In my last post, I mentioned how it’s “not uncommon to find that 80% of a nonprofit’s donorbase might be made up of one-time givers, while only 20% of it’s donations come from those one-time givers.” I also mentioned how obvious it seems that donors tend to become more valuable the more often they give (I recall using the word “duh”).
Let’s Dig In
But let’s dig a little deeper into this phenomena. Take alumni giving as a case study. The gold standard of alumni giving is to get those grads to make 3 gifts. “Third time’s the charm,” as it was were. Now, there’s nothing actually magical that happens after three gifts—this isn’t Beetle Juice. But there is something… funny… that happens when you focus on increasing repeat donations; we call it the Z factor.
The Z Factor
To be clear, there is no causal relationship between number of gifts and lifetime value of a donor. A donor who gives $10,000 once has a higher lifetime value than one who gives $10 five times. Math is fun. And yet as we’ve covered, the Pareto Principle holds true for nonprofit fundraising, and there is sector-wide data that demonstrates, for some reason, a positive correlation between those two measures: as donors’ gifts increase, so too does their lifetime value. We believe the correlation is caused by a third factor, the Z factor.
Excuse me while I third variable for a moment..
To nerd out for a second, this phenomena is called the “third variable problem”. Essentially, by focusing on X, you inadvertently influence Z, which makes Y happen. If our X is number of gifts, and our Y is lifetime value, then the third variable problem says that Z is what makes lifetime value go up as number of gifts increase.
The problem with trying to influence Z is that Z is different for literally every individual in your donor base; Z is that spark (remember our fire?) that gets them to give.
Lucky for us though, by simply strategizing how to move the needle on X, Z takes care of itself. This means that our prior prescription to focus on moving your one-time donors to give once more holds true as a strategy for increasing LTV because of the Z Factor. Put simply, once an organization grows beyond a couple hundred constituents, it becomes virtually impossible to manually track the Z factor—that’s where a CRM comes in. The more your team and tools are able to keep track of X and Y, though, the less you have to worry about accounting for the highly-variant Z (at least for the bottom 80% of your donorbase where the numbers start to get unwieldy—you can and should have a sense of the Z factor for your major donors).
How to Track the Z
At Totem, we’re developing processes to help track the Z factor directly across your entire donorbase, so you can know the “why” (which translates to an increase in Y… sorry couldn’t resist) for everyone who has chosen to support your cause.
Co-founder and CSO who puts the Z in factor