fundraising industry

Provocative Thoughts on Donor Retention Math, and a Homework Assignment

There’s one big metric that is measured in most nonprofits: the “retention” rate. [See here why I think that’s bad terminology.]

Generally, the nonprofit sector has a problem with this. Most donors who give one year don’t give the next. The current benchmark is under 50%. That means fewer than half of those who give one year will give to the same organization in the next year.

But overall, philanthropy isn’t really growing or declining. In the United States, it’s been hovering about 2% of Disposable Income for the last 3 decades or so.

This basically means each year, the same people give, about the same amount, to charities (mission-driven organizations). They’re not giving more, or less, they’re just giving differently than the year before.

So, most of your effort spent acquiring new donors, or re-activating lapsed donors, is wasted. Because, in another year, you’re going to have to do it all over again.

Let’s Get Mathy

(Yes, that’s a bit of a play on my name. Sue me.)

The 50% retention affects you like this: if you just set a group of donors who gave a total of $100,000 this year on autopilot and let them run, the next year you’d receive $50,000. The year after that, $25,000. And then $12,500, $6,250, and $3,125. That’s the 5-year value with a 50% retention rate. Let’s call that $96,875 the baseline that you could get in the next 5 years (after the initial $100,000 “acquisition” year).

So, what happens if you increase your retention rate a little bit? Maybe instead of 50%, you have 55%. Is it that big a difference?

YES.

Year 2: $55,000;

Year 3: $30,250;

Year 4: $16,638;

Year 5: $9,150;

Year 6: $5,033.

Now, the 5-year total is $116,701.

That’s an increase of over $19,000. That’s a lot of money, for not a lot of change. Just 10% more donors sticking around each year (55 vs 50).

What Would You Be Willing To Spend In Order To Keep An Extra $19,000?

So how do you apply this kind of math?

Well, the first step is to start making projections. It’s easy to get into the habit of looking only at one year’s worth of data, or this year’s budget, or last year’s gift, and ignore trends or forecasts. Don’t do that. Go deeper. Start measuring you retention rate and making long-term projections to see what you can reasonably expect in the future.

A second aspect is to consider what you might have to do to get that additional retention. Because, let’s face it, doing what you’ve always done has gotten you to your current 50% value. You need something different, and that probably means spending money. On donor appreciation events, or another fundraising staff member (maybe part time) to make personal phone calls, or an extra mailing in the year, or whatever.

A good way to think about this is to decide what additional programming value you want to create from additional funds raised. If it’s that you want to get $5,000 additional value out of that $19,000, then you have $14,000 with which to do it. If you need $15,000 additional value, then you need to make it happen with $4,000.

Here’s how the math works out: Returning $19,000 (net $15,000) for a $4,000 spend (to improve retention from 50% to 55%) is an ROI of about 390%. Alternatively, it’s a Fundraising Ratio of a little under 40% (or Cost to Raise $1 of under $0.40). You may think that’s too high, but it’s not. It’s totally worth it. Because you brought in waaaay more money than you spent.

Another Example, Please

Or, you might need to think about it like this: if you need $15,000, what’s another way to get it? Well, suppose you’ve done some analyses and you feel you would need to spend $30,000 to increase retention enough to net that $15,000. How much do you need to increase retention then to get that additional $15,000? You’ve obviously got to figure out a retention strategy that’s going to work to bring you $45,000 additional money over those 5 years. Turns out that’s about a 61% retention rate. So, will your $30,000 spend increase your retention by 20% (61% / 50% – 1 = 0.20)? If not, you’ll need to find more efficient ways of doing it.

Working Out The Math

Spreadsheets are great for creating these solutions. You can use them to play around in just a few columns to see different projections with varying retention percentages.

Begin with your current retention rates, and project that out to an immaterial amount. Above, I went out for 5 years, and that seemed small enough relative to the initial cohort of $100,000. As you increase the retention rate, though, you’ll see that cohort of significance extend later and later.

[At that point you will probably also want to start adding discounts for interest, but that’s a bit more technical and doesn’t materially change the discussion, just the magnitudes of the numbers involved.]

For example, it takes about 7 years at a 50% retention rate to drop the annual giving to under $1000 ($781 in year 7). At a 55% retention rate, not only is each year’s value higher ($19k in the first 5 years above), but it takes longer to become immaterial. There’s a whole additional year of material giving at this level ($837 in year 8). And as you increase the retention rate more, the compounding effect gets greater and greater. A 60% retention rate adds 2 more years, and an 80% rate doesn’t become immaterial until year 21. Talk about impact.

Your homework challenge is to figure out the differential in giving that would come from that 80% retention rate, and then determine how much you could spend to improve that retention in order to have a Fundraising Ratio of under 50%.

Knowing what some of the possibilities are can enable the discussions you’ll need to have with your entire fundraising staff, from front-line to directors, on where your priorities should be and what you might need to do to materially change your results.

Conclusion

The point is, a small change in your retention rate can have a big impact. If you know just how big, then you can know just how much you can spend, and should spend, to make that happen. Until you start working out the math to actually make the changes, though, it’s going to feel like you’re forever running in place.

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When you just tryin’ to keep up

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