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What is donor lifetime value?

Why calculate donor lifetime value?

What is my donor lifetime value?

Pairing LTV with DAC

Segment, segment, segment

Applying these concepts at your shop

What is donor lifetime value?

In Part 2 of Data-Driven Fundraiser’s Reference Guide we briefly discussed donor lifetime value. Today, let’s dive even deeper.

Donor Lifetime Value, or LTV, is a prediction of how much money you can expect to receive from a donor during the lifetime of their giving to your organization (from first donation to last donation, from acquisition to lapse).

There are a few key pieces of information we need to discern from the definition above.

1. Donor lifetime value is a prediction.
2. Donor lifetime value is a representation of the dollar value of a donor relationship.

• Please bear in mind that you will not actually calculate donor lifetime value on a per donor basis, rather you will calculate LTV across segments of your donor database.

Donor lifetime value is measured over the lifetime of a donor’s giving to your organization.

It is important to understand that LTV is nothing more than a prediction or projection of the value of a donor relationship. That is to say, it is not set in stone. The more data you input into your donor lifetime value equation, the more accurate your predictions will become. More on this a little later.

Next, it is crucial to comprehend that donor lifetime value is used to assess the financial value of each constituent in your database. LTV is simply a measure of the dollar value your relationship with a donor will have during its entirety. Donor lifetime value answers the question, “from start to finish, how much revenue will a donor contribute to your organization?”

With that being said you will never actually calculate the lifetime value of a single donor (or at least you shouldn’t at first). Predicting the future donations of an individual donor is not particularly worthwhile. Instead, you’ll want to calculate donor lifetime value for your entire donor database (what is my average LTV?), or better yet for a segment of your database (what is my under $100 donor LTV?) This will prove more useful when it comes to using LTV to inform fundraising strategy.

Regardless of how you segment your LTV calculations, it is important to note that it is measured over the lifetime of a donor’s giving. When you calculate donor lifetime value you’ll be predicting the total amount of revenues a donor will produce. This means your lifetime value metric will include projections for future giving. That’s part of what makes LTV such an important and increasingly salient metric to measure.

When you tie it all together, the definition for donor lifetime value isn’t terribly tricky. It is simply a prediction of how much money you can expect to receive from a donor during the lifetime of their giving. What can muddy the water is the fact that there are dozens of ways to calculate this metric and myriad ways to misinterpret it. Let’s try and clear some of that up.

Why calculate donor lifetime value?

With our definition in mind, let’s answer the all important question: why bother to calculate lifetime value in the first place?

Donor lifetime value can be transformative for your fundraising office. Remember, this is a metric that is forward looking. It predicts the value of your organization’s relationships with your donors into the future. With that information you might be able to more effectively budget costs for donor acquisition campaigns.

This leads to a concept called “business model viability.” When you pair donor acquisition cost, or DAC, (part 3 of this series) with donor lifetime value, you can start to gauge the viability of your fundraising department. Essentially, you should be able to answer the question, “Are we profitable?” with those two metrics in hand.

For example, if you are acquiring donors for a cost of $50 on average per donor, and your donor lifetime value is $75, you would be “profitable.” But if DAC is $100 per donor and LTV is $75 you’d know that you’re in the red and acquiring each new donor will actually incur a $25 loss.

Looking to the for-profit sector for evidence of LTVs usefulness proves powerful. Starbucks is a fantastic example of the importance of knowing and tracking donor lifetime value, or in their case, customer lifetime value. It will most likely come as a surprise to you, but the lifetime value of an “average” Starbucks customer over a 20 year period is north of $14,000. Let that sink in for a moment.

Over the lifetime of their relationship with Starbucks (20 years in this case) a typical customer will be worth $14,000 to Starbucks. That’s unbelievable, but it’s true. It helps justify the fact that Starbucks spends over $1,000 a person to acquire new customers. Not only is it a justified expense for a new customer, it’s a no brainer.

Yet even with data validating Starbucks expense, it still seems incredulous. Try sharing this example with a colleague or coworker. They probably won’t believe you. “There’s no way I’m going to spend $14,000 at Starbucks,” they may say. (Feel free to send them this reference as proof). But that’s the point. Data and metrics are not biased, they’re just numbers, and that is exactly why lifetime value can be so transformative.

If you had the lifetime value of an average donor at your fingertips, you’d be able to more confidently justify spending money to acquire them . Without that data you’ll be more hard pressed to convince your colleagues to increase spending.

What is my donor lifetime value?

Calculating your donor lifetime value isn’t easy. But, it isn’t impossible. In fact, far from it. Before we discuss how to calculate your donor lifetime value by hand, I want to recommend using a tool like Fundraising Report Card®. Fundraising Report Card® calculates your donor lifetime value for you.

With that being said, let’s address the data you need to accurately create your lifetime value predictions. To calculate donor lifetime value you’ll need three inputs:

1. Donor lifespan
2. Average donation amount
3. Frequency of donation

Let’s break these three components down.

Donor lifespan is simply the length in time that a donor maintains a relationship with your organization. Determining this metric can be accomplished by analyzing many years of historical donation data. Although difficult to calculate, the definition should hopefully be simple to comprehend. Lifespan is nothing more than what it sounds like – the length of time a donor has a relationship with your organization.

