If you’ve dabbled anywhere near consumer markets, you would know what consumer lifetime value is. When it comes to fundraising, the concept is identical, but it’s known as donor lifetime value instead. The Donor Lifetime Value Model (or LTV) gives you a prediction of how much you can expect to receive from a donor during the lifetime of their giving.
How do you know when your donor acquisition and retention is worthwhile? You can see how retaining your donors is bringing positive gains to your organization, but a ‘relationship’ is such a qualitative thing, how do you measure the monetary impact it has? What is the value of actually retaining donors?
That’s where LTV comes in. LTV is used to give a numerical value to the relationship you have with your donors.
When talking about LTV, it is important to understand that LTV is nothing more than a prediction of the value of a donor relationship. That is, it is not set in stone, and because it is a prediction you may not necessarily arrive at an accurate value. The more data you use to calculate your LTV, the closer you would be to accuracy.
Next, you need to understand that donor lifetime value is used to measure the financial value of each component of your database. That is, it is a dollar value for the relationship you have with your donor.
In very simple terms: from the beginning to the end, how much revenue will a donor contribute to your nonprofit?
Of course, you are not going to calculate the lifetime value for every donor – or even a single one. What you are calculating is the average LTV. Even averages don’t offer much help if the database is too diverse though, so the focus is on calculating average LTV for each segment of your donor database.
Because each segment will include people of different demographics, putting them into the same basket wouldn’t help. Classifying them into segments allows you to see the value of retaining a particular kind of donor.
While it is up to you how you choose to segment your donors for your LTV calculations, it is important to remember that LTV is measured over the lifetime. This means that you’ll be including projections for the future. How much money can you expect a donor to contribute throughout their lifetime?
Based on this, you’ll be able to budget your fundraising events and activities accurately. As a nonprofit, you don’t want to drop into the reds. If you have a projection of how much each donor will be contributing, you will know how much you want to spend on retaining them.
Calculating LTV is fairly easy. All you need is the average donor lifespan, average donation amount and average donation frequency. By multiplying all of these together, you can get the LTV.
Though there are a myriad of ways to misinterpret the LTV, knowing your segmented donor lifetime value is practical in providing meaningful insights about the donor database.