Donor Lifetime Value: Not all donors are created equal

Image of a gold bar with text over it saying "Donor Lifetime Value: Not All Donors are Created Equal"What is the long term impact of a donor on the bottom line of an organization? Lifetime Value is described as the net profit projection applied to the donor’s entire future relationship. In the simplest terms, if a donor costs $75 to bring in and their Lifetime Value is $200, therefore the donor is worth pursuing because there is a net profit. In other words, the amount of money expected from the first gift to the last. The most useful way of using Lifetime Value is to measure across all current or even particular segments of a donor pool.

A simple way to calculate donor Lifetime Value is to start with three metrics; the length of time that a donor is affiliated with the organization, the average total lifespan donation amount by all donors, and the average frequency of donations by all donors over the relationship.

Lifetime Value =
Average Lifetime x Average Donation Amount x Average Frequency of donations

The accuracy of generated predictions varies greatly depending on the complexity of the model used. Typically the donor’s entire relationship dollar value represents the budget ceiling for acquiring/retaining the donor as well as the surplus to follow through on the organization’s mission. Remember, donors are assets and retention is a major influence on increasing Lifetime Value.

Shifting to look at the Lifetime Value of a donor causes organizations to see the long-term sustainability of their budget. This also allows organizations to gauge which donors are worth targeting.

One downfall of calculating donor Lifetime Value is, for accuracy organizations need to add complex equations to the Lifetime Value calculation to figure specifics like the discount rate and net profit. Another issue involves the tendency of Lifetime Value calculations to overestimate the value of previously acquired donors versus new donors. Remember, this is a powerful tool for an organization to use, but should not be the only source of data used to make decisions.

Donor Lifetime Value should be calculated at regular intervals because the inputs to the calculation change over time, resulting in adjusted Lifetime Values. As time goes on and you get more data, Lifetime Value calculations become more accurate. Make sure to calculate Lifetime Value for different segments of a donor pool. For instance, calculate all donors that we obtained through a TV ad spot, word of mouth, etc.