How to calculate Donor LTV and why it’s important for your nonprofit
Donor Lifetime Value is an important metric. Here’s a resource to help you calculate Donor LTV.
As a fundraiser, one of your major concerns is donor retention. And this is largely because it costs 10x more to acquire new donors than it does to keep the donors that you already have.
But of all the metrics that you could be tracking — there are a few that will help to orient you in the best way possible and align your fundraising strategies with growth in mind.
One of the most important metrics is Donor Lifetime Value.
What is Donor Lifetime Value (LTV)?
Donor Lifetime Value (LTV) is the measure of how much revenue a single donor will generate for your organization from the moment they first donate, to the time they lapse. Essentially, it is the amount of monetary value a donor brings to your organization in the lifetime of their relationship with you.
In this case, LTV is represented as a dollar amount, reflecting the amount you can reasonably expect to have donated to your organization over a certain period of time.
Why is Donor LTV important?
Donor LTV is a better way for you to understand and quantify your fundraising strategy. When you clearly understand your Donor LTV, you are able to make stronger predictions and strategize around trends. This helps you structure how you will approach a certain segment when you fundraise.
Let’s do a little thought experiment: let’s take a look at two, hypothetical, donor segments: annual donors who give $500 or less , and annual donors who give at least $1000 .
When you calculate the donor LTV for the segment of donors who give $500 or less, you realize that over the lifetime of their engagement with your organization, this segment of donors gives an average of $5000 .
When you calculate the donor LTV for the segment of donors who give at least $1000, you realize that over the lifetime of their engagement with your organization, this segment of donors gives you an average of $3200 .
So which group of donors is more valuable to your organization in this hypothetical situation?
Just by looking at gift amounts, your immediate tendency may be to solicit donors who give larger gifts. And no one would bat an eye. But because you understand the donor LTV, you can cater your fundraising strategy to the segment of donors who are helping your organization generate more value and revenue over the long-term.
Of course, there are TONS of factors that contribute to why one segment’s donor LTV is higher or lower than another’s. Some of the reasons could include:
- Large gifts that heavily skew results
- Donor stewardship and engagement strategies that are particularly effective
- Retention strategies that are more developed
- Resources (or lack, thereof) to build campaigns
Donor LTV is an important factor to consider when building your fundraising strategy — but it cannot be the only one. Remember that.
How do you calculate Donor LTV?
Calculating donor LTV is not an exact science. In fact, there is no standard formula. But the simplest way to understand the concept and calculate it is this: The length of time a donor remains an active donor , multiplied by the average donation of that donor , multiplied by how often that donor donates .
For those of you that enjoy a formula, here’s what it could look like:
An important thing to note about this Donor LTV calculation, is that this is an average. What this will produce is the Gross Average Donor Lifetime Value . It doesn’t take into consideration factors like attrition.
Typically, this type of calculation is either done for an entire donor database, or for a segment of donors (which we recommend). It is not used as a measure of an individual donor — because that would not be as useful from a strategic perspective.
After plugging your numbers into this calculation, you are left with a single number — a dollar amount. This dollar amount is the lifetime value that a donor, in that segment, is expected to bring to your organization over time.
The importance of understanding Donor LTV
Understanding donor LTV is important for your entire team, especially when evaluating the success of campaigns and events.
Let’s say that your organization throws a small fundraising event. It costs your team $5000 to put together (on top of staff and volunteer time). After ticket sales and donations, you raise $5500. That means that your event raised $500.
Some would look back at this event and might say that a $500 profit was not worth the time, effort and investment to throw this event. But this doesn’t paint the whole picture.
Let’s say the donors who first came in contact with your organization through this event, continue to give every year. Suddenly, you have a donor LTV of $250 per donor for this segment of donors. That’s revenue and value that wasn’t accounted for in the first assessment of the event’s success. But it’s value that should not be ignored, because it completely changes the narrative.
Segmentation for Donor LTV
As we mentioned earlier, segmenting your donors is extremely important when developing fundraising strategies. And calculating donor LTV is no different.
LTV is an average measure for a group of donors – so you want to group donors into segments that you can actually target through campaigns and strategies. That is the best way to make use of a donor LTV metric.
Here are some donor segments that a donor LTV would be useful for:
Segment by giving levels
Segmenting by giving levels makes a lot of sense. The way you would approach someone who donates $5, and the way you approach someone who donates several thousand dollars will vary quite a bit.
Having a donor LTV for each of the most important segments to your organization will be a great way for you to understand what segments need more love, and where the opportunities exist for you to increase gifts or double down on something that’s been working well.
Segment by location
Segmenting by location is useful, especially if your organization receives support from a large area. There are certain narratives that make more sense to some audiences, and not at all to others — and these narratives can be driven largely by geographic regions and references.
Understanding the donor LTV of a specific location may help your team decide which areas to do more programming, or target for events and fundraising. When you are able to attribute value to a certain segment, you are able to prioritize your strategies more effectively.
Segment by channel
It would be interesting for your team to segment donors by the channel you acquired them from. Having an understanding of where donors came from — and linking that to how much value they bring to your organization over time — can be very powerful.
This will basically tell you which channels are working, and which are not. You are even able to attribute dollar amounts and predictions to your channels in a more accurate way.
Keela’s Donor LTV Calculator
We know that playing around with calculations isn’t everyone’s cup of tea. That’s why we decided to make it easier for you. We’ve put together a free Donor LTV Calculator. You’ll have to do some digging through donor records for some historical numbers — but it will be worth it!
What you’ll need to get started
Before you use Keela’s Donor LTV Calculator, you will need to know a few things:
- History of total donations
- How many donations you received each year
- How many donors you had in each year
- Know how long donors stay engaged with your organization before they lapse
You should be able to find this information in your nonprofit CRM. Once you have those, you can get started.
How to use the Donor LTV Calculator
Step 1: Pick a segment
Before using this calculator, choose a segment of donors that you want to work with. The information from this group of donors is what will be most important.
Step 2: Make a copy
You’ll have to make a copy of this document to be able to make changes.
Step 3: Fill out the yellow boxes
Next, open up the calculator. You will see an empty table with blank yellow cells. Here’s what you should enter into each of those yellow cells.
Total Donations ($): In this section, place the total dollar amount of donations for the corresponding year. For example: If we raised $200, 596 in this year, I would put 200596 in this cell.
Total Number of Donations: In this section, place the total number of donations/transactions for the corresponding year. For example: If it took 1500 donations to raise all of the money we raised in a single year, I would put 1500 in this cell.
Total Number of Donors: In this section, place the total number of individuals who donated for the corresponding year. For example: If all of your donations for a single year came from 400 total donors, I would put 400 in this cell.
Average Number of Years a Donor is Retained: This is where it gets a bit complicated. In this section, calculate the average amount of years a donor will continue to give to your organization before they lapse. This is why having an historical perspective is useful, because this is a difficult number to get with only a few years of data. For example: If donors who donated 10 years ago stay engaged with the organization, on average, for 4 years after their first gift, I would put the number 4 in this cell.
Once you fill out the boxes, the Donor LTV calculation found at the bottom of the page will automatically complete. What you are left with is the Average Gross Donor LTV for that segment, in dollars.
As an added layer of segmentation, we split up the view for 5 years of history and 10 years of history.
Using Donor LTV is one way to make your fundraising strategy more robust. We hope that this tool helps you springboard to something much more strategic.