By Alan Sharpe, CFREThe ten dumbest words ever spoken in the English language are: “We don’t have money in our fundraising budget for that.”
The people who say this most often are board members. Uninformed board members. Timid board members. Board members who don’t understand that charitable organizations live or die by their donors, and that you and I must spend money to acquire, steward, upgrade and retain our donors.
The surest way to win board approval for your donor acquisition and stewardship budget is to know your long-term donor value.
Long-term donor value defined
Long-term donor value is simply the gross amount of income you expect to receive from a typical donor during a given timeframe. When you know how much a typical donor is worth to your organization long-term, then you know how much you should be willing to invest to acquire, steward and upgrade that donor.
For example, if you know that your typical donor will donate roughly $1,998 to your charity during the first five years following that donor’s first gift, you should be willing to spend a fair amount of money to acquire and cultivate that donor.
The key to winning board approval is knowing how quickly a typical donor will break even, and how much that donor will give you over time.
How to calculate your long-term donor value
1. Decide on the time period you want to measure following the donor’s first gift. The period could be ten years, five years, three years–any period you want to measure. For the purposes of this illustration, I’m using a period of five years.
2. Choose an acquisition channel. Long-term donor value varies greatly depending on how donors are acquired. So don’t mix up your results. Pick just one channel of acquisition. In this example, we want to know the long-term value of donors acquired through direct mail.
3. Run a query on your donor database to find all the donors who gave their first gift to your organization five years ago in response to a direct mail donor acquisition mailing.
4. Run a report on these donors to find every gift they have ever given to your charity, through every channel (direct mail, phone, monthly, special event, online, bequest and so on).
5. Include the following fields in your report for each gift:
* Donor ID
* Date of gift
* Size of gift
6. Export the results of the report
7. Create a spreadsheet
8. Down the left side of the first column (Column A), create the following rows:
1. Donors Acquired
2. Cumulative Gifts
3. Cumulative Revenue
4. Cumulative Average Gifts Per Donor
5. Average Annual Gift
6. Long-Term Donor Value
9. In the columns to the right, create one column for each year. Our spreadsheet will look like this: Column B is Year 1, Column C is Year 2, Column D is Year 3, Column E is Year 4, Column F is Year 5
10. Populate Column B with the results for Year 1, the year of acquisition. It will look like this:
1. Donors Acquired, 6,856
2. Cumulative Gifts, 10,912
3. Cumulative Revenue, $3,002,975
4. Cumulative Average Gifts Per Donor, 1.6
5. Average Annual Gift, $275
6. Long-Term Donor Value, $438
To see a sample of this spreadsheet, click here.
11. Let’s look at Column B.
Row 1 is the number of donors you acquired in Year 1: 6,856
Row 2 is the total number of gifts these donors gave you in Year 1. Gifts given is larger than donors acquired because some donors gave more than once in Year 1.
Row 3 is the total dollar value of all the donations these donors gave in Year 1, through all channels.
Row 4 is a formula field that divides the Cumulative Gifts (Row 2) by the number of Donors who gave this year (Row 1).
Row 5 is a formula field that divides total revenue received that year (Row 3) by the number of donors (Row 1).
Row 6 is a formula field that multiplies Average Annual Gift (Row 5) by Cumulative Average Gifts Per Donor (Row 4).
To see a sample of this spreadsheet, click here.
13. For the remaining four years, you populate the columns in the same way and end up with a spreadsheet that looks like this (each column is separated by a comma):
Year 1, Year 2, Year 3, Year 4, Year 5
Donors Acquired in Year 1, 6,856
Cumulative Gifts, $10,912, $19,227, $26,553, $33,286, $38,376
Cumulative Average Gifts Per Donor, 1.6, 2.8, 3.9, 4.9, 5.6
Cumulative Revenue, $3,002,975, $4,877,466, $7,051,333, $10,781,172, $13,695,731
Average Annual Gift, $275, $254, $266, $324, $357
Long-Term Donor Value, $438, $712, $1,029, $1,573, $1,998
As you can see, the long-term value of a donor acquired by direct mail is $438 in Year 1 and $1,998 in Year 5. Your results may differ.
To see a sample of this spreadsheet, click here.
Remember this for the long-term
The longer the period of time you choose to calculate long-term donor value, the more important it is that you include every gift ever given by every channel. A new donor acquired by direct mail will likely give you only direct mail gifts for the first few years. But a donor acquired by direct mail who stays with your charity for 20 years may eventually give monthly gifts, contribute to your capital campaign, give at a special event, participate in your walk-a-thon, give online, respond to an email appeal, join your Legacy League, and leave you a sizeable bequest when she passes away.
The key to understanding your long-term donor value is always knowing which donor acquisition channel you are referring to and which gifts you are referring to. In the above example, the long-term donor value calculation is based on all donors acquired by direct mail five years ago and includes all the gifts they ever gave during those five years. Naturally, if this calculation included only their direct mail gifts in that time period, the results would be different.
Now approach your board of directors well-armed
As you can see, when you know what your average long-term donor value is, in other words, when you know how much money a typical donor gives to your charity in a given timeframe, you can approach your board with hard, persuasive evidence for investing in donor acquisition, donor stewardship, monthly donor conversion, bequest marketing, gift upgrading, mid-level-donor stewardship and much more.
To see a sample of this spreadsheet, click here.
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Mail Superiority: How to Run a Profitable Annual Direct Mail Fundraising Program.
