Let's Raise Some Money
Insights from Karen Climer about fundraising and nonprofit organizations

In Acquiring New Donors, Think In Terms Of Lifetime Value

November 27th, 2013 by Karen Climer

A fundraising colleague sent me an email with some vague questions about fundraising budgets and acquisition costs.  Should direct mail be the highest expense?  Should we spend less on cultivation?  What about event costs?  The answer is a big fat, “It depends.” (Don’t you just hate that!)

Too many organizations think of fundraising expenses only on an annual basis.  The most common measure is the cost per dollar raised.  (i.e. it costs us 20 cents to raise a dollar)  That is a valuable measure, for sure, but it’s not the full story.  What’s really important is the donor’s lifetime value.

Roger Craver explains it better than I ever could.  He says:

“What if I told you Starbucks spends $1,400 to acquire a customer who starts off by spending $4.25 for a Caramel Frappacino®.

 “You’d say Starbucks is foolish — until you learned that the 20 year lifetime value of a Starbucks customer is $14,099.  That’s why, for the same reason, Amazon spends $240 to acquire a customer for its $69 Kindle … why insurance companies pay more than 100% of the first year’s premium to acquire a policy holder … and on and on.  If consumer companies didn’t invest this way — plus make the additional investment required to hold on to these new customers and convert them to long-term, committed customers — they’d be out of business.

 “The same holds true for virtually all charitable and advocacy organizations.  Failure to invest substantially in the acquisition of new donors and new members required to replace attrition and/or insure growth is a certain prescription for extinction.”

Sometimes organizations expect every segment of their overall fundraising strategy to make a profit.  That’s not going to happen.  You will “lose” money on acquisition this year, but will reap the rewards in the future.  Your smaller gifts are going to cost more (on a percentage basis) to acquire and renew than your larger gifts.  But you have to have the smaller gifts, or where will you find the major gifts?  Most organizations have experienced a check showing up for $50,000 from the estate of a person you’ve never heard of.  But more often than not, the major gifts and planned gifts start off as smaller gifts.

It’s important to measure segments individually, such as this event raised $250,000 and had $50,000 in expenses.  But it is also important to analyze the holistic fundraising plan.  For example, this weekend, many of the big box retail stores will sell consumer electronics at the break-even point or even a loss.  Yes, they will sell big-screen TVs for less than what they paid for them.  Why do they do that?  To get people in the door.  (It definitely works.  Already, people are camping outside of these stores.)

If Big Box Store measured the success of the weekend sales based only on the profits from televisions, the weekend would be very disappointing.  But Big Box Store factors the net profit on all products.  The loss on the television is just part of the marketing costs of getting you into the store.  If Big Box Store thought the way some nonprofits think, they would say, “We have to at least break even on consumer electronics.  We can’t price them any lower.”  They wouldn’t lose money on the TVs and video game consoles, but they wouldn’t sell as much clothing, sporting goods, and household items either.

Acquisition is like the TV losses – it’s expensive.  And yes, sometimes it costs more than the first donation is worth.  But it’s part of making the entire program a success.

Note to my colleague who asked the original question:  Please do not rush off today and allocate your entire budget to acquisition!  It’s only PART of the equation.  Next week, I’ll share some more thoughts about the cost of renewal and cultivation.

P.S. to everyone: If you ever have a fundraising or nonprofit question, you’d like me to weigh in on, feel free to email me.  It’s like the fundraising version of Ann Landers.  I always thought she had a neat job!

Posted in Acquisition, Fundraising Costs

One Response

  1. Ron

    This article is so right on. If every businessman would pay attention to the lifetime value of a customer, many customer service problems would go away. This is not only good advice for the fund raising industry. THIS IS GOOD ADVICE.

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