Previously, I’ve written about the benefits of calculating your Donor Retention Rate and more importantly, your Donor Revenue Retention rate. Today, I want to share how to calculate an individual Donor’s Lifetime Value, and why it’s important.
What is a Donor’s Lifetime Value
A donor’s lifetime value is relatively simple to calculate. It is basically the Annual Giving the donor has already given to the organization, multiplied by how many years the donor is expected to keep giving, based on all donors within the organization.
A donor’s Annual Giving is calculated by taking their total amount of gifts, divided by how many years they have been giving. So if a donor gave three gifts over 4 years for a total of $4,000, the donor’s Annual Giving is $1,000 ($4,000/4 years).
To calculate the Lifetime Value of that donor, we take the Annual Giving and multiply by it by the average expectancy a donor within the organization will keep giving, in years. This average expectancy is a function of your organization’s retention and attrition rates. Here is the actual formula as it involves adding up a sum of an infinite series to calculate the number of years an average donor will keep giving:
Fortunately, this ‘infinite series’ simplifies to just 1 divided by the attrition rate, or 1/Attrition Rate.
So if a nonprofit’s donor attrition rate is 40%- that is they are keeping 60% of their donors from the previous year and losing 40% of them- then the average lifetime for every donor is 1/.4 or 2.5 years.
Putting it all together in our example, if our sample donor is averaging $1,000 / year in giving, then this donor’s lifetime value is $1,000 * 2.5 years = $2,500.00.
Why is it important to measure each donor’s lifetime value?
The real value of calculating a donor’s lifetime value is that you can understand the overall value of each of your donors. Clearly, a donor giving $2,000 per year is more important than one giving $100/year. But how much more important?
Calculating each donor’s Lifetime Value unlocks the mystery of how much time you- as a nonprofit volunteer, board member, or fundraiser- should spend with each donor. After all, if you spend more time (and thus money) acquiring or stewarding a donor than their Lifetime Value, that ends up being a poor financial decision.
However, if you calculate the lifetime values for ALL of 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.
Furthermore, by understanding the average lifetime value of ALL of your donors, you can then make much better financial and business decisions to justify the expense of acquiring and maintaining new donors.
How SimplyFundraisingCRM Helps
In SimplyFundraisingCRM, your organization’s key data points, including average donor lifetime and donor lifetime value is only a click away on your dashboard:
Understanding donor retention retention, attrition, lifetime, lifetime values, and ultimately each donor’s lifetime value will help your organization improve efficiencies, save time, and ultimately raise more money available for your mission!
And with SimplyFundraisingCRM, all of the hard math is done automatically for you in a solution that anyone can use and everyone will love- plus at an affordable price.
Start your journey with better fundraising software today!