Your donor lifetime value (we’ll call it your LTV in this article) is one of the most critical metrics you’ll track as a nonprofit leader. It allows you to see how your campaigns perform by helping you keep an eye on how much you spend acquiring a donor compared to how much that donor gives back during their time with your organization. It can also help you identify the different donor segments you might want to target in future campaigns, and it can also help you plan future outreach efforts that will help you move your cause forward.
When you calculate your donor lifetime value, you also learn more about other key nonprofit KPIs that are important as you guide organization’s strategies and future activities.
How To Calculate Donor Lifetime Value
The term donor lifetime value refers to the average contribution your donor will give over a lifetime of engagement with your organization. To calculate your donor lifetime value, you’ll need access to three pieces of information: Your average donor lifespan, your average donation amount, and your average donation frequency.
Say the Agloe Food Bank wants to calculate their average donor lifetime value. When they look at their average donation amount, they discover most donors give around $40 per gift. Most of their donors give twice a year, and they usually support the food bank for an average of three years.
- $40 (the average gift) x 2 (the average number of gifts) = $80 (the average yearly contribution for each donor)
- $80 x 3 (the average number of years most donors stay engaged) = $240
- The average donor lifetime value for the Agloe Food Bank is $240.
You may also want to try calculating the future value of a relationship instead of your historical performance. To do that, divide your average annual donation amount by your donor attrition rate. That looks like this formula:
Average annual donation ÷ % of donors that stop giving each year (expressed as a decimal)
So, if your average annual donation is $100 and 80% of your donors stop giving each year, your average lifetime donor value is $125 ($100 x .8 = $125).
That math may throw a few people off, but it’s because you’re trying to predict the future value of a relationship. It accounts for a large percentage of one-time givers (while the first calculation depends on counting repeat donors), while also giving insight into donor retention and engagement rates. It’s also the jumping-off point for many other important insights you’ll need to guide your organization.
A single LTV doesn’t need to apply to all donors. You can segment your donors into groups to understand how the LTVs change when you’re dealing with donors within different demographic brackets like geographic area or income. The average value for a recurring donor, for example, will typically be higher than the average for a one-time supporter. Similarly, the average lifetime value for a major donor will be higher than the average value of an online donor.
Why Do LTVs Matter for Your Organization?
Your donor LTV is an important figure because it helps to address the past, present, and future of your organization. It tells you how much people gave and how long they engaged with your organization. Those two figures together are a good predictor of future donor behavior. Here is what LTVs can help you understand about your organization and donors.
Overall Relationship Value
While it seems cold and impersonal to put a dollar value on our donor relationships, it’s also necessary for understanding how each of them financially impacts your organization. Let’s be clear: You should never place more emphasis on a donor’s financial value than on their inherent value as a person who’s passionate about your cause. This is a metric that’s best used to inform other strategies, like brainstorming ways to show potential donors the impact they can have in their communities and making sure your fundraising expenses are not costing you more money than they raise.
For example, a nonprofit that plants trees in areas affected by wildfires would be able to say, “our average donor gave enough to restore X acres of forests.” That uses information you already know about a donor’s lifetime value to tie their donation to real-world, genuine results that inspire giving. This also works for current donors: When you understand your LTV, you can identify those donors who give above that average and prioritize additional outreach efforts, like personal meetings or intentional connections at events and other gatherings. This can be an invaluable way to identify long-term donors who don’t necessarily fall into the “major donors” category and may otherwise fly under your radar.
While it seems impersonal, tracking the value of the average donor relationship makes it easier to create a personal connection with supporters that’s informed by their history with your nonprofit. It’s also critical for ensuring your campaigns are performing as expected.
ROI of Your Campaign
The LTV can be very helpful to determine the future value of a campaign. After all, if your goal is donor acquisitions, you’re dealing with new constituents, not existing donors with established giving histories. You don’t yet know what they’ll give over their time with your organization, so you’ll need to use the potential LTV to predict it.
To understand campaign ROI, you’ll have to calculate the cost of donor acquisitions as well. The donor acquisition cost, or DAC, is the total costs/total number of acquired donors.
DAC= Total cost ÷ total of acquired donors
So, if the campaign costs $8,000 and results in 100 new donors, the total DAC is $80. Comparing that to our potential LTV tells us the ROI of that campaign. If we were to use the $125 potential LTV from earlier, we know that the campaign resulted in a return of $45 per person. The ROI would be calculated by dividing that number by the cost of the investment and then multiplying by 100.
ROI= (LTV-DAC) ÷ DAC x 100
So in our example, the ROI would be $45 ÷ $80=0.56 x 100=56%. An ROI of 56% on a donor acquisition campaign shows us the true value of our efforts. It tells us that, while the campaign performed strongly, there are likely ways to improve it.
How You Can Improve
Donor LTV is important because it provides valuable insight into how much time and effort you can comfortably invest in each donor or donor group. In the prior example, we show an ROI of 56% on a recent donor acquisition campaign. Meanwhile, our existing overall LTV is $125.
That may indicate we’re spending too much to acquire new donors. Or we’re focusing on the wrong donor groups with our campaigns. This information prompts us to look deeper into a specific area so we can improve contributions.
First, we can review the actual results of the campaign where $8,000 was spent. If the campaign raised $12,480 or less—which is the cost of the campaign, with a 56% return added—then it’s in line with our existing LTV. If it raised more than that, then it may have attracted more high-value donors that will elevate the overall LTV over time.
There are dozens of ways to play with the LTV to see how it affects your campaigns and how you can improve them. This is especially true when you can segment this data into different audience groups.
Of course, to do that, you’ll need a way to manage your data and create various segments where you can review the LTV, compare it to campaigns, and see how you can improve. To do that, you’ll need a nonprofit CRM that can provide reliable, insightful donor data.
Engaging Old Donors and Encouraging New Ones With Neon CRM
When you calculate your donor lifetime value, you’re able to calculate several other key metrics that can give you valuable insight into your fundraising strategies and their overall effectiveness. Comparing it with your campaigns will help you better focus your efforts on tactics that are effective and cost-efficient. And to do all that, you need a nonprofit CRM that will help you track your donor data and organize these insights.
Neon CRM is a powerful tool that can help you calculate your donor lifetime value for your whole donor base and for different segments of supporters. If you’re interested in how your organization can use these tools to build a more effective fundraising program, we’d love to talk to you. Contact us online to schedule a demo of Neon CRM!
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