Net Present Value
Net present value (NPV) is a finance term that’s meant to help you decide whether an investment is worthwhile or not.
It’s pretty much the same for fundraisers, who can calculate NPV this way:
- Total projected lifetime giving from a donor (or group of donors)
- Minus the cost of acquiring the donor
- Minus the lifetime cost of cultivating the donor
When you calculate NPV on your donors, you’ll discover some amazing things.
Let’s look the NPV of a normal group of under-$10 donors:
So you know from the day you cash their first check that this group of donors is going to put you in the hole at an average of minus $24 each!
I don’t think anybody — including the donors themselves — would be happy with that!
There are several things you can do to improve this:
- Raise the average first gift, thus the projected lifetime giving.
- Lower the cost to acquire them, which you can do by either making it cheaper or more effective or both.
- Lower the cultivation cost by decreasing and/or spending less on it. This is the important part; you might even lower the cultivation cost on these low-dollar donors all the way to zero!
Now let’s look at a different group of donors, those whose initial gift to you was between $50 and $100. Their NPV calculation tells a different story:
That’s more like it! And you can usually make it better yet by spending more on cultivation.
NPV is really just another way of putting the Pareto Principle to work for your fundraising program. It helps you know with some precision how much more you can (or should) be spending on some donors, while also showing you how much less you can spend on others.
This can lead to a better overall response, better donor retention, higher return on investment — and you can afford to empower your donors in exciting ways.
NPV can also help you build smarter donor reactivation programs. It shows you that some donors just aren’t worth reactivating, while others are worth going to extra mile to do so.
So get out your calculator and start figuring. NPV is what you want to know!
P.S. Please share your experience by leaving a reply below. We’d love to learn from your experience.
P.P.S. I hope you’re using math in ways that make your fundraising more effective and profitable. Stay tuned to the Moceanic Blog for more information on this important part of the job of a fundraiser!