There’s no question in my mind that a great deal of the furor over the ‘high cost of fundraising’ on the part of the watchdog groups, the press, regulators and many nonprofits themselves stems from absolute ignorance.

Ignorance about what “acquisition” is, how it should be measured, and when or whether its costs should be considered acceptable.

Because the acquisition of new donors is essential to maintaining and growing virtually every organization, we all need to get much better at both understanding and explaining this essential process. The alternative is continued ignorance on the part of some watchdogs, implied scandal on the part of the press, panic and finger pointing in the boardroom, and angry, turned-off donors.

First, let’s take a coffee break.

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.

After all, donor acquisition is the well-spring, the feeder track, the seed corn (call it what you will) of a long-term financial development process that, if properly measured and executed, leads to highly profitable monthly giving (somewhat akin to 5 Frappacinos® a week?) … mid-level giving … upgrading to major gifts … and eventually sizeable bequests and other planned gifts. Each of these programs adds to the Lifetime Value of a donor base. In short, it is the profitable returns from these post-acquisition programs that provide the funds needed to move the mission forward.

Put another way, an organization might ‘lose’ $50 over and above the amount of a newly acquired donor’s first gift, but in subsequent years that $50 investment produces a mighty substantial return. In most cases a return far, far greater than any returns produced by the organization’s certificates of deposit or endowment.

Only by calculating the fundamental metric of Lifetime Value for your organization will you have what you need to design and steer an effective, productive acquisition program.

Do you know the 3, 5, 10 or even the 20 year Lifetime Value of your donors or members?

Roger

P.S.  Next, in Part 2 of Acquisition Costs and ROI we’ll deal in more detail with why this metric is so important. Why and how it should guide your decisions on premium vs. non-premium programs, and much more.

P.P.S.  Some resources:

• If you’d like to see the various ways Starbucks could calculate Lifetime Value download this infographic from Kissmetrics.

• Agitator readers can get the Lifetime Value of their files — and 4 other Fundraising Vital Signs — calculated free of charge by the analysts at our sister organization, DonorTrends. Allow 6 days.