Last week I looked at the Long-Term Value of new donors. I used a 5-year timeframe to quantify LTV, as one possible approach.

An important companion metric to LTV is Long-Term Cost (LTC). LTC is sum of Cost of Acquisition (what it costs to acquire a donor) and the Cost of Cultivation (the cost to cultivate the donor beyond acquisition, using the same timeframe as used in LTV).

LTV and LTC are two building blocks to understand the acquisition program's ability to generate net revenue and to provide a return on investment.

Here's an example:

LTV = $350
LTC = $80 (COA is $40 and COC is $40)

The Long-Term Net is $270 (LTV - LTC) and the Long-Term ROI is 4.38 (LTV / LTC).

Try calculating these metrics on your various acquisition programs. The result will provide insight into where you should be spending your precious acquisition dollars for maximum growth.

What's a New Donor Worth?

Long-Term Value (LTV) is an essential performance metric. Every organization should know how much their new donors are worth. With LTV you gain an understanding of what you can afford to invest in new donor acquisition -- a key to growing your organization.

While there is no crystal ball to tell you what today's new donors are worth, you can look at past classes of new donors to understand what they were worth over the long-term. You can then assume that today's donor, acquired through similar means and circumstances, is of similar value.

Here's an example. The graph here shows the 5-year value of the class of 2005 for one organization.

I've seen many sophisticated ways of estimating LTV. Some methods involve statistical models and present-value calculations. All this is fine and good. However, just taking a specific acquisition class and dividing their giving into the original number of donors in that class is a simple and solid approach. I have found that simpler approaches allow you to do more slicing and dicing. And this is valuable.

The graph above slices the LTV trends into three first gift ranges. It illustrates the importance of first gift amount in acquiring donors of value.

Recommendation: Start calculating the LTV of your donors -- by first gift amount, by channel, by offer.

Base Your Decisions on the Facts

Check out a thoughtful post by my fellow colleague at TrueSense Marketing, Jeff Brooks: Donor's opinion can lead you astray of the facts.

I'll add to that by highlighting a small study on thanking donors. It illustrates Jeff's main point: the importance of basing decisions on the facts, rather than opinion or hunch. It also adds texture to his point about thanking donors: It also matters how we thank donors.

The organization used to mail its thank yous to upper donors with first class postage on the carrier envelope. Then as a cost-cutting measure, they switched the postage to bulk. You'd think a small difference like that would be hardly noticeable to a donor. Keep in mind, however, that postage will affect both speed and rate of delivery. Here's what happened to response rate:

First, notice that these donors responded in the 10% range to thank you letters. That's better than most appeal letters.

Second, look at the change in response rate. It's a 20% decrease! This shows why it's important to test before making changes. Get the facts. Can you afford to lose 20% of your income from thank yous?

How Organizations Grow

Here's a valuable way to look at your organization's growth trends.

You split each year's revenue by the class of donors that provided the revenue. For example, you have donors who've been with you for over 6 years. I call these "old growth" donors. The giving of these donors is represented in the blue shade at the base of the graph. Notice how their giving declines over time. This is due to natural attrition. This shows what the organization's revenue profile would have been IF they stopped investing in new donor acquisition after 2004.

Fortunately, this organization invested in acquisition in 2005 (rust colored band) and again in 2006 (green) and this fueled growth.

All the bands collapsed in 2007 and the acquisition effort (purple) was not enough to counteract this and the result was flat growth.

The classes in 2008 (light blue) and 2009 (orange) were smaller and their revenue contribution was not sufficient to fend off decline.

The important point here is to understand your organization's revenue base and then to plan acquisition efforts to achieve the growth you desire.

What Is the Prime Age for Fundraising?

In my two previous posts, I used the US Census population projections to show growth in the prime donor audience over the next 40 years. Some may ask: How was the prime donor age range determined?

I compared the proportion of donors in each age bracket with the proportion of the US population. I used a 2008 Target Analytics study to arrive at the proportion of donors and the US Census for the US population. Their findings are consistent with what I’ve observed through the years.

The following index graph shows the results (click to enlarge graph):

Clearly, folks 55+ are more into giving through traditional channels (primarily direct mail) when compared with their younger counterparts.

But wait, there’s more. The index curve changes radically when focusing on online giving (using the same study):

The prime years for online giving are 35-74. However, as the Target study points out, online giving is still a small percentage of total donor giving for most organizations.

As online continues to become more mainstream and as the generational cohorts continue to age, online will grow.

I'd love to hear comments about what you are doing to raise funds online.

Growth Trends in the Prime Donor Population

The population in the prime fundraising age of 55-85 is expected to grow over the next 40 years, as the following graph based on U.S. Census projections shows. (Click the graph to enlarge.)

The profile of the growth is worth noting. The population grows steadily over the entire period. Not a single year of decline. For the last 10 years we’ve enjoyed a healthy period of donor population growth. The annual rate was between 2% and 3%. Fortunately, that rate of growth is expected to continue until 2019. The following graph shows the annual rate of growth more clearly.

Beginning in 2020, the annual rate of growth will slow dramatically and move to the 0.6% to 0.7% range. Organizations will be competing more fiercely for donors to fuel the growth goals in the future.

Stay tuned for more observations and thoughts in future weekly updates.

Demographic Shift to Impact Fundraising

Five generations are changing fundraising. The following graph shows how each succeeding generation builds to create the total population in the prime fundraising years of 55 to 85. (Click to enlarge the graph.)

The prime fundraising population is expected to grow from 72 million to 120 million over the next 40 years, according to U.S. Census projections. This is great news because many of these people will become donors.

However, it’s not a slam dunk. We also need to pay attention to the generations that make up this audience, which are indicated by the different shades. Over the past 10 years -- the period over which most of our direct marketing testing knowledge is based -- the dominant generations were traditional. These are the G.I. and Silent generations, indicated in blue and red, respectively. In the next 10 years, Baby Boomers will be the majority of our audience.

Much has already been written about how the generations respond differently to fundraising approaches. This generational shift has huge implications for our donor marketing.

Growth Recommendation: Split out age in your testing to learn which approaches work best with the emerging Boomer segment.

More observations and thoughts to follow in future weekly updates.