Average donation amount is the average amount of a donation made to your organization by all donors. You may want to consider segmenting this input to calculate segmented lifetime values. More on that below.

This input is the most straightforward of the three, and you will want it broken down year over year (average donation amount in 2014, average donation amount in 2015, in 2016, etc.). This way you’ll be able to calculate historical donor lifetime values and plot how they have changed over time.

Frequency of donation is yet another seemingly simple metric needed to calculate donor lifetime value. It is a measure of the total number of donations made in a time period (let’s stick with years) divided by the total number of donors in that time period. For example, if your organization received 1000 donations in 2016 and those gifts came from 500 donors, your frequency of donation would be 2. Each donor (on average) is making 2 contributions. That’s your frequency of donation.

Now, tying these three metrics up together will give us our lifetime value. That formula looks something like this:

LTV = Lifespan × Average donation amount × Frequency of donation

Pairing LTV with DAC

Lifetime value on its own is useful, but where it really becomes powerful is when it is paired with donor acquisition cost. In part 3 of this guide we briefly discussed how donor acquisition cost and donor lifetime value go hand-in-hand to determine fundraising return on investment. Let’s take a closer look.

High DAC and low LTV is unsustainable. If you have to pay $500 to acquire a new donor, and that donor over the lifetime of their giving will be worth $250, you will “go out of business” in a hurry.

On the opposite end of the spectrum, low DAC and high LTV is “profitable.” $250 to acquire a $500 LTV donor is sustainable and profitable for the fundraising department.

These two metrics combined in this context can be unbelievably insightful. If your goal is to further your organization’s mission then making sure your fundraising is “profitable” should be a primary concern.

But how do you actually use donor acquisition cost and donor lifetime value in practice?

Segment, segment, segment

Talking about donor acquisition cost and donor lifetime value is easier said than done. Yet, there are a few ways to get the most value out of these metrics right now. Segmenting donor acquisition costs and donor lifetime values can provide you and your team with the information you need to make informed decisions.

It may seem counterintuitive at first, but starting with the big picture (overall donor lifetime value and overall donor acquisition cost), is actually a recipe for disaster. Instead, start with something more refined, more granular.

When it comes to segmenting DAC and LTV I suggest two approaches:

1. Segment by giving level
2. Segment by acquisition channel

Segment by giving level

Donors in your organization’s under $100 giving segment will have far lower lifetime values than those that are in the $1,000-$5,000 segment. That makes sense because the two different giving segments will have different average donation amounts, frequency of gifts, and even lifespans. Plus, one really large donation could skew the lifetime value of all your donors. That is why segmenting LTV by giving level is a smart idea.

The same principle applies with donor acquisition cost. Under $100 donors should cost less to acquire than a new major donor, for example.

What is the benefit of comparing these segmented DAC and LTV metrics instead of the overall numbers? Usability. Knowing your overall DAC and LTV numbers is worthwhile, but not necessarily practical. At least not at first. Instead, focusing on your under $100 donor DAC and LTV presents more meaningful insight right now.

Imagine you knew exactly what your donor lifetime value was for an under $100 donor. With that information you’d be able to more decisively budget for a new acquisition campaign. And, with some of the tools we discussed in part 3 of this guide on donor acquisition cost, you’d be able to measure and track what your acquisition costs are. When the campaign is said and done you’d be able to compare the two metrics and calculate your fundraising return on investment.

Segment by acquisition channel

Which leads us to our second form of segmentation, by acquisition channel. We went more in depth on the subject in part 3, but donor acquisition cost makes sense to calculate on a per campaign, or per acquisition “activity” basis. DAC is easier to track this way. Plus segmented donor acquisition costs provide more insight and decision support when it comes to choosing where to make future acquisitions investments.

The same idea applies to donor lifetime value. Just as LTV will differ by giving segment (under $100 donor vs. $5,000+ donor) it will also be different depending on acquisition channel. A donor who is acquired via Facebook ads may have a shorter lifespan than a donor who is acquired via your annual event. That will have implications on their lifetime value which will inform where you invest more in the future.

This is a lot of information, and it may very well be overwhelming right now, but don’t fret. If your organization has been keeping track of donations then you have access to this information. Simply load your donation data into Fundraising Report Card® and view your donor lifetime value metrics. Keep in mind that if you can export lists of donations from your donor management system or CRM you’ll be able to get those “segmented by acquisition channel” lifetime values as well.

Let the technology crunch the numbers. Your organization needs you to interpret them and make strategic decisions based on the findings!

Applying these concepts at your shop

We’ve covered a lot in this section of the guide. Let’s try and sum everything up into a few key, actionable takeaways that you can use at your shop today:

• Donor lifetime value is a fancy term for, “the financial value of the organization’s relationship with a donor over the lifetime of their giving.” Nothing more, nothing less.
• If you have access to donation records you can calculate donor lifetime value. Please consider using existing technology to help in that cause.
• Don’t start with the “big picture.” Instead focus on segmenting your donor lifetime value metrics by acquisition channel and especially by giving segment.

 

NOTE: Thank you Jennifer Willett, Cheryl Papsch and Lizzie Weiland for editing this section of the guide.

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