What is Donor Lifetime Value and Why is it the Most Important Fundraising Metric of All

Nonprofit organizations need to keep their data organized, and one of the main reasons is so their fundraising metrics will always be accurate and up to date. But which metrics should you be paying the most attention to? The Fundraising Report Card is all about data, and we’ve seen a lot of it. And we have become convinced that donor lifetime value is the most useful and revealing metric for your organization to know.

What Is Donor Lifetime Value?

Donor lifetime value refers to the predicted average dollar amount that a donor will give to your organization over their lifetime.

It’s not calculated by adding up actual donations for each donor, though that’s what many people first imagine when they hear the term. The reason you can’t do that is because most of your donors are still alive. And, for donors who are deceased, especially ones from a while back, inflation and other factors render old data less and less accurate.

You calculate donor lifetime value using a simple formula that involves three variables, each of which must also be calculated from your data:

  • Average value of each donation in a given year
  • Giving frequency – how many gifts are given per year
  • Average length of a donor relationship with your organization

You can learn much more about this informative fundraising metric and how it is calculated, but that’s not the focus of this article.

Misconceptions about Donor Lifetime Value

One of the keys to understand about this metric is that it’s not an exact figure. It is an estimate. It’s a prediction. If you calculate it every year, it will fluctuate every year as your data gets updated and remains current.

Consider the three variables that are used to calculate it.

If you get more donations this year than last year and your average donation value doesn’t change, then your donor lifetime value will increase. Why? Because your donors gave more often, which means they will give more over their lifetime – assuming nothing else changes.

The hardest term to rely on here is of course donor lifespan. Some donors join, give for a few years, and then stop giving. For donors like that, calculating lifespan is relatively easy. Maybe your average donor lifespan is five years. After that, most of them move on and don’t ever give again.

But what about donors who are loyal for many years? What about planned giving?

This is why the lifetime value metric can only ever be an estimate. Those data points will factor into these calculations, but they are in general outliers.

This is also why you’re much better off calculating donor lifetime value at several giving levels. Fundraising Report Card runs calculations at five different giving levels, with the highest one being $5,000 and up. That one includes all major donors as well as planned giving.

Why the Donor Lifetime Value Metric Is So Useful

So, let’s take a look at why we consider LTV the most important metric to calculate.

LTV Helps Guide Your Marketing Decisions

This is probably the most obvious and talked about reason to know your average lifetime value. And it’s a good one.

If your average lifetime value is $100, you can now make more informed decisions about how much to spend on acquiring new donors and marketing to your existing ones. More than that, if you’ve broken your data up into giving levels, you can get even more specific of what is justifiable to spend on certain types of donors.

Suppose for your donors who are in the $250 to $1,000 giving range have an average lifetime value of $800. So – that’s not a one-time gift. That’s all they’ll ever give, total. This means most donors in this giving range are giving either several gifts on the low end of that range, or they’re giving just once, at the higher end of that range.

With an average lifetime value of $800, how much should you spend finding and engaging donors like these?

Merge with donor acquisition costs

Your marketing costs are best summarized by finding the total amount spent on marketing divided by the number of new donors acquired. If you can also break this data up by giving level, you can now compare what you’re spending to find donors at each giving level with what they will give over their lifetime.

That’s very useful information! If you’re spending $100 to find a donor who will give on average $800 over their lifetime, that’s a good investment. But if you’re spending $650, that indicates some inefficiencies, and a misplaced priority on certain marketing campaigns and efforts.

LTV Puts Data like ROI in Context – Whether Good or Bad

Think about a fundraising event. Suppose you spend $50,000 on an event, and you make $350,000 in revenue. So that’s a $300,000 ROI. Much of that comes from existing donors, and much from major donors.

Thinking about the $250-$1,000 giving range by itself, let’s say they gave an average of $300 at the event, and it totaled $25,000 in revenue. Was that a good ROI?

Well, you can already see how complicated it would be to figure that out.

But when you know the donor lifetime value for this giving range, you know that this $300 average donation does not represent the full amount these donors will give. Many of them will give again because your average lifetime value is $800.

You can think similarly about social media campaigns, direct mail campaigns, major gifts fundraising, donor reactivation campaigns, and so much more. The ROI of one single campaign or event becomes less important when viewed in the context of lifetime value.

