[eJP note: the following article was originally published March 24, 2009.]
How Charities Can Use LTV to Improve their Fundraising
by Liesbeth van Uytven
Lifetime Value (LTV) of a donor database is a subject that is often discussed amongst charities. SAZ’s experience shows, however, that few charities evaluate this important indicator of a long-term, healthy fundraising strategy on a regular basis. This article hopes to inform those who want to initiate a deeper evaluation of their donor database. The first part will explain the concept of Lifetime Value and its effect on fundraising strategy. Four analyses for you to consider will then be discussed. The article closes with some points for consideration.
What is Lifetime Value?
Lifetime Value is a valuable database marketing concept that allows a profound evaluation of the return on investment from donor segments or individual donors. It can be used to evaluate past fundraising strategies and helps to insure the charity’s long-term profitability. A simple definition is given by Arthur M Hughes in his book The Complete Database Marketer:
“Lifetime Value (LTV): The contribution to overhead and profit made by a customer during their total relationship with your company.”
When using this definition for monitoring donor Lifetime Value, we can define three important components: first there are donations (income), followed by costs, which are the aspects relevant to generating a profit. The third important factor is time, monitored in the analysis by the donor’s loyalty to the organization. It is clear that changes in any of these can have either a positive or a negative impact on the long-term value of the donor or donor segment.
The lower the investment that is needed to convince donors to make consecutive donations and to maintain a cost-efficient relationship with them, the better the LTV will be. All costs that are made to maintain this relationship need to be included when calculating the Lifetime Value. Costs include the expense of direct mailing, telemarketing, thank-you letters, newsletters, database selection, etc. The more income a segment of donors generates, the better the LTV. If a donor stays loyal to the charity for longer, and donations become more frequent, this obviously will also lead to an increased LTV.
Profit, not costs
An important remark here is that income and costs are mutually responsible for profit. An American saying goes, “You’ve got to spend money to make money.” That holds true for fundraising as well. An emergency campaign, for example, will incur extra costs. The income generated from this investment will increase proportionately, creating a tidy net income for the campaign. Cost reduction is important for charities, but not always the most profitable fundraising strategy in the long term! Return on investment (ROI) is a better predictor of long-lasting fundraising success and profitability.
Independent research and SAZ’s own experience have shown that the majority of the income responsible for Lifetime Value is generated during the first 5 years of the relationship. The income decrease beyond five years is due to the fact that donors just aren’t as loyal as we would like them to be. This is why the term long-term value is also used. In-depth analysis shows, however, that those few donors who are still loyal after 5 years are very valuable to the organization.
Accidental income, such as legacies and major donations, is hard to anticipate and therefore typically left out of the basic Lifetime Value analysis. For a charity to be successful, it needs a specific marketing strategy that incorporates top-of-the-pyramid fundraising programs and is able to make valid predictions about these key donations, incorporating costs and income related to these programs into their analysis.
Implication on strategy
Four useful analyses for successful strategic fundraising decisions based on Lifetime Value are:
- Donor acquisition and cost per donor
- First-gift amount and donor value
- Donor reactivation and LTV
- Donor conversion and loyalty
Donor acquisition and cost per donor
First we will provide some insight on the value of the Lifetime Value concept for donor acquisition. From a fundraising point of view, the goal is to never have it cost more to acquire a new donor than the donor will contribute over his or her lifetime as a donor. The LTV way to determine a charity’s budget for new donor acquisition is to analyze the anticipated income by target group and acquisition medium and then allocate the investments accordingly.
Gross cost/donor: Total costs of acquisition campaign divided by number of donors
Net cost/donor: Total income of acquisition campaign minus total costs of acquisition campaign divided by number of new donors
Analysis of your database will reveal predictors of a higher Lifetime Value. This means that a prospect budget can be devised using acquisition techniques that will be profitable in the long term. One important predictor of high long-term value is a new donor’s first-gift amount.
First-gift amount and donor value
Analysis shows that a consideration of a high first-gift amount along with the basic ROI of acquisition campaigns is a good long-term strategy. We have divided one of our client’s new donors into six first-gift amount segments to examine the percentage of income generated.
