More On 2nd Gifts – Part 1
Tom’s post Why Are 2nd Gifts Made triggered a number of valuable comments from readers.
In turn, I want to devote two posts to digging into the critical subject of Second Gifts in greater detail; going beyond the basic “how to” advice from Jeff Brooks and John Haydon reported in Tom’s post.
Today’s post outlines ‘why’ Second Gifts are so important to an organization’s future. And…the metrics and investments that should drive Second Gift strategies—particularly those of mid-sized and large organizations.
WHY FOCUS ON INVESTING IN SECOND GIFTS
Let’s start off with a timely comment to Tom’s post by Caity Craver:
“Right now in the US, hundreds of millions of envelopes are being scanned, sorted, and delivered to potential donors asking them for a gift of $12, $15, $20 to join a cause.
“If you’re lucky, 1% of them may respond.
“To generate this 1% it will cost you between $35- $70 per new donor acquired.
“Our job [as fundraisers] is to protect the acquisition investment.
“The fundraising challenge…is not simply calculating/understanding your ‘rates’. (although it’s VITAL you know your numbers). The challenge at our doorstep is to answer ‘How much are you willing to invest to convert / retain / reactivate your donors?’ ”
[Author’s Disclosure: Caity is my spectacularly bright and energetic daughter. She also happens to be a veteran of 18 years’ direct response fundraising and the CEO of DonorTrends.]
In short, as Caity notes, true ‘donor acquisition’ involves far more than simply getting the initial gift. This is only the first step (and in many ways the most simple step). Meaningful acquisition requires not only calculating — but understanding — why the extra effort and investment is worth it.
And as Jay commented on Tom’s post: The retention rate for 2nd time donors is nearly three times larger than the retention rate of first time donors!”
That’s not all. And here’s where the importance of understanding, calculating and drawing up a 2nd Gift Plan is so important. Just look at the Boomerang retention chart below to see relative values of various types of retained donors — those donors whose higher value and better retention begins with the second gift.
PROBLEM AND OPPORTUNITY STARTS WITH ACQUISITION
It never ceases to amaze me how much time and money is spent on donor acquisition, and how little understanding and effort goes into second-half of acquisition — second gift efforts and retention.
Part of the answer may lie in the silos that exist separating ‘acquisition’ from ‘donor development’ functions in many shops. That’s certainly the case in all too many organizations.
But I suspect there are two, far larger reasons:
- Failure to understand and plan for the true, detailed complexities of acquisition;
- Unwillingness to invest the time and money needed to effectively complete the execution required for a first rate acquisition program.
I’m not singling out the hundreds of hours and countless millions of dollars our sector puts into picking lists, perfecting copy, testing incremental changes that usually lead nowhere. That’s simply the necessary first — albeit expensive — step in the process of attracting and keeping new donors.
What concerns me is that most organizations and their consultants stop right there. Response rates are cheered or condemned. The campaign is pronounced a success, failure, or about the same as others, and the numbers are entered into spreadsheets.
From there the Excel jockeys take over, calculating the average retention rates, the average gifts and the average amount of time it will take to pay back the investment. Done!
Wrong! Not done!
In fact … this is the point where the hard work should begin.
Let me suggest a look at just two of the conventional ways most fundraisers — especially direct response fundraisers — view and measure donor acquisition. Then let me suggest a reformulation.
Incomplete Acquisition Metrics
Let’s start with ‘cost to acquire a donor’. In reality this is nothing more than an efficiency metric measuring one list/package/message/technique against another. It tells you nothing about the work left to do.
‘Months to break even’ is another of those oft-used metrics that can cause you to miss the point. Why? Because it unintentionally creates both a floor and a ceiling on expectations. Using this blunt instrument almost pre-ordains a ‘planning’ schedule driven by the mentality that as much stuff as possible will be cranked out between now and break even date to meet the goal of recovering cost. The result? Inefficient underperformance on the acquisition investment, some frustrated/angry donors and wasted money. [See The Agitator series Raise More, Ask Less.]
