Transcript
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Now, I'm not going to say that it's free money, but it's almost like getting free money.
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Make your phone calls, write your handwritten notes, go visit with your donors, make them feel special, love them.
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Welcome to the Practice of Nonprofit Leadership.
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I'm Nathan Ruby.
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Well, today we're going to be talking about a concept called the lifetime value of a donor.
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Now, the lifetime value of a donor is simply the total value of a donor's financial contributions to a nonprofit over the lifetime of that relationship with the organization.
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So lifetime value of a donor is basically just a simple calculation Annual average gift times the average number of years that they're going to remain a donor.
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So let's, before we get into this too far, let's calculate a real life example so you make sure that we're on the same page.
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You understand what I'm talking about here.
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So in this case, in this example, our donor is a monthly donor.
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And you know we we love monthly donors because monthly donors are very committed to the organization and they are much, much more likely to stay a donor over an extended period of time to any organization.
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And even in my own situation, my own example my wife and I were longtime supporters of an organization that used to operate in Latin America.
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We knew the leadership, we knew some of the board members, we knew the executive director, we knew exactly how the money was being spent and so we were a monthly donor.
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And we were a monthly donor for five or six years and loved every second of it.
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And some months, you know, when they would send communication and we get it, I would, you know, I'd say oh yeah, and I would read it and I was excited about it.
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Other months or other, you know, sometimes if I missed the email it didn't make any difference, because every month that gift was going and we were, we were happy to do it and I know the organization we supported was happy to receive it.
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So we love monthly donors and in this example we're going to do, let's say, $30 a month.
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Now, when it comes to monthly donors, $30 a month is pretty common and it's a very common monthly gift.
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Whether it's a domestic organization or international, it doesn't really make any difference.
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$30, $35 is kind of the sweet spot, so that's what we're going to use for this example.
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So if we had a monthly donor at $30 over the course of a year, over 12 months, that is $360.
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Well, you know, that's a pretty nice gift.
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It's not massively large but it's still a pretty nice gift.
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So $360, so it's $30 times 12.
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That gives us our 360.
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But now let's look at it a little bit more as a lifetime value.
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So 360 over three years is $1,080.
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$360 over five years is $1,080.
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$360 over five years is $1,800.
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And $360 over 15 years is $5,400.
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So now lifetime value now takes what would be a $30 a month gift.
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That is nice but not excessively large.
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Now it becomes okay.
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This is a gift that has a little bit bigger value and has more impact to the organization.
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Now that $5,400 over 15 years.
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That is also assuming that their $30 a month never increases, which is actually pretty rare.
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Typically, when you have a donor that is a monthly donor like that, it is common for them to increase that gift over the years.
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Before we go any further, just note this is just a off the thumb estimate.
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Some monthly donors are going to be more.
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Some lifetime values in some organizations are going to run a little higher than others, depending on what nonprofit sector you're in.
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But everything we talk about today you can use as a basic rule of thumb, as a basic rule of thumb.
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So okay.
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So if we know that the lifetime value of a donor is where we take their average annual gift over a one year, three year, five, 10, 15, whatever the case may be, and we add that up and we get a number of what we can expect over the years.
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Okay, well, that's great.
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That's basic math, nathan.
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But what do we do with it?
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How does that help us make better or different decisions as executive directors?
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Well, I'm glad you asked.
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So we got three of them today.
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So number one is budget and forecasting.
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So let's say, just for the sake argument, that you have a $50,000 budget.
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All right, you're a nice organization doing good work in a local community.
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Maybe you're early, maybe you're just getting started, maybe you've been around a while, and that's a budget that you've worked up to over a few years, but we'll use 50,000.
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So if you can secure 10 people giving you $30 a month, that is $300 a month, which is $3,600 a year.
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All right, that's the math, and that represents 7% of your budget.
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Okay, well, to be honest, 7% is not that big of a deal.
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All right, but what if it was 10% the next year and maybe 15% the year after that and maybe, just maybe, the year after that, that number becomes 25% of your budget.
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So if you look at the time value or the lifetime value of donors and you can increase that number year after year after year, how cool would it be?
