The quantification of value in money gained by a nonprofit from a donor is the only way an organization can successfully adapt its fundraising strategy. This value doesn’t have to be difficult to calculate, but many fundraisers still don’t know how to do it or what it’s useful for.
However, in learning how to calculate this value and its incredible power when used in conjunction with acquisition costs and segmented donor lists, you’ll be able to not only leverage your donor lifetime value (DLV) but increase it significantly and keep donors engaged and giving for longer.
If that’s what you’re hoping to learn, you’ve come to the right place!
The Meaning and Significance of the Donor Lifetime Value
The simple definition of a lifetime value is the amount of money that comes in from a donor over the course of their lifetime. This needs to be expanded upon, and to do this, we need a little more information. There are important statistics to consider as context for the value of a donor lifecycle to a nonprofit.
Donations to nonprofits roughly follow the 80/20 rule. This means that the vast majority of money donated comes from a select few individuals who make up the minority of total donors. This has implications for resource allocation and projecting Return on Investment (ROI), both of which we will discuss shortly.
95% of all giving each year is lost to donor gift attrition. This is the rate at which donations are not renewed. This is the part of the equation that nonprofits can, but often don’t, work on directly to improve their annual donation revenue. There are many ways to do this, some of which we will also discuss later on.
These statistics form a picture of a handful of extremely valuable donors who, when looked after, could provide invaluable contributions to any nonprofit they are gifting to. Then, there are the remaining 80%, who, while only contributing a minority of donations, still assume a cost to acquire, and thus contribute to the overhead of the nonprofit, especially if they have a high rate of turnover.
This value, with all its implications, is the donor lifecycle value (again, DLV), and it varies between individuals based on how much the person donates and how long they’re likely to stick around. To better understand why DLV is important, it needs to be looked at in the context of donor acquisition costs.
Donor Acquisition Cost: The total costs to acquire donors are divided by the number of donors.
While this seems like a simple average, there are a few issues to consider. First of all, the total costs might be thought to include all the salaries of the individuals involved, plus the fundraising expenses. On the other hand, you could exclude fixed costs and focus primarily on expenditures directly related to fundraising.
The latter will be a lot simpler of a calculation, but it will also be somewhat less accurate. However, it might be impossible or extremely difficult to identify the portion of a staff member’s salary that could be attributed to fundraising, and this could cloud things.
How you calculate your cost of acquisition will depend on the state of your organization and factors such as its size and how much money is involved. It will also be determined by just how accurate you need to be.
As a note, larger organizations are generally recommended to calculate both. If you’re running a smaller operation, keep it simple, and skip the fixed costs for now. This is due in part to the reality that your team likely wears many different hats -- "fundraising" being just one of them (that will be its own blog post, so stay tuned).
Regardless of how you do it, you’re left with an average of the amount you’re paying to onboard one donor. This is a very significant metric, even in its simplified form. This metric will help you determine your ROI on each donor when used in conjunction with your donor lifetime metrics.
The length of time your donor stays engaged and gifting to your nonprofit represents the donor’s lifetime. The value of this lifetime is determined by how much money they will gift over its course.
These two separate calculations then give you a basis for calculating your ROI for any individual new donor. From there, you’re able to make a value list to identify your highest-value donors and compare them against others to determine where to allocate resources.
So, donor acquisition costs relate to the return that a nonprofit gets on each donor. Donors who are retained, therefore, give a better return than those who donate once, and this brings us back to the DLV. The significance of this one calculation extends into ROI calculations as well as resource allocation and helps nonprofits hone their approaches to double down where the efforts are most rewarded.
The DLV is also a metric that donors want to know about and can be used to display successes when expressed in a deliberate and careful way in the context of the ROI that comes from high-value donors.
To calculate donor lifetime value is to provide a means of combining information on acquisition costs with information on retention rates to identify the long-term gain of a single donor and the return that comes with long-term donations.