Reformulating the Approach to Measuring and Planning
Here are some basic direct response acquisition figures from a mid-to-large size direct response oriented organization as background for facilitating a different mindset.
In the example , you’ll see they’ve spent $100,000 to acquire 2,000 donors for a cost to acquire of $50 each or $50,000 in net up-front investment
And, let’s assume a first year retention rate of 30%. This will leave them with 600 out of the original 2000 donors going into the second year.
Now, instead of thinking about ‘averages’ and ‘frequency of giving’ to determine how long it will take to break even on the acquisition spend, let’s focus instead on the amount of money each donor needs to contribute beyond the point of acquisition to reach the break even point on that initial acquisition investment.
In this illustration (and remember these numbers aren’t fully loaded with maintenance and overhead costs) the amount of money each donor who gives again beyond the point of acquisition, 600 in this example, needs to donate just to break even on acquisition spend is $83.33.
This is a somewhat oversimplified starting point aimed at adjusting a fundraiser’s mindset. For example, in addition to overhead costs it ignores additional donor attrition in Year Two. All of which means the organization will likely need $100 from each of these 600 new donors to breakeven. And probably well north of that to have net income left over for program.
So, with this reformulating of mindset the fundraiser’s question should be: What is my plan to get $100 (or better yet, $150 to make a profit) from each of these donors?
If the fundraiser applies only the conventional planning process indicating it should take X months to achieve break even or profitability based on using historical realities (i.e. certain attrition each year, certain gift frequency, certain average gifts) he/she has virtually pre-ordained a ‘no change, no growth’ result going into the future.
Instead, why not think about how the organization can raise $150 from each of these donors in the next 6 or 12 for 24 months? And, of course, not every donor can be expected to give $150.
And that brings us to the essential metric of Lifetime Value. If we know the potential/historical value of a similar type of donor (in mass acquisition programs most donor identification unfortunately comes generally because of the size of the initial gift) we can then build a far more sophisticated plan. A plan based on the predicted annual value of different types of incoming new donors.
For example, Ben Miller of DonorTrends, one of the volunteer analysts for the Fundraising Effectiveness Project tells me that while an average of only 26% of new US donors make a second gift in year two, the new donor retention rate of those giving under $100 is only 18% compared to 47% of those giving above $250. (The data scientists at DonorTrends have also found an inverse relationship between the likelihood to give and the value of the second gift.)
How Much to Spend on Second Gift and Retention Strategies?
Once we know Lifetime Value of our donors we can determine just how much — or how little — we should spend on those new donors going forward. For example we might be willing to spend $20 over the next year on a $40 donor knowing we can retain/upgrade her/him substantially based on Lifetime Values of similar donors.
For those ‘higher value’ donors we might employ a more intense welcome and onboard process, more phone calls, different packaging, etc. — more time, more money. (Again see the Boomerang chart above and for heaven’s sake don’t overlook planning and investment for monthly giving!)
On the other hand, on an incoming $12 donor with ‘lower value’ potential we may decide that our spend should be substantially less.
(By now the ‘paralysis-by-analysis’ crowd will be wanting to import all kinds of external data and dice and slice these new donors into a complex mail plan. Not necessary, this is one place where focusing on likely Lifetime value is ‘good enough’ — all that’s truly needed.)
My point is this. Take the time to understand the potential Life Time Value of different types of new donors (‘high value’ and ‘lower value’). Then tailor your thank you, welcome, and most of all your Second Gift Strategy plans to make the most out of those differences.
With a bit more effort you’ll more quickly and efficiently realize the greatest return on your acquisition investment.
P.S. In Part 2 of More on Second Gifts I’ll cover additional ways to maximize second gift efforts.
This article was posted in: Breaking Out of the Status Quo, Direct mail, Donor acquisition, Donor retention / loyalty / commitment, Fundraising analytics / data, Nonprofit management, Research.
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