Donor Engagement

Understanding Donor LTV for Effective Donor Engagement Strategies

Rahul Razdan Rahul Razdan
Jan 2022

Donor Engagement
A simplistic definition of Donor Lifetime Value (LTV) is the total amount of donations that a donor would make to your organization over their lifespan. Here's how you can calculate your Donor LifeTime Value and Donor Acquisition ROI for these scenarios:

Donor LTV = Avg. Donation x Num. of Donation per year x Donor LifeTime in years

Donor Acquisition ROI = (Donor LTV - Acquisition Cost) / Acquisition Cost
43.6%
Did you know that over half of the new donors acquired by nonprofits, drop off after the first donation?

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Why is it Important to Measure Each Donor's Lifetime Value?

The real benefit of calculating a donor's lifetime value is that you can understand the overall value of each of your donors and invest accordingly in donor engagement. It goes without saying, a donor giving $5,000 per year is more important than one giving $1,000/year, but how much more important? When you calculate each donor's Lifetime Value, you also understand how much time and the worth of that time you - as a nonprofit volunteer, board member, or fundraiser- should spend with each donor. After all, it's not a good financial decision if you spend more time (and thus money) acquiring or stewarding a donor than their Lifetime Value.

However, if you calculate the lifetime values for all your donors and sort them from highest to lowest, you will quickly see gaps between the donors you should be spending time with and those you should not. This enables you to build a well-informed donor acquisition plan as well as donor retention strategies while justifying the expense of acquiring and maintaining new donors.

Here are three simple scenarios that exemplify the importance of understanding the Donor LTV and how higher donor retention could drive this value through the roof.

Scenario 1: Organization ABC spends $60 on acquiring a new donor, XYZ, who donates $100 once and then drops off.
  • Donor Acquisition Cost = $60
  • Donor LTV = $100
  • Acquisition ROI = (100-60) / 60 = 66.7%

Scenario 2: Organization ABC spends $60 on acquiring a new donor, XYZ, who donates $100 each year for six years.
  • Donor Acquisition Cost = $60
  • Donor LTV = $600
  • Acquisition ROI = (600-60) / 60 = 900%

Given a choice, it is easy to see that most organizations would prefer scenario 2. That is because for the same donor acquisition spending across the two scenarios, the donor retention rate and thus the donor LTV is significantly higher in scenario 2. Now, let's build on scenario two and create another scenario that has an even higher Donor LTV and Acquisition ROI.

Scenario 3: Organization ABC spends $60 on acquiring a new donor, XYZ, who donates $100 each year for six years. In addition, donor XYZ helps bring in 5 new donors each year through a peer-to-peer fundraising event that ABC runs annually.
  • Donor Acquisition Cost = $60
  • Donor LTV = $600 (donations) + {5 x 6 x 60} (donor acquisition cost savings) = $2,400
  • Acquisition ROI = (2,400-60) / 60 = 3,900%

TAKEAWAY

The strength of a robust peer-to-peer program cannot be understated. Not only does such a program drive donations throughout the year, but a well-run peer-to-peer program also helps host organizations build donor lists and grow their donor base by leaning on their fundraiser's network. Such organic donor growth saves nonprofits the donor acquisition cost, and the ensuing network effect (friends and family donating to the same organization) typically results in higher retention and thus higher donor LTV.
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