A few weeks ago I had an awesome opportunity to share a bit of what I know on data driven fundraising during an in-person presentation at the Foundation Center in Washington, D.C. Even more recently I had a similar experience conducting a webinar in partnership with the Clairification School on Meaningful Metrics.
Both of those presentations were well received (thank you if you attended either or both), yet one sticking point came up at about the same time in each. You see, on slide 31 of my presentation deck I introduce a concept called donor lifetime value.
If you are an avid reader of the Fundraising Report Card® blog you’re most likely familiar with lifetime value (LTV). You’re aware of how to calculate it, it’s implications on your fundraising efforts, and why you’d be interested in knowing it at your organization. But, for those of you who are not familiar, have no fear, you’re far from alone.
During both the in-person Foundation Center presentation and the more recent online webinar, there were myriad questions regarding donor lifetime value. And, although I’ve taken some time to write about LTV and its importance in the past, I thought we could address those questions once more today.
Why is lifetime value important
It has become common knowledge that retaining donors is one of the best ways to build and grow your fundraising operation. Acquisition is nice, but more and more development professionals are acknowledging the importance of retaining, stewarding and cultivating relationships with donors.
It’s somewhat ironic then that we don’t have a set-in-stone way to measure the benefit of developing those relationships. Sure, you can measure your donor retention rate and see positive gains in how well you are maintaining relationships with your donors (retention rate going up), but how do you know what impact that has on the bottom line? What is the value of actually retaining more donors? Can we measure that? Can we assign a dollar value to improved donor retention?
Starbucks (yes the coffee chain) can, and did. Starbucks obviously is not a nonprofit organization, and have no fear, I am not here to tell you that your nonprofit needs to behave more like a for-profit, instead, we can look at how Starbucks quantified their relationships with customers and apply that to our donors. Customer lifetime value and donor lifetime value are identical, both in theory and in practice. The only difference is with whom the metrics reference (customer or donor).
The average Starbucks customer will spend more than $14,000 during the lifetime of their relationship with the chain. Yes, $14,000.
If Starbucks spends $1,000 to acquire a new customer, that would be considered “no big deal.” It wouldn’t be a big deal, actually, it would be a profitable deal. That’s the power of lifetime value, it quantifies the value of a relationship with a donor over the lifetime of their giving. In Starbucks case, knowing that the average customer is worth $14,000 to the company becomes a rationale for investing in customer acquisition. The same concept will apply at your nonprofit.
Okay, that’s impressive, but what really is lifetime value?
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.
- Donor lifetime value is a prediction.
- 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.
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. Predicting the future donations of an individual donor is not particularly worthwhile (or practical). 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 and implement in your fundraising plan.
Donor lifetime value is a really important fundraising concept. Brady Josephson has been preaching its importance for years! Check out his blog post from 2015, What is Lifetime Value? to learn more about the different ways to calculate LTV.
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.
You’ve piqued my interest, how do I calculate my LTV?
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 donor lifetime value for you.
With that being said, let’s address the data you need to accurately create your lifetime value projections. To calculate donor lifetime value you’ll need three inputs:
- Donor lifespan
- Average donation amount
- 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 is 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
Segment, segment, segment
You could calculate donor lifetime value for your entire database, but that is not advisable. Entire database LTV calculations will be skewed with outliers. Ultiamtely this will not help you take actionable next steps. There are two ways I recommend making your donor lifetime value calculations actionable:
- Segment LTV by giving level
- Segment LTV 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.
Knowing your overall donor lifetime value is worthwhile, but not practical. Instead, focusing on your under $100 donor lifetime value will present more meaningful insights right now. Oh, I can spend $75 to acquire a new annual fund donor because their lifetime value is $125.
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.
Segment by acquisition channel
Just as lifetime value 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 should invest more in the future.
Pairing giving level and acquisition channel segmentation is truly the “holy grail” of donor lifetime value. Yet it is important to acknowledge that calculating these segmented metrics will undoubtedly be tricky. That is why Fundraising Report Card® exists, to help in that effort, but even so, you’ll need good data hygiene and data storing procedures before you can get this granular.
Ultimately though, this should serve as a strong reminder why you have invested in donor management systems — to store, organize and track all of this data that you will eventually use to calculate LTV metrics.
More lifetime value questions?
If you’ve made it this far, hopefully you feel more comfortable with the concept and application of donor lifetime value.
Yet, with that being said, don’t fret if you still have some lingering questions. Lifetime value is not a simple metric (that should be obvious by now).
Feel free to comment below with your thoughts below and I’ll reply as soon as I can, or better yet, send me an email, and I’ll get back in touch ASAP.