How to Calculate Donor Lifetime Value and its Usefulness as a Metric of ROI
There’s no magic needed to calculate a donor’s lifetime value. You should have information on the rate of each donation, and you’ll be able to estimate how many years you expect them to stick around. This last part should be relatively stable across all donors, so you’ll be able to draw upon your donor data for it.
To be more specific, you can get an annual giving value by dividing the amount a donor has gifted and dividing it by the number of years they have been involved with your nonprofit. This is an average of the total giving, split by the donor’s lifetime in years.
For example, a donor has been donating for 5 years and has donated a total of $10,000. Their annual giving is $2,000.
Then, you want to calculate how long they’re likely to donate. Knowing how to calculate donor retention rate is the same as calculating the lifetime. Here’s the actual calculation for the average lifetime:
Average lifetime = 1/Attrition rate %
For example, if your nonprofit keeps 80% of its donors each year and loses 20%, the average donor lifetime is 1/0.2, which is five years.
From there, you can calculate the lifetime value by using the annual giving result and extrapolating it across your expected donor lifetime. From our examples:
$2,000 * 5 five years = DLV of $10,000
It’s worth noting that this expectation of a donor lifetime is a metric that is determined by your retention rates, which are essentially the opposite of your attrition rates. Fortunately, there are things you can do to improve your retention rates, and your DLV should point you in the right direction as to where to focus your resources and time.
Finally, with your donor acquisition cost and your DLV, you’ll immediately be able to see whether your onboarding costs are worth it and how many years it takes to make a return on each donor. If your acquisition costs are not returned over the course of the average donor’s lifetime or not returned significantly, this can alert you to areas that need urgent attention and improvement.
Improvement can come in many forms, and even if you are getting a good ROI, the chances are there are areas you can focus on to make it even better. This, of course, benefits the organization directly, but it will have positive feedback on donor retention too, which makes its impact double.
The simple definition of a lifetime value is the amount of money that comes in from a donor over the course of their lifetime.
Notes on Segmenting your Donor List
With a populated donor list, you’ll be able to segment your donors into separate groups based on various categorizations such as donor giving or communication preferences. This is going to help tremendously in resource allocation, especially when combined with your value list, which you can update with the information you gathered in the previous section.
In the next section, we’ll talk about strategies for improving donor retention and why it matters. By first organizing your donor list, you’ll be setting yourself up to maximize the leverage of these lifetime value calculations to drive more revenue.
Begin by segmenting your donors into categories based on their communication preferences. Then separate those each by their preference for the method of donating. For example, one group may prefer to be contacted by email while others prefer texts, and within those groups, there may be people who prefer to be led to a landing page to make an online donation, while others want instructions for donating by check from a donor-advised fund.
Separating your donors this way has plenty of benefits:
- Approaching donors in their preferred manner builds better donor relationships and motivates them to stay engaged. This alone is a movement toward improving retention and can be as simple as switching from emails to text-based communications, if that is their preference.
- Preferred information can be sent, maximizing the appeal of your outreach to individual donors. Some may want to know more about one drive over another or worked with a specific group that they would like updates on. Updating donors on the specific areas they’re interested in also helps provide valuable feedback that keeps them motivated.
- Personalized emails or texts also give donors a sense that they are personally valued. While this might seem like a lot of work, there are numerous ways you can accomplish this, and there are plenty of apps and technologies to help automate a lot of the hard work behind this effort.
Rally Corp has plenty of tools for fundraising via mobile and can help take a lot of the hassle out of the process. For example, automated texting programs allow for a broader range of segmentation without the added complication of doing all the hard work yourself. Rally Corp also makes capturing donations easier with simple donor shortcuts and live fundraising feedback to see the immediate impact of each contribution in real-time.
So, segmentation allows your outreach efforts to boost engagement, which boosts retention, which, in turn, increases the lifetime value of a donor. Here are some other ways to try too.
Boosting Donor Retention to Maximize Lifetime Value
To finish up, we’ve got a short list of a few ideas to help you increase these values in your retention and value metrics.
