Vetting for Value
Understanding donor value is key to measuring effectiveness.
June 2006 By Tim Burgess
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The question was simple and direct: “What’s the best way to evaluate our fundraising programs for efficiency and effectiveness?”
The questioner was a nonprofit fundraising executive who had a wealth of experience and an impressive track record of success. Without a doubt, she knew her stuff. But despite her experience, she and her colleagues didn’t have a firm handle on what parts of their program were producing the best long-term results. They’re not alone.
Many nonprofit fundraisers don’t have a solid understanding of how their decisions are helping or hindering the effectiveness of their fundraising. And that’s because they lack the factual information they need to make wise
decisions.
Net present value’s power
Every salesperson, no matter the industry, knows the importance of net present value. A car dealer knows exactly how much he can spend to get a customer to take a test drive because he knows the potential value, or NPV, of that customer. The insurance agent knows how much he can spend to acquire a new customer because he knows the NPV of a customer’s
premium payments. The same is true for fundraisers, because they should know the NPV of new donors.
Simply stated, NPV is the long-term value of a new donor in today’s dollars. It’s a complex calculation that takes into account the costs of acquisition and of cultivating or servicing the donor over time. NPV is the equivalent of net revenue, and it’s a powerful statistic to understand.
Determining the NPV of donors unlocks a huge opportunity to treat them
differently, even to ignore some potential new donors because their value will never exceed the cost to acquire and service them. For example, a donor acquired through direct-mail acquisition with an NPV of $225 can and should be treated differently than a special-event-acquired donor with an NPV of just $89. A donor acquired from outside List A with an NPV of $189 is less valuable than the donor from List B with an NPV of $269.
Armed with solid NPV information, fundraising executives can begin to make fact-based decisions driven by precision of purpose.
Applying NPV to strategic decisions
With limited resources, where would you spend $100,000 for new-donor acquisition? Take a look at the table (Figure 1), which shows the NPV of donors based on their acquisition source. Clearly, all things being equal, the smart fundraiser will invest in acquisition source D because it will deliver the highest NPV to the organization. But without this vital information, many fundraisers would choose source B because it has the lowest cost of acquisition, or source A because it has the second lowest cost. Others might base their decision on percent response or average gift. While important, these latter statistics must always be placed in context with NPV.
Using NPV as your key management statistic will help you focus your limited resources on those strategies and tactics that will provide the best long-term return on investment. And that’s because NPV takes all the various metrics across all fundraising programs and boils them down to the one most valuable metric.
Organizations that take the time to determine NPV are the organizations that will achieve the greatest success. Consider the case of the organization (Figure 2) that achieved huge improvements in its acquisition and lapsed-donor reactivation efforts when it began to make decisions based on NPV. Its long-term value and NPV numbers soared.
To successfully measure the efficiency and effectiveness of your fundraising program, get a handle on the NPV you’re producing from your acquisition and donor-cultivation efforts. Then focus your campaign strategies in those areas where you can create the greatest improvement. You’ll raise more money by wisely and effectively investing where you will receive the greatest return.
Timothy Burgess is co-founder and senior strategist at direct-response fundraising firm Merkle Domain. Contact: tim.burgess@merkledomain.com.
The questioner was a nonprofit fundraising executive who had a wealth of experience and an impressive track record of success. Without a doubt, she knew her stuff. But despite her experience, she and her colleagues didn’t have a firm handle on what parts of their program were producing the best long-term results. They’re not alone.
Many nonprofit fundraisers don’t have a solid understanding of how their decisions are helping or hindering the effectiveness of their fundraising. And that’s because they lack the factual information they need to make wise
decisions.
Net present value’s power
Every salesperson, no matter the industry, knows the importance of net present value. A car dealer knows exactly how much he can spend to get a customer to take a test drive because he knows the potential value, or NPV, of that customer. The insurance agent knows how much he can spend to acquire a new customer because he knows the NPV of a customer’s
premium payments. The same is true for fundraisers, because they should know the NPV of new donors.
Simply stated, NPV is the long-term value of a new donor in today’s dollars. It’s a complex calculation that takes into account the costs of acquisition and of cultivating or servicing the donor over time. NPV is the equivalent of net revenue, and it’s a powerful statistic to understand.
Determining the NPV of donors unlocks a huge opportunity to treat them
differently, even to ignore some potential new donors because their value will never exceed the cost to acquire and service them. For example, a donor acquired through direct-mail acquisition with an NPV of $225 can and should be treated differently than a special-event-acquired donor with an NPV of just $89. A donor acquired from outside List A with an NPV of $189 is less valuable than the donor from List B with an NPV of $269.
Armed with solid NPV information, fundraising executives can begin to make fact-based decisions driven by precision of purpose.
Applying NPV to strategic decisions
With limited resources, where would you spend $100,000 for new-donor acquisition? Take a look at the table (Figure 1), which shows the NPV of donors based on their acquisition source. Clearly, all things being equal, the smart fundraiser will invest in acquisition source D because it will deliver the highest NPV to the organization. But without this vital information, many fundraisers would choose source B because it has the lowest cost of acquisition, or source A because it has the second lowest cost. Others might base their decision on percent response or average gift. While important, these latter statistics must always be placed in context with NPV.
Using NPV as your key management statistic will help you focus your limited resources on those strategies and tactics that will provide the best long-term return on investment. And that’s because NPV takes all the various metrics across all fundraising programs and boils them down to the one most valuable metric.
Organizations that take the time to determine NPV are the organizations that will achieve the greatest success. Consider the case of the organization (Figure 2) that achieved huge improvements in its acquisition and lapsed-donor reactivation efforts when it began to make decisions based on NPV. Its long-term value and NPV numbers soared.
To successfully measure the efficiency and effectiveness of your fundraising program, get a handle on the NPV you’re producing from your acquisition and donor-cultivation efforts. Then focus your campaign strategies in those areas where you can create the greatest improvement. You’ll raise more money by wisely and effectively investing where you will receive the greatest return.
Timothy Burgess is co-founder and senior strategist at direct-response fundraising firm Merkle Domain. Contact: tim.burgess@merkledomain.com.
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