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What would it feel like if you could start off the year on January 1 and know that you had 25% of your budget accounted for even before the year started, accounted for even before the year started.
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That, I know it would make me feel pretty good.
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And so what the point here is is, as you are building from one year to the next, to the next to the next, most of those donors that you have had give last year.
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If you're cultivating year, if you're cultivating, if you're engaging with them, vast majority of them will continue to give, and so that is something that you can build on year after year after year.
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It would be nice to not have to start back at zero on January 1st and then have to figure out how you're going to generate that entire $50,000 budget from day one.
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Have to figure out how you're going to generate that entire $50,000 budget from day one.
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So number one is lifetime value of donors can help you with budgeting and forecasting, all right.
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Number two is permission to spend budget on fundraising.
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Now, it is always easy Well, maybe easy is not the right word, because nothing's easy and nonprofit work, but let's say that it's easier to spend money on program needs and responsibilities.
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So let's say that we're serving 50 people a month now and the program is growing.
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People are starting to find out about it, the need is bigger in the community and now, all of a sudden, we realize that we are now serving 150 people a month.
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Well, we'll probably need higher, more staff.
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I mean, your, your program can't triple and and have the same staff people, so hiring more staff would be common.
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Um, you know what's another example.
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Let's say uh, let's say uh, say you're running a before school, after school care program and last year you had a hundred kids, uh, in the program, and last year you had a hundred kids in the program.
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And now the phone is ringing off the hook and there is this huge need.
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The numbers are, you know, 125, 130, 135,.
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But you are also identifying a need that you know a lot of these kids are going to need transportation.
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So well, we need to buy another van to make sure that the kids that need our service so bad have access to it, okay.
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Well, that is a fairly common and a fairly easy decision for an executive director or a board member to make when it is based on program.
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So, all right, now try this one.
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Let's assume that you are going to go to your board and you're trying to get the okay to make a purchase and here's what we say All right, okay, board, our current budget is we're going to change the budget size.
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Let's say it's $250,000 this time.
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So, all right, with our current budget of 250,000, we are seeing an upward trend in our programming, that we expect to double our program need in the next few years.
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And in order to hit that $500,000 future budget, I am recommending that we hire a new fundraising director now at a cost of 50,000, so that we can meet that need in three years.
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Well, if you go to your board and you say, hey, we're going to have a budget problem in a few years and so my solution is to hire a fundraiser to start working on adding revenue now, and that's going to cost us $50,000.
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My guess is your board is probably going to give you a blank look and a lot of the time the discussion ends right there.
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So now let's compare and contrast that statement to this statement.
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All right, here we go.
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Same organization $250,000.
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We know the budget's going to increase to $500,000 because we're doing amazing work and the need is growing.
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Statement to the board Based on our current trend, it looks like our budget is going to increase over 100% in three years.
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Based on our current lifetime giving projections of our three-year donors, we will need to add an additional 100 donors over the next three years.
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In order to do this, I recommend we invest now in a fundraiser to help us meet that three-year budget goal.
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So you're using the lifetime value of your donors to project a future revenue need.
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That gives your board something to grab a hold of to say, okay, we're going to spend this money now, but we're going to raise more money in the future.
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And you know, I think sometimes as executive directors, we, we, we don't always give the board the information that they need to give us, the answer that we need them to give us.
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So if we just throw it out there and say, hey, you know, this is coming, I need this, I need you to approve this, and then you don't give them the pathway to making that happen or the pathway to making it pay for itself.
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Your, your board members, they they often they don't have the understanding or the vision to be able to give you what you need to be successful.
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So using the lifetime value of donors will help you get permission to spend money on fundraising All right.
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Another one is permission to spend more of your time.
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This is you, the executive director, permission to spend more of your time.
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This is you, the executive director, permission to spend more of your time in relationship building with your donors.
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Now there are some donors who become monthly donors or they become annual donors.
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They come in at a certain level and they will stay there for the entire lifetime that they are connected with your organization, and for the entire lifetime that they are connected with your organization and for the entire time that they're donors.
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And that's okay.
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We love all of our donors, regardless of how much or how little they give.