35% of all donors had a first-gift amount higher than 15 euro. These donors are responsible for 64% of all income! It is safe to say that the higher the first-gift amount of a donor, the better his Lifetime Value will be.
Donor reactivation and LTV
Lifetime Value is even more important when a charity has a strategy for reactivating lapsed donors. In this analysis, reactivated donors are compared to newly acquired donors within the same campaign. Reactivated donors often have a much lower cost per donor compared to newly acquired donors. Costs are lower because the addresses are available for free. Responses of lapsed donors are in general also higher than responders from cold lists because they are familiar with the charity and have given before. On the surface, donor reactivation may seem to be a profitable strategy. However, when a charity does not look into the long-term value of these reactivated donors, this can be a very dangerous conclusion!
Our study shows a good example of a poor strategy based on evaluation of reactivated donors on a campaign level only. First we looked at a normal Long Term Value growth for donors acquired with a cold mail order list. The average cost per donor was 6 euro. The net value of the segment grows to more than 6 euro over time. Then we examined the long-term value of the reactivated segment. When looking at the cost per donor during the acquisition campaign, the investment for reactivation was less than 2 euro. That is three times lower than the investment it cost to acquire a new donor with the cold mail order list. However, the value of the reactivated segment doesn’t increase at all over time! As a matter of fact, it actually decreases further, meaning that it costs the organization more money to keep in touch with this non-profitable segment.
Further analysis explains why this happens. Donors who lapsed once seem to lapse much more easily than newly acquired donors. Certain groups just aren’t loyal. Donor reactivation remains an interesting strategy, but segments must be carefully monitored for profitability. The frequency of gifts and the amount of the gifts are a good way to predict future profitability of reactivated donors. It is safe to say that it does not pay to reactivate donors who made a single or low donation.
Donor conversion and loyalty
The third important factor in Lifetime Value is the fact that time can be measured in different ways within the donor database. The duration of the relationship with the donor is important. This can be measured by the number of gifts a donor makes to an organization. It is often mentioned that a donor should be converted to a multi-donor as fast as possible to achieve a good LTV. In reviewing the total number of gifts made by a donor with the number of months to convert to a second gift it is apparent that the faster a donor was converted to his second gift, the more gifts he made to the charity, so the better his LTV will be.
As mentioned in the beginning of the article: donor loyalty is one of three major determinants in Lifetime Value. The sooner a donor is converted to a consecutive gift, the more likely he is to become a more loyal donor. The conversion absolutely needs to take place within the first year of donation, but the optimal time would be to convert the donor within 6 months after his first donation. A welcome program for new donors can help your organization to accomplish this goal.
Considerations when analyzing
Hopefully this article will provide some food for thought with regard to database analysis. Two important issues to consider before starting to structure an analysis are costs and management involvement.
Discussions among analysts arise as to whether or not acquisition costs and fundraising overhead costs should be included in the analysis. Both approaches have their pros and cons. An organization should evaluate what is the best choice for them and consider the methodology used when drawing conclusions from the analyses. Once a decision is made on how to handle costs in reports, it should stay consistent over the years to enable comparisons over time.
When starting up lifetime or long-term analysis, management involvement is beneficial. Starting with a one-time analysis can be helpful, but regular and planned reporting using a standardized report once a year is even better. Time and budgets should be allocated to conduct the necessary database analyses. And of course, when the analyses show that strategy changes are needed, decisions should be made accordingly.
So why should you start now?
We can conclude that regular long-term value analysis is necessary to provide meaningful information to ensure fundraising strategies will achieve lasting success. First of all, you must know the potential value of your donors in order to determine your maximum investment for new donor acquisition. Secondly, an organization should always monitor long-term profitability of reactivated donor segments to prevent wasting fundraising budget on non-loyal, low-value donors. Finally, it is also worthwhile to evaluate two important predictors of long-term fundraising success through direct marketing: the donor’s first-gift amount and conversion time from first to second gift. Both cost allocation and management involvement are important considerations in guaranteeing successful application of the LTV concept in your organization’s decision-making process.
Liesbeth van Uytven is head of SAZ’s List & Media Services department. She and her team are responsible for international new donor acquisition programs. The effectiveness of donor acquisition strategies is carefully monitored by regular direct marketing and in-depth database marketing analysis to assure long-term fundraising success.