Each year, millions of corporate citizens are faced with the task of selecting insurance benefits for the upcoming cycle. Many have to work through several competing options of health insurance and select plans according to a bewildering array of benefits, deductibles and copays. In addition to the typical medical insurance, citizens are also inundated with information about dental and vision plans as well as life insurance and disability choices.
I imagine very smart people in the insurance industry spend countless hours weighing the financial risks and rewards of every possible scenario. The fine print of the accidental death and dismemberment policies can be quite disturbing as you ponder the monetary value of a lost finger, hand, arm or leg.
I’m sure we think all of our body parts are pretty important, but their ultimate value really depends on how we use them.
For instance, a finger is much more valuable to a concert violinist, who depends on it to provide the technical virtuosity needed for life as a professional musician. The loss of even a little finger could not only have a devastating emotional impact, but could mean many years of lost potential revenue as well. So, in this case, a special insurance policy would be warranted.
Fundraising professionals are expected to make calculated investments all the time. A common challenge is determining how much money should be invested in donor acquisition – for example, purchasing a list of potential donors – and then figuring out whether the investment was worth it once the campaign ends.
Recently, a friend of mine who manages development for a nonprofit organization spent $2,300 on a mailing list. When the campaign was over, she had received eight new gifts from the list, for a total gift amount of $1,100. At first glance, she wondered whether the purchase was worth it. Viewed as a single transaction, she lost $1,200. But, as she prepared the report for her development committee, we had a chat about Lifetime Donor Value.
Lifetime Donor Value means considering the worth of a donor the way an insurance company actuary would estimate the value of a concert violinist’s little finger. It’s not simply a transactional relationship – its monetary significance is dynamic and needs to be analyzed, then measured over time.
Before reporting to the committee about the return on her $2,300 investment, a few calculations needed to be considered:
What is the organization’s current donor retention rate?
My friend’s nonprofit has a 65% retention rate. This means that in any given year, 35% of the donors who gave in the previous year do not give again.
What is the organization’s average gift over time?
Looking at the previous five years, the average gift increased from $35 to $50.
So for the eight new donors acquired, nearly three (35% of 8) probably will not give again the following year, but five (65%) likely will.
By year two, another two donors will fall away (35% of 5), and so on. With no further retention efforts, the last of these donors will be gone by year five.
But even at the current retention rate, the lifetime value of these new donors is $3,030 – justifying her original $2,300 investment.
Also consider that the average gift amount for her organization increased by 42% over the past five years. If she continues to invest in acquisition and retention efforts at the same rate, she can reasonably expect both her average gift amounts and retention rates to grow, further justifying her efforts.
Framing the donor acquisition cost in a way that recognizes “lifetime value” can make a big difference as the development team considers making further investments. Like the concert violinist, as we strive to become “virtuoso” fundraisers the value of our donors will increase.
Should you purchase a donor list?
Go through these 5 steps:
Step 1: Determine the cost
Step 2: Determine the average gift for the last 3 years
Step 3: Determine the average number of donors acquired through direct mail campaigns for the last three years until today.
Step 4: Determine the average length of time a donor stays with your organization.
Step 5: Multiply: [Average Gift] X [Number of Donors] X [Years]
If the product is greater than the cost of the list, you should consider purchasing it. Even if the amount comes out to be the same, purchase anyway. You’ll still bring in new donors.
Note: This formula acknowledges donor acquisition programming only. If coupled with good retention strategies, your gifts and donors can increase over time.
Jeremy Morse is the vice president of client strategy at Achieve, a division of Forte Interactive.