- Build rapport – this is one of the strengths of your segmented list. It will allow you to adjust your messaging to appeal more directly to your donors as individuals. With a little personal touch here and there, you’ll be able to bridge that gap between faceless donation and the people involved. Building this relationship creates an important personal motivation to continue donating.
- Offer Volunteer Positions – There’s nothing more engaging than physically engaging with your project. Hands-on experience can answer a lot of questions your donors might have and provide a bonding opportunity between the project and the donor themselves. Donors can also contribute knowledge and expertise, making the situation hugely beneficial for both parties.
- Simplify recurring donations – So much money is lost from convoluted or inconvenient donation processes. A single click or a single text option is going to improve the donor experience to the point of boosting retention immediately. Make sure you focus on simplifying these procedures and reducing friction at every step.
- Be Transparent – An insight into the workings of the project goes a long way, and letting donors in on the goings-on can make them feel involved even if they aren’t able to volunteer directly. There’s a lot of information that donors would like to know in relation to where their money is going, so your ROI on their donation is an important thing to get right. ROI can be listed in figures, but often it’s better to document the direct impact of these donations in a story.
Each of these pointers represents an allocation of resources. With your lifetime value information, you’ll be able to rank donors from most to least valuable to your project in terms of available funds raised, and this will help when prioritizing the allocation of these resources. Essentially, all donors benefit from these retention-boosting activities, yet with limited staff and funds, it’s important to prioritize those who stand to provide the project with the highest ROI.
Your DLV isn’t just a metric for determining your financial projections for your nonprofit. It’s also a critical piece of information for donors themselves. And this is where things can get a little bit tricky.
How to Communicate Value to Donors
Transparency is listed above as one of the most important factors in donor retention. However, there is a complication that arises from a lack of donor understanding about the way things work for nonprofits. As such, it matters how you display your information.
Retention is critical for organizations with low acquisition budgets. And yet, not recruiting donors is even more expensive than recruiting them in the long run. This, of course, brings us back to knowing that lifetime value is one that is worthy of the costs of recruitment. However, to be transparent about these things, these complexities must be framed in a way that doesn’t frighten people off.
Donors need to know the overview of the costs of raising money, and these figures need to be honest and accurate. But donors need to know it in relatable terms that are also reassuring, and expressing the proportion of income that goes towards donor acquisition can go either way. Consider the following examples:
“Our fundraising efforts cost a third of our income.”
“With your $5 donation, we can make $15 in additional donations to our cause.”
Both statements are accurate and refer to the same outcomes, yet one is a lot more unsettling than the other. So, knowing how to frame donor value in a bigger-picture way can mean the difference between caution and encouragement to donors.
By now, you should know the power of a lifetime value measurement and how to wield it to your advantage. You should also know how to calculate donor retention rate and how it’s affected by engagement. If you’re a large-scale nonprofit, you should have the resources to calculate a detailed donor acquisition cost. This means calculating the fraction of the fixed costs that were allocated to fundraising. Of course, you can simply log the variable costs if you don’t need such detail.
Then, you’ll have historical records and know how to calculate donor retention rates. Next, you can use it to calculate the donor's lifetime value. Then, when used in conjunction with your acquisition costs, you’ll see your ROI. Finally, when you implement some of the retention-boosting approaches we listed, especially when focused on the high-value donors you identified from the value calculation, you’ll quickly see boosts in retention, leading to longer lifetimes, higher lifetime values, and, therefore, greater ROIs.
To help you with this, Rally Corp has created a free Donor Journey Map available for download here.
With this resource, you'll work through the various stages of the donor journey, from one-time donors to those participating in your monthly giving program. This will help you better understand your ideal channels and strategies. The intent, of course, is to understand what this looks like today, so you can build a better experience tomorrow. Knowing your donor's lifetime value is just one of the more meaningful insights you'll gain in this process.
That’s all there is to it – the pivotal factor in all of this is the lifetime value calculation. Get your head around that, and you’ll be leaping ahead in no time.