Month: October 2015

Beyond RFM – doing intermediate-level segmentation

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By now, hopefully, you have seen the benefits of segmentation and the value of RFM as a preliminary tool.  But you have probably intuited a few of the flaws in it already:

  • The distinction between recency groups is sometimes artificial. Let’s say two people give $20 per year, one at the end of January and the other at the beginning of February.  The former would be at 13 months for a January mailing; the latter at 12 months.  A few days difference could mean that one gets mailed and the other didn’t.  (In fact, I’d love to test a segmentation out to 13 months instead of the standard 12 because of this; please comment or email me if you’ve done this, so I can share and illuminate myself).
  • The distinction between frequency groups is artificial. Your multidonors range from people who donate once a year over a series of years to people who donate to literally every communication they get.  RFM analysis gives these two people the same number of communications.
  • The distinction between monetary value is artificial. You probably saw this one coming, given the first two.  Which donor would you prefer – a donor who donates $10 ten times per year or a donor who donates $50 once a year?  RFM prefers the latter; I’m guessing you would prefer the former.
  • It carries literally no other information. The $25 dollar donation of today could be from someone who clipped coupons to raise the money to donate or Bill Gates divesting himself of what he found in one cushion of his couch.  What a person donates is an indicator of capacity, but it’s a blunt tool when a scalpel is possible.
  • You probably noticed I was talking only about the mail in examples. RFM doesn’t look at channels of donation, nor at the sensitivity of people to those channels.

Let’s address this last one first, as we look for ways to customize RFM more than using it alone.

Separate RFMs by channel. When you do your telemarketing list pull, you will almost certainly want to call deeper into your file to people who have made a previous telemarketing gift than those who you are trying to make their first gift on the phone.  Same thing in the mail: you may be willing to mail multidonors out to 48 months $50-99.999 for people who have given through the mail, but only to 12 months or 18 months $50-99.999 for people who have only given online or on the phone.  Separate RFMs by channel will help you make these determinations.  Remember that you are looking to make sure that you have a strong multi- or omni-channel program, but that doesn’t mean you have to be agnostic as to channel of origin or preference.

Cadence analysis.  This goes to your $10 10x versus $50 1x donor example above.  You have to figure out who likes/needs multiple communications to make a gift or gifts and who doesn’t.  Some ways you can do this:

  • Look at how many types of offers you have going to a person in rotation; hammering the same key on a piano over and over isn’t music, nor will the same approach be music to your donor’s ears.
  • Take a look at how many times you mail someone in acquisition. Sometimes chronic non-responders need a different offer (as with rotating your offers above), but you can also see whether someone after seven or 17 or 27 times of getting a message from you means they almost certainly won’t donate and you can bless and release.  The same holds true for your lapsed donors as well.
  • Test consistent communication versus no communication versus resting periods to see what happens when you try different cadences.
  • Look at frequency of gifts within a certain period of time, rather than ever. You can see dramatic results sometimes by decreasing your mailings to your one-time-per-year donors versus your multi-per-year donors.

Mission area: I mentioned this when discussing customization types, but tailoring your communications toward the area of your donor’s interest is also a legitimate segmentation target.  Why would you send that advocacy alert to people who care only about your work in schools or your calendar with pictures of dogs to your car people?

Income: If you don’t want to ask that millionaire for $17, a wealth append can get you the information you need to customize your ask strings and communications strategy.

Location: Zip codes are the poor person’s income append and can be free-ish, so that’s a potential win.  More often, though, you can use zip code modeling to breathe life into underperforming acquisition lists.  Simply find your top X percent of zip codes from your current file and ask for just those zip codes from the rental list.  It will be slightly more expensive to rent per name this way, but it can provide a 20%+ lift in response rates and/or average gifts.  This is also a way to test new lists while minimizing risk.  One caution: you don’t want to do this for all lists or you risk self-limiting your acquisition strategy.  If a list works well for you across zip codes, use the whole thing