While the outside perspective of this company would be that it was constantly trying to be profitable through these blast/shotgun mass marketing strategies and that this was what drove the company’s revenue, the truth is that the company was successful more for what they could upsell to existing customers. Since all of the company’s first time sales came through the direct marketing route, customers had to send in reply cards indicating their interest in purchasing a product. These reply cards were all uniquely coded, allowing the company to track just how well each individual ad was doing. And, since customers had to be mailed the product, the company then had each customer’s contact information.
Once an individual made one purchase through the company’s mail order system, they were in the database. The company had deep product lines for certain affinities, so if you bought an Elvis Presley watch, they knew to mail you an ad for the next best Elvis product, perhaps a plate or a cuckoo clock.
While the large majority of the company’s sales came from retained customers, the company was able to invest heavily in new client acquisition. Why was this?
Many companies struggle with making a case for support for advertising spending. How can one figure out the ROI? Well, my previous employer had created an algorithm to estimate how much income could be expected on future purchases from a brand new customer. This was called a lifetime value estimate. When the company looked at the ROI on any magazine ad or newspaper insert, it could look at the direct value of placing the ad (how many sales of the particular product that was advertised came in from that ad), but could also look at the expected lifetime ROI (the sales from the ad, plus expected additional sales to those new customers for other products).
Annual Giving is an industry that shares a lot of similarities with the direct marketing industry. There may be a high new donor acquisition cost, but what is the expected lifetime value for each of those new donors? How could this be calculated? If your department had a lifetime value calculation, how would this information be beneficial? My guess is the lifetime value for each new donor to an annual fund would be quite substantial, even when accounting for outliers, and removing the big time 8 or 9 figure donors, the average lifetime value for a new donor would probably still be in the high 5 figure range.
If Annual Giving departments were able to utilize a somewhat accurate lifetime giving number, this could switch the stakes when having internal discussions related to future budgetary dollars. How much easier would it be for you to tell your VP that you need to increase your budget to launch a giving day or a volunteer driven initiative or a new software purchase if you could show that for each donor that would be brought on board, this would result in an additional $20,000 over the course of that donor’s lifetime?
Here are a couple of suggestions for how to get this type of estimate started:
- Break your constituents into three groups: Alumni, Parents and Friends
- For each group, look up all constituents (alumni then parents, then friends), that made their first gift to your institution 35 years ago.
- Eliminate anyone who has lifetime giving of more than a certain dollar amount ($5 million, $10 million, etc). While this would seem to skew your data, it will make it more based on annual giving, and not on major giving from a few individuals. This will lower your number, but make it more believable to your higher ups, and will ensure your data isn’t skewed based on one or two people.
- To double-check numbers and make sure the class you are looking at isn’t a complete outlier, complete this same analysis for the 34 and 36 year class. Are these numbers in a similar range?
- Determine the average lifetime gift size for donors from each of these classes.
- Account for inflation to determine what your lifetime value 35 years out would be now.
- Of course, you could choose to show an ROI for 15 years out, or 50 years out, it is up to the department.
However you determine to calculate a lifetime value of new donors, as long as you can back up your analysis with a well thought-out reasoning, your department will benefit in the end.