Donor lifetime value is key to sustainable fundraising organizations

How to analyze donor lifetime valueYou’re probably familiar with the term “lifetime value” but you may not realize just how important the metric is to your long-term fundraising success.

A donor’s lifetime value (or LTV) is the total amount they give throughout their affiliation with your organization, making it a true “north star” metric for sustainable fundraising organizations. Sometimes, the LTV from a donor comes from just one gift. Other times, it’s a recurring gift that lasts more than a decade, with a few other big donations made in between. There are also cases where a donor will give for a few years, then lapse, before returning a few years later. But very often, once a donor stops giving, their support is lost for good.

Understanding donor lifetime value can help fundraisers focus their efforts. What portion of resources should be spent on donor acquisition vs. donor retention? How much time should be spent on securing a first-time donation vs. upgrading existing support? A deep-dive into the metric can help answer these questions.

How to estimate donor lifetime value

Donor lifetime value is based on two factors: the average amount given every year and how long the contributions last for. You could certainly calculate this for past donors, but it’s often more useful as a forward-looking tool. Being able to predict this value can help you make decisions around your donor acquisition and retention efforts.

Luckily, we have a simple way to estimate donor lifetime value. Two pieces of information are needed: the average annual giving anticipated from a donor and the expected time before a donor lapses.

You might be able to estimate average annual giving based on a donor’s first few gifts to your organization. For a brand new donor or prospect, you can make a prediction based on other donors with similar demographics and interests. It could be that this donor has already given $600 per year, or you may be estimating that a new donor will do so because they fit the same profile as many of your other supporters.

You can also use your donor data to determine the expected time before a lapse. To do this, you’ll need to know what portion of your donors lapse each month. For the industry as a whole, retention rates are now only 45% annually, which means 55% lapse each year. Given that, we can use a simple formula to determine the average time until a donor lapses: 1 / Donor Lapse Rate. In this case, 1 / 0.55 = 1.8. For our estimate, then, we can say that it will be 1.8 years until the average donor lapses.

Putting it all together, we can now estimate that this $600 per year donor will contribute for 1.8 years, for a projected donor lifetime value of $1,080.

What we learn from donor lifetime value

Knowing that we can expect a new donor to contribute $1,080 throughout their affiliation with our organization can impact many parts of your fundraising strategy.

Most importantly, it helps you determine whether you are spending too much, or too little, on donor acquisition. If the average cost of your efforts to acquire that donor - including advertising, administration, and more - is approaching or higher than the $1,080, the strategy is not going to be sustainable.

Often, though, acquisition costs are hard to change. Instead, you could prioritize your donor retention efforts to extend the donor’s relationship with your organization. Donor retention efforts are typically much more cost effective than new donor acquisition, since they rarely involve any expensive advertising campaigns.

The impact of better retention rates

So what happens if your organization is able to boost its donor retention rates? We can use the same method we used above to see the change in donor lifetime value.

In the previous example, we used the industry average donor lapse of 55% per year. Let’s assume that with great donor relations and stewardship, your organization is able to slow this down by 10%, to 45% per year. Using the 1 / Donor Lapse Rate formula, we get a new average time-frame for this donor of 2.2 years.

Given the same initial donor, the new estimated donor lifetime value becomes $1,320, up from $1,080. That’s now a 22% increase in the giving you can expect from a new donor, and it won’t require any increased spending on expensive advertising.

Read a free, complete guide to donor retention here!

Balancing donor acquisition and donor retention

It’s easy to understand what a donor’s lifetime value means, but it’s crucial that fundraisers also know the levers that can have major effects on it. In our experience, the two biggest drivers are acquiring better quality donors and achieving better retention rates.

Given the high rates of donor lapse each year, most nonprofits put considerable effort into new donor acquisition. To make donor acquisition more effective, it’s important to target those with with traits that make them likely long-term supporters. Simply identifying those capable of making a single gift is unlikely to lead to sustainable success.

Rather, it’s crucial that fundraisers show more balance between donor acquisition and donor retention strategies. When working together, nonprofits can hit the sweet spot and continually add new donors to their pool, then keep them in the fold for a much longer period of time. That helps to make the most of your organization’s investment in new donors and creates the most impact over time.

Take the first steps to improving LTV

To create long-lasting, valuable giving relationships with your supporters, you need to establish, build, and maintain donor trust and confidence. This helps you retain the donors you acquire and increase their contributions over time. Start reducing donor attrition at your organization with the achievable goals outlined in our free Donor Trust Checklist:

Download the free Donor Trust Checklist