Calculating Donor Life Time Value
Calculating the life time value (LTV) of a typical donor is relatively simple and very useful. You just need to know your average annual donation amount per donor and your donor attrition rate (the percentage of donors that stop giving each year). To compute LTV just plug those numbers into the following formula:
Avg Annual donation / (attrition rate) = Life time expected donations
($100/yr)/(.10) = $1000
Although it might be more accurate to discount the value of future contributions to present value, it requires a slightly more complex computation and the effect is mostly offset by the likely increase in average donation amounts over time.
Knowing the LTV not only allows you to make better decisions about how much is reasonable to spend on acquiring new donors, but also gives you an important metric to track and improve on. Although it is certainly great to improve the average annual donation figure, your most dramatic results can come from improving (reducing) your donor attrition rate. For instance in the example above, reducing your attrition rate to 5% from 10% increases the LTV to $2000.
Of course improving your attrition rate by that much isn’t easy, but it can be done. I believe the easiest way to achieve a dramatic reduction in donor attrition is by eliminating the inevitable donor loss that comes from the normal cycle of annual appeals and gifts and instead stressing sustaining support through a monthly giving program. I’ll discuss that more in my next post.Calculating Donor Life Time Value