WORTH

Why Charity Water Doesn’t Have a “Donate Now” Button
Why it’s important to do things from your supporter’s perspective, not yours.
Short and sweet.

 

How to Budget Across Channels for Maximum Revenue

Condensed from a presentation at the 2014 American Museum Membership Conference
Steve Sullivan, The Weekly Nugget

How do you know how much to invest in each channel you’re using? How much of your budget should you spend on digital? Should you be abandoning direct mail?

One goal to rule them all
It’s far easier to make decisions when you know what your goal is. Are you primarily trying to engage people in your mission? Is your program growing and you need maximum revenue? The most number of customers or supporters? Or do you have a mature program and want the most effective use of your money?

Being clear on your one overriding goal, among all the objectives you have, greatly simplifies decision making and keeps you on track. Write it down and stick it to your monitor.

The importance of efficiency
The key to budgeting is figuring out the most efficient use of your limited resources: how to reach the most potential supporters or customers in the most cost-effective way to gain the most revenue or engagement. Two important metrics can help: Lifetime Value and Return on Investment.

What is a supporter worth?
Lifetime Value (LTV) tells you what a supporter is worth. It’s a simple calculation: just add up all the revenue your supporters will generate during the average time between their first gift or purchase and last, and then subtract all the expenses directly related to finding, serving, and keeping them. That figure, divided by the total number of donors, gives you the net revenue for each supporter, or their lifetime value. You can calculate it for your entire program or subgroups of your supporters, such as how they joined. This allows you to better understand how much it’s worth spending to bring on a new supporter than looking at their acquisition cost alone.

Usually, you’ll find that for most new supporters, their LTV far outweighs the cost of acquiring them in the first place. But not always. Imagine a first-time donor or member who gives once and is never heard from again. Their LTV might be negative, and you have actually lost money. That should be the exception to your typical donor, or your program is in trouble. Lifetime value helps you with long-term planning and gives you a better understanding of which type of supporter is most valuable.

How much are we making?
For more immediate decision making, Return on Investment (ROI) is very useful. ROI is calculated by taking the total revenue of an audience segment, a campaign, or a channel, and dividing it by the total expenses for the same (Revenue ÷ Expense = ROI). ROI is another way of showing how much money you’re getting in return for every dollar you spend. If it’s over $1.00, you are making money, if below, you are not.

ROI is a simple, easy way to equalize comparisons, to make apples to apples comparisons. How did this group of people perform during different campaigns? How did each channel perform last year? Otherwise, it’s hard to compare a 100,000 piece acquisition mailing’s results to 1,000 acquisition emails and know which ultimately was more profitable dollar-for-dollar, or which is the more efficient use of money. It’s especially helpful to compare segments within a campaign.

An example of ROI in action is tracking renewal performance. Each additional notice you send the same group will nearly always have lower results. Knowing how many notices to send is easy if you track their ROI on a regular basis. If you want maximum revenue and renewals, and you test adding an addition notice and are still making money, it’s worth keeping. It might even be worth testing adding another. Monitoring ROI is an easy way to see when you’re close to breaking even or losing money.

How much can we make?
Most leaders prefer that each and every tactic, campaign, or channel make money. But that isn’t always the best thinking. If your goal is to maximize revenue, it can be a smart investment tactic to purposefully go into the red and lose money. By carefully pushing the limits, you’ll gain more supporters than you would have. If you know the LTV of those people, you know what their long-term worth is, and it’s often worth losing money to gain that future revenue. Doing this consistently over the years will compound your revenue growth.

For example, spending $125 to acquire a new supporter that only brings in $85 the first year means a net loss of $40 (an ROI of $0.68). However, if you know that this group’s lifetime value is a net $252 over 5 years, including the initial $125, it’s clearly an investment worth making. By knowing the lifetime value of your supporters, combined with their annual ROI, you can much more easily make the case to your leadership for more acquisition investment. That’s rarely wasted money.

What’s the true impact?
When you measure ROI you are measuring direct results, those people who directly responded to your appeal, campaign, or channel. Yet that isn’t the full story, especially as more people channel hop. You send out a mailing, and they make a gift on your website, for example. You generally can’t track this, so you don’t really know the full impact of your investment. One way to get a clearer picture is by doing a Matchback Analysis. If you have an original group of people you’re soliciting, you can match back all the eventual transactions after a set time period and see who responded.

At our zoo, we match back the list of new members who joined during our summer season to the original lists of people who received our spring new member campaigns. This eye-widening stat gives us a much fuller perspective of what impact the campaigns had. Now, it would be misleading to attribute every new join to those original campaigns, but then again direct results are not fully accurate either. Both metrics give you a couple of guideposts to help you understand how your investment truly paid off.

After all, just because only 2% of your mailing produced results doesn’t mean the other 98% was wasted. Many of those letters make a brand impression that can lead to a gift or join later on. Knowing the direct ROI and the matchback ROI helps you make better decisions about your (or a case for) investment.

A caveat
ROI can be misleading when it comes to budgeting. Obviously, some channels are going to have amazing ROI compared to others. Email tends to have a very low cost, yielding a misleadingly high ROI, for example. You might not want to budget based on just that figure. You also have to look at whether you have enough people to solicit by that channel and a high enough return to reach your goals. Otherwise, you may need to continue to invest in other channels. This is one reason why direct mail continues to be the mainstay moneymaker at most nonprofits.

It’s also worth considering lifetime value as well. Some channels perform better than others over the long term and are worth more investment. In our LTV analysis, we found that gate sales—which are 60% of our overall sales—have by far the lowest LTV. This makes sense, since many of those transactions are spontaneous and those members are less committed. They renew at lower rates and spend less over time.

Mail and web sales, by contrast, have much higher LTV. There is a higher barrier to joining, weeding out the less committed, and you end up with higher loyalty. So despite the high cost of direct mail, over the long term those members boost our renewal rate and bring in far more revenue and mission engagement member-per-member.

The big picture
ROI isn’t the be-all end-all metric, but it is a handy and easy way to look at the effectiveness of segments, campaigns, and channels. It’s a good way to know where to invest your money, and how much to invest. Especially when combined with lifetime value, ROI is a solid tool to help make decisions to maximize revenue.

 

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