Donor Lifetime Value (DLV) might seem straightforward at first, but taking an in-depth look at how this number is calculated can help shed light on why a DLV-centric approach to fundraising can help you to understand why maximizing your donor retention rate is essential to realizing the greatest ROI. Expressed simply, DLV is the sum of all revenue that comes from a single donor over the course of their relationship with your organization.
There are costs associated with each donor relationship however, so it’s important to work with a calculation that helps you visualize the net revenue each relationship will generate. In this post we’ll break down both a simplified and more in-depth version of the DLV formula, explain what each variable means, and hopefully offer some valuable context for why thinking about your efforts in terms of DLV will make you a more effective fundraiser.
Simplified Donor Lifetime Value
This version of the DLV formula is straightforward, and great for helping people to understand the concept. A donor’s lifetime value is equal to their average annual donation amount multiplied by the length of their giving relationship in years. So for example if Donor A gives an average of $50 a year and will give annually for 35 years, her lifetime is $1750.
Being able to predict a donor’s lifetime value accurately is essential for making strategic decisions about how you’ll manage your relationship with them. Once you’re able to accurately visualize the real value of your existing donor list in dollars, it’s likely that you’ll realize the true importance of donor retention in terms of dollars lost. If Donor A has a predicted lifetime value of $1750 but only gives for three years, that represents a loss of potential donations of $1600.
Consider the Costs
The simple expression of donor lifetime value used above is a great way to understand the potential value of any given donor, and can help inform your strategic decision making. However, the simplified formula is missing a critical component necessary to accurately visualize the lifetime value of any given donor: the costs associated with acquisition and marketing. Without incorporating these costs, it’s not possible to really understand a donor’s lifetime value.
The above formula starts with the simplified equation of annual donation amount multiplied by length of relationship in years, but subtracts from that amount the combined costs of acquisition and marketing. Let’s revisit Donor A, who gives $50 a year for 35 years; their simple lifetime value is $1750. That’s not the whole picture though, because it cost $18 to acquire Donor A.
How do you determine the cost of acquisition? Divide your total spend on acquisitions in a single year by the number of new donors you develop, and you’ve got a working number. Right away we see that in the first year she gave, Donor A was only really worth $17 after the cost of acquisition. Immediately we can see one of the benefits of long term donor retention - the ability to amortize the cost of acquisition over the length of the relationship. In the case of Donor A that’s about 50¢ per year based on her predicted DLV, which improves your net gift revenue per year for donor A to $34.50.
In an ideal world, once you acquired a donor they’d be committed to giving to your cause for life; unfortunately we all know that’s not generally the case. Year after year it takes constant effort and communication to sustain a non-profit’s relationship with a donor, and that requires resources. The final element of our DLV equation is the cost of marketing.
Unlike the cost of acquisition, which is incurred only once per donor, the cost of marketing is ongoing. Calculating this cost on a per donor basis is a challenge that different organizations tackle in different ways, but generally speaking you can divide your annual marketing budget by the total number of donors who give a gift in that year to arrive at a rough estimate. Combining this number with your cost of acquisition will give you a clear picture of net DLV, which you can use to guide your resource planning and other strategic decision making.
Hopefully this breakdown helped you get some insight into exactly how donor lifetime value is calculated. If you’d like to learn more about how a DLV-centric approach to fundraising can help you maximize your net revenue from donations, contact us today.