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We love them all because I always remember, donors don't have to give to you, so when they give, it is a personal choice that they have made and that is an awesome, awesome thing.
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But giving at the same level year after year after year after year, that's not.
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That's not our goal.
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That's not our goal for our donors.
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Our goal is to continue to move our donors up the giving pyramid to bigger and bigger gifts, to bigger, more impactful gifts.
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That's our goal.
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That's what we want to have happen.
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So how do we do that?
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Well, we do that by deepening the relationship of the donor with you and with the organization.
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So, all right, well, what impact?
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How does that work and what impact does that make?
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So, all right, let's go back to our donor, to our $50 a month donor.
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And they were or no, they were, they were giving $30 a month.
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Sorry, my math is off and I'm having.
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I'm only halfway through this.
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So we've got our original donor and that's $30 a month.
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At 12 months, that was $360, right, $360 a year times 10 years $3,600.
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That was our original example.
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Awesome, love it.
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Great gift.
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I'll take it.
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I'll say thank you every single time.
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Well, what if we could take that same donor and move them up to $50 a month?
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Well, okay, $50 a month times 12 months now becomes $600.
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A year times 10 years is now $ 6,000 total.
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Oh, you know, 3,600 is nice, 6,000 is nicer, you know, love it.
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Um.
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So Now I'm not going to say that it's free money, but it's almost free money.
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So in order for this to happen is you have to make sure that you are making your phone calls, writing your handwritten notes, going and visiting with your donors, making them feel special and loving them.
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It is once you get a donor, especially past oh, typically the three-year mark.
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If you get a donor who is given every year for three years, and especially if they have given every month for three years, so they've given 36 gifts in a row oh my gosh, that donor has chosen to lock arms with you and walk with you to solve whatever problem your organization is solving.
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And so those donors are prime donors to sit down with, spend more time with, encourage them and ask them to increase that gift.
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And you have a donor like this that is going three years, four years, five years, as an annual donor.
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Then again they become prime, prime, major gift prospects.
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And so now your $3,600 10-year donor or your 6,000 10-year donor becomes 10,000 or 15,000 or 25,000.
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And that's how you do that.
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So when I say that there is permission to spend your time and energy in building relationships with your donors, I'm actually not talking about the board.
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I'm actually talking about you giving yourself that time and that permission to spend your time making those relationships a priority in the everyday job, with all the other things that you're trying to get done and all the other things that are just as important.
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And you know, not saying that the program and admin and marketing and finance, not saying all those things aren't important because they are.
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All I'm saying is is you've got to make sure that you are giving sufficient time, energy and effort to these donors, because these donors, based on lifetime value, could become substantial supporters of your organization.
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That allows you to transform the organization down the road.
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So now one quick word of caution.
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And when you start calculating value of a donor, you do run the risk of seeing your donor, or maybe even a little bit of treating your donor as a mere transaction.
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They become a kind of a cash machine where you go up and you put your debit card in, you push a couple of buttons and out pops money and then you drive away.
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That is not how we treat donors.
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That's not how well.
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It's not how we treat donors If you want your revenue to grow year over year over year.
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Sometimes that does happen, but that's not what we want and so we don't want to see them as mere transactions.
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That's just.
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That's not the point.
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That's not what we're trying to do.
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The point is to see potential revenue so that you can make better decisions in how you spend your budget, your time and your energy.
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And, in fact, if you want to increase the lifetime value of your donor, you actually have to increase the relationship with the donor.
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That's how it works.
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So always remember, fundraising always starts, always finishes with the relationship.
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Fundraising is about the relationship.
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The bigger the gift, the deeper relationship it takes to get there.
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So, lifetime value of a donor.
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It's a great way for you to get a little bit better understanding and get your arms around forecasting and budgeting more money on fundraising and, lastly, it gives you personally the permission to spend your valuable time building relationships with your donors.
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Thank you for listening today.
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If you are benefiting from what is being shared in this podcast, we would like to ask you to share a review on the platform, let us know how the podcast is benefiting you and if you'd like to get in touch with us and I gotta say, tim and I love it when you guys reach out to us, it's the best part of this podcast but to do that, our contact information can be found in the show notes.
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That's all for today.
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Until next time.
