Look, I get it. You got into fundraising to change the world and support a cause, not to do math.
Digging into metrics and calculating ROIs was never my favorite part. I like a good spreadsheet as much as the next development professional, but it wasn’t the highlight of my day. I wanted to talk to donors, write appeals, you know…the wordy feelings part.
Fine, I’ll admit it: doing math makes me nervous. I’ve got leftover baggage from standardized tests and feeling really lost in math class, and I know I’m not alone amongst fundraising professionals.
But math holds the information you need to grow your fundraising, especially one particular metric: Donor Lifetime Value.
And even if you are an absolute Mathlete, there’s a good chance that you’re not including Donor Lifetime Value in your fundraising strategy.
But you need to.
What Is Donor Lifetime Value?
Donor Lifetime Value (DLV) is simply an estimate of the value of a donor’s contributions over their entire relationship with your organization. That’s it. It’s using averages to make an educated guess about how much a donor will give before the relationship ends.
This concept is much more common in the corporate world, which traditionally pays quite a lot of attention to the lifetime value of customers. It’s how a company knows it can afford to give you a special introductory price at what seems to be a loss, or can spend a significant amount to acquire you–they know your lifetime value will exceed what they spend.
Note: We’re not talking about individuals here. DLV is calculated in averages, which you’ll pull from your database or CRM. The strength of a DLV prediction comes from a larger data pool.
How To Calculate Donor Lifetime Value
Okay, so here’s the math. At its simplest, donor lifetime value is calculated:
Average Donor Lifespan x Average Gift Amount x (Total Number of Donations/Total Number of Donors)= DLV
So, let’s imagine I raised $8000 this year. If my average donor gives for about 2 years, and my average gift amount was $40, given in 300 gifts from 200 donors, my DLV would be $120.
2 x 40 x (300/200) = 120
You can get fancier to fine-tune your predictions. You can add variables for percentages of lapsed donors, the average gift amount from your lapsed donors, and the average increase of gifts, to have a number that is even more precise.
As you consider your number, it’s important to remember that when donors are retained, their giving tends to increase. By how much? Subtract last year’s donation total from this year’s, then divide that number by this year’s total and multiply by 100.
(Total Donations This Year – Total Donations Last Year) x 100 = ?
This Year’s Total
So, if last year my total was $8000 and this year’s was $9000, I’d have a 12.5 % increase. I know my average donor lifespan is two years, so instead of calculating both years with my current average donation, now I can include the increase in my DLV prediction:
(Year 1 Average Gift) + (Year 2 Average Gift Amount + 12.5%)= Average Gift Amount with Increased Giving
First year: Average gift amount is $40 (Donor Value for one year: $60)
Second year: With a 12.5% increase, the average gift amount increases to $45 (Donor Value for one year: $67.50)
(Year 1 DLV+ Year 2 DLV)= DLV with Increased Giving
Total Donor Lifetime Value: $127.50
You may also want to subtract the number of dollars you spend on acquisition and stewardship from the total. But at its core, we’re just talking the average number of months a donor is retained, times the dollar amount of the average gift, times the average number of gifts.
Still want to see the lifetime value for an individual donor? CauseVox’s clunk-free, easy-to-use fundraising CRM collects that for you automatically.
That’s right. We’ll do your math, because we love you. And also because the CRM already collects all the necessary data, including online and offline donations, and how much a donor has brought in through peer-to-peer fundraising. The information is just a click away, no hassle, no database gymnastics.
Why Is Donor Lifetime Value So Important?
DLV is useful as a metric for the overall health of your fundraising. It can help you make decisions about how to spend your budget, what activities to prioritize, and which acquisition methods are ultimately delivering results.
Adding DLV to the metric mix can help stave off what I’ve noticed as two paradoxical nonprofit problems. 1. We do things that don’t work for too long. 2. We quit doing things that might work way too soon.
Looking to the long-term gives you a broader picture than analyzing the ROI of individual campaigns.
The initial ROI can be misleading when you consider DLV. If you spend $100 on an effort that brings in 4 new donors, who each give you $20, it would be easy to write that off as not worth it. But if you know that if those donors are retained, they’re likely to give $400 each over the next four years, that ROI starts to look different.
Likewise, if you discover that the DLV for peer-to-peer fundraisers is higher than other donors, you may want to invite more donors to participate in your next campaign.
Segmentation Is Key
However you calculate your DLV, you’ll find it gets the most interesting when you segment your donors by giving ranges or acquisition mode. It’s useful to see how your entire donor database delivers, but if you have a wide range of gift amounts, as most nonprofits do, gift amounts at the extreme of either end can skew your DLV number.
Running the numbers by acquisition mode allows you to get a better picture of where you should be spending your acquisition budget.
For example, if I discover that the DLV of donors acquired by newspaper ad is significantly higher than any other means (and simultaneously discover I have traveled back in time), then I know it makes sense to pay for the ad, even if other means of acquisition are free.
How To Impact DLV
Of course, metrics are only useful if they inform your actions. Calculating DLV is interesting, but where it really shines is when you track it over time, and start trying to impact it.
When you consider the equation, it’s clear that you have three immediate choices for increasing your lifetime value:
- Increase the length of retention
- Increase the average gift amount
- Increase the frequency of giving
There’s also an implied fourth option: increase the total number of donors. It’s usually more cost-effective to put the majority of your efforts into keeping the donors you have.
First-time givers are necessary, of course, but they cost more to acquire and usually don’t give a second time. Retention, gift amount, and frequency are a sounder investment.
The cold hard math of DLV provides a lot of information for your warm and fuzzy donor relationships. It helps target what your goals are: lengthening the relationship, increasing giving levels, or securing another gift.
You’ll know if you should spend your time making thank you calls (retention), adding higher giving levels to your donation page (increase gift amount), or following up with an additional ask (increase gift frequency).
Math Is Good
So take the time to play around in your database and do some equations. You may discover interesting things, and everything you learn can help you raise more money.
As you recalcuate your averages over time, you’ll see if your strategies are working.
Go forth, and math! Or let us help. CauseVox offers you smooth, seamless access to your fundraising data, so you can focus on building the donor relationships that help your nonprofit to grow with less frustration.