Amazon is willing to spend $240 to acquire a customer for its Kindle that costs just $69. Insurance companies pay more than 100% of the first year’s premium to acquire a new policy holder.
Starbucks spends $1,400 to acquire a new customer who starts off by spending $4.25 for their first Frappuccino. Even rental car companies are more than eager to discount prices on their lease to acquire a new customer.
Every store that sends out a weekly flyer will discount certain items as a loss leader to attract customers to their stores.
Are they all foolish or do they not understand basic economics?
The truth is they are doing this because of the ‘Life Time Value’ of a customer. In Amazon case they are willing to spend $240 to acquire a customer for Kindle because the repeat business from that customer will eventually be profitable.
This is the kind of investment companies are willing to make to acquire and hold on to new customers and convert them to long-term, loyal customers–that in reality is smart business.
Acquisition of new customers is essential to maintaining the growth for virtually every organization, yet nonprofits shy away from this because it’s expensive or because of lack of understanding of this essential principle.
Investing in acquisition of new donors is necessary to replace attrition and/or insure growth in order not to suffer a slow and painful extinction.
After all, donor acquisition is the wellspring of maintaining and growing a profitable business (any business, including yours!)
Nonprofits can do this when getting their first donation from a new prospect by thanking them immediately, developing them to mid-level giving, upgrading them to become major gift givers, and eventually encouraging them to donate sizeable bequests or planned gifts.
Before you begin calculating the ‘Life Time Value’ of a donor look at your data file to see who your donors are, chances are they are mainly women and the elderly. If this is the case then, these are the people you should target.
Women: A recent study found that most women are distrustful of certain industries. When asked about which industries they trust respondents in the survey said nonprofit were the most trustworthy.
The elderly: They tend to become more compassionate with age. Statistics Canada reported that in 2010: The average and median amounts of annual giving tend to increase with age. For example, people aged 75 and over had made average annual donations of $725, compared with $431 for those aged 35 to 44 and $143 for those aged 15 to 24.
The respective median amounts for these three age groups were $231 for people aged 75 and over, $127 for 35- to 44-year-olds and $30 for 15- to 24-year-olds.
Calculating the lifetime value of a donor
Now, calculating the ‘Life Time Value’ of a donor is a bit complex, since there are many variables involved, yet the ‘Life Time Value’ of a donor is a powerful concept because small changes can make a big difference to your profit.
So, what is ‘Life Time Value’ of a donor?
Simply stated, the ‘Life Time Value’ of a donor is the profit generated from them from the first time they make a gift to your organization until the day they stop.
To calculate how much you need to invest as a nonprofit to acquire and keep a new donor, use your current donor base to estimate the three items below:
- Average donation amount generated per appeal. Make sure you deduct the hard cost of appeal. For Direct mail: postage, printing creative cost, etc. For an Event: hard cost to run event, etc.
- Average donation size per annum per donor. Add donations amount per campaign made by a donor and divide by the number of donations made per year.
- Number of years a donor continues to support your nonprofit organization. Calculate the number of years a donor supports your organization.
No need to calculate donors who give just once a year or a donor who has not given for the past 3 years. Consider the latter as lapsed.
Campaign Year-end Statistics
Number of direct mail appeals per year sent to donor A 4
Total donations generated from donor A during the year $250
Donor A’s gift to last campaign $125
Number of donations per annum from donor A 2
Number of years that donor A has supported your cause 6
In this example the ‘Life Time Value’ of donor A is $1,500 ($125 x 2 x 6).
Now do this for all your donors.
Another important factor to remember is that, if you can change any of the three variables, you improve your profit.
All you need to do is convince donor A to:
- Donate an average of $200 instead of $125 per campaign, then the ‘Life Time Value’ of donor A would increase to $2,400 ($200 x 2 x 6).
- Ask them to give 3 times instead of 2 times per year; the ‘Life Time Value’ of donor A would increase to $2,250 ($125 x 3 x 4).
- Convince them to stay 7 years instead of 6, then the ‘Life Time Value’ of donor A would increase to $1750 ($125 x 2 x 7).
If on the average your donors fall within a range of $800 to $1,500 then you know that you can afford to spend up to $750 quite comfortably to obtain a new donor.
Only by calculating the fundamental metric of ‘Life Time Value’ for your organization will you know how much to invest per donor for your next acquisition program.