Trust and grant fundraising intro courses
Laura Buller
Fundraising
When we want to measure acquisition and its potential return on investment, we need to estimate how much money those acquired donors may bring in. A typical way to achieve this is to measure the cost per acquired donor versus the estimated donor lifetime value. If the latter is higher, we reasonably expect to make more money than we spent.
The crux of estimated donor lifetime value is being able to estimate your typical donor's lifetime with the organization. This is based around retention rates. The generally accepted calculation for estimated donor lifetime is to take 1 and divide by your overall attrition rate (attrition rate being 1 minus the retention rate).
Here's the issue, though. Going back to using this in formulae to justify acquisition, your overall database retention rate is probably too high.
New donors
New donors tend to have a lower retention rate, and the ratio of those donors to the rest of your database will affect your overall database retention rate. More new donors? The lower your rate is. The overall rate, however, still does not fully represent what is happening in acquisition.
So we really need to figure out what the estimated lifetime is of a *new* donor.
The most accurate method would, of course, be to measure the retention of a new donor as they continue giving through the years. That is, what is the 2011 retention rate of a donor acquired in 2010? How many of those remain for 2012? Then 2013? Then 2014? And so on.
We may rather approximate. One way we could do this is to modify our estimated donor lifetime calculation to have a different first year.
How do we do this?
Let's say you have an overall retention rate of 50%. If we calculate using the general method, we get 1 divided by 0.5, giving us an estimated life of 2 years. We want to deal with new donors, though. Let's say they have a first year retention of 20%.
Our new formula would be 1 + [first year retention rate]/[overall database retention rate]. This assumes that once retained for a year, those donors tend to have a retention rate closer to the overall database retention rate. The difference is significant, though. In this case, we get 1 + (0.2)/(0.5), which gives us 1 + 0.4, or 1.4.
Our first formula gave us an estimated 2 year lifetime. The second gave us 1.4. Using the first formula gives us a 43% overestimation, and in turn would give us an equal overestimation on our estimated donor lifetime value. That could be the difference between going forward with an acquisition or not.
More about retention rates
If you are interested in dealing with retention rates in the short and long terms, especially when breaking up data into parts like "new donors," I have a 3-part video series that gives an overview here:
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