If your lifetime value remains well above what you’re spending to acquire and re-engage your donors, then you’re in good shape.

LTV Reinforces Importance of Retention over Acquisition

Acquisition is important. Obviously. But retention is more important. Again, let’s run with the same example. The average donor in the mid-range gave $300 at the event. According to our hypothetical figures, that means these donors will still give an average of $500 more before they lapse.

But if you don’t do anything to retain them – no thank you notes, no emails, no follow-up, no future campaigns, no personalized communication – then you won’t see that $500, and your donor lifetime value will decline.

What must you do to keep your LTV high and make it go higher? Focus on retaining more donors. That will increase your average number of gifts, which leads to a higher donor lifetime value.

LTV Shows How Donors at Different Levels Behave Over Time

What happens if 10% of your mid-range donors elevate their giving and make a gift that’s over $1,000? And what if 20% of them reduce their giving below $250?

This will show up in your data if you’re calculating lifetime value at the different levels, which the Fundraising Report Card does for you automatically.

You may also discover that donor retention rates vary based on giving level. Maybe low-dollar donors give more times, but at lower amounts, whereas mid-level donors give more money, but only once or twice. In that scenario, you might find following up on the mid-level donors to be not very economical if you struggle to inspire very many repeat gifts.

The flip side is, if you’re not doing any follow-up with that group, or if your follow-up is generic and uses the same approach as for all the other giving levels, this might explain the low mid-level donor retention.

With donor lifetime value as the primary metric, you can now begin using your other metrics like donor retention to draw more actionable conclusions such as in this example.

LTV Reveals How Donors from Different Sources Behave

If your CRM data is strong, you can also track donor lifetime value based on the source of acquisition.

Imagine having lifetime value data for donors acquired through Facebook, through Instagram, through TikTok, through events, through direct mail, from volunteers, and through phone outreach.

You might find great variation in lifetime value for each of these and other sources.

If so, you would now be able to invest your marketing dollars more efficiently. If the average donor acquired through Facebook gives $240 in their lifetime, but the average donor from TikTok gives $60, then you should be spending more money advertising on Facebook than on TikTok.

LTV Shows You What Is and Isn’t Working

Imagine making a presentation to your board and being able to show data revealing that you’re currently spending $90 to acquire low-level donors who will only give $70 over their lifetimes.

That would be a very clear case for reducing spending to acquire donors from this group, and your board would (should?) greatly appreciate knowing this.

Do you see how much more final that kind of data is compared to ROI data from this or that campaign, or even revenue for the entire year?

One year is up. The next year is down. What does it mean? Well, if your donor lifetime values aren’t changing much, but your overall revenues are down, that means you lost some donors. The issue isn’t ROI in that scenario, but whatever is causing you to lose donors.

LTV Provides a Clear Direction for Fundraising Goals and Tasks

Lastly, when you know your donor lifetime value, you can get much more practical and strategic in where you will focus your efforts. Remember the three variables – giving amount, giving frequency, and length of donor relationship.

Make any of these metrics increase, and your lifetime value increases too.

The tactics you can use to affect these variables aren’t the same. For example – donor gratitude affects donor frequency and length of relationship. People who get thanked tend to stick around longer, and sometimes they send extra gifts after being thanked. So, if you feel like you’re already doing a great job of thanking donors, maybe devote more efforts to increasing giving amounts.

For that, you might alter your giving arrays on your donation page or your fundraising letters. Or you might start sending more targeted communication to donors who give at different levels. These tactics will probably result in higher average giving amounts.

Know Your Donor Lifetime Value Metric

All of this and so much becomes clear to you when you have accurate donor lifetime value data.

But running these calculations on your own is very time-consuming. You’re already working hard just keeping your data current. You need that. But then doing valuable things with your data requires a whole additional set of tasks – and people and time to carry them out.

The Fundraising Report Card exists to help nonprofits quickly and almost effortlessly stay current with their essential fundraising metrics, with lifetime value being the most essential one of all.

All you have to do is submit three categories of data and our platform will calculate dozens of very useful metrics, including charts and graphs so you and your board can visualize your data.

Those three data fields are your donor IDs, donation amounts, and the date of the donations.

Fundraising Report Card is free to use and will become a very powerful tool. You’ll wonder how you ever lived without it!

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