LTV … The GPS For Fundraisers
As I emphasize repeatedly in my book, Retention Fundraising, over the long haul, Lifetime Value (LTV) is the most significant measure for benchmarking and steering your fundraising efforts.
In fact, as Charlie Hulme, head of DonorVoice’s U.K. operation, puts it, “Unless you believe you’ll find the cure/right the wrong/feed every child with your next appeal, it’s unethical not to focus on lifetime value.”
Once you know a donor’s lifetime value, you’ll better understand how to allocate your resources, both in terms of donor acquisition (what lists and packages and techniques to use) and donor retention (how much to spend on important efforts like ‘thank yous’, second gift strategies, monthly giving efforts, and improving donor service).
[Graphic courtesy of Donor Trends]
A Simple Way to Estimate Lifetime Value
An easy-to-understand, commercial example of the lifetime value concept is that of a gym member who spends $20 every month for three years. The three-year lifetime value of that customer would be $720 ($20 × 12 months × 3 years = $720 in total revenue).
You can see even from this example why many health clubs offer a free starter membership. Gym owners know that as long as they spend less than $240 to acquire a new member (the amount the member will pay in the first year — $20 a month × 12 months), the customer will prove profitable in a relatively short amount of time. This is the same way our boards, CFOs, and fundraisers should view the investment in acquiring new donors.
Nevertheless, I’ve attended countless board meetings where the development director attempts to explain why the organization is spending $30 to acquire a new donor who contributes only $15 with her first gift.
“That’s an unacceptable 200% cost of fundraising!” the treasurer angrily exclaims.
But what if every one of those new donors has a five-year lifetime value of $300? Instead of losing $30 per donor, the acquisition effort actually produces a valuable asset worth $270 per donor in gross income over the next five years.
That’s a 20% per year return on investment. Probably a lot better annual return than the organization is getting from its endowment portfolio.
Happy board. Happy CEO. You’re a rock star!
This leads to the important question: do you know the three-, five-, ten-, or even twenty-year lifetime value of your donors or members?
Fortunately, it’s easy to calculate when you put the actual or estimated numbers into the following equation:
- Average $ amount of a donor’s gift to your organization
- Multiplied by the number of repeat gifts per year by that donor
- Multiplied by the average number of years your donors remain on your active file
- The result equals gross lifetime value.
(You can arrive at the net lifetime value by deducting the costs of soliciting and servicing the donor over the period of time you’re measuring.)
If you don’t want to use your own pencil and paper to calculate LTV, you can go online and use Harvard University’s free calculator.
It’s not important how you do it, just that you do it!
What’s the 5 year LTV of your donors?
P.S. You’ll find a more extensive explanation of the uses of LTV in Chapters 21 and 22 of Retention Fundraising and in Appendix C, which you can find online here, you’ll find a variety of acquisition strategies using Lifetime Value.