your donor database to create parameters that make sense to operate from.
Here are the key averages to calculate:
- Average gift amount over the last 12 months for first-year donors
- Average increase in gift amount by donors retained
- Average lifetime in months a donor is retained
- What % of lapsed donors return annually
- What is the average gift amount from lapsed donors
- Total average number of donors in the database over the last five years
From these six simple, but powerful specific numbers you can create your guidelines.
Let’s say your answers are…
- 21 months
…then the true Average Lifetime Value per donor parameter in regards to acquisition for your organization is found by the following equation:
Divide the $144.50 (avg. annual gift) by 12 to find the equivalent monthly amount. In this case, the monthly amount is $12.04.
Multiply $12.04 by 27% (avg. increase in giving) and then add it ($3.25) to $12.04 to get the monthly amount in year two, or $15.29.
Average Lifetime value is then 12 (months) x $12.04 ($144.50) plus 9 months (to equal 21 total months of avg. giving) x $15.29, which equals $282.14 in lifetime value before considering any lapsed donors coming back ( [12 x $12.04] + [9 x $15.29] = $282.14 ).
To consider returning lapsed donors, we simply add 12.1% (% of lapsed returning) of $110.25 (avg. annual gift by returning donors) or $13.34 bringing the grand total to $295.48 in average lifetime value per donor for this specific charity.
This would allow this particular charity to spend up to $295.48 in brand new acquisition and retention practice costs before going below breakeven.
This is exactly how any commercial business would evaluate any new customer acquisition strategy!
Will This Be Used?
I have yet to be in any nonprofit board meeting where lifetime value averages are discussed in any form, yet it comes up in almost every other business startup board meeting I have been part of and drives this key fact:
Since 1970 the number of nonprofits crossing the 50 million annual revenue barrier is less than 200 while the number of new commercial companies to cross the same barrier is more than 50,000.
Folks that is a huge difference, especially since we need nonprofits to scale to fulfill their missions!
How about you? Will you use lifetime value to drive donor acquisition strategy discussions? Let me know in the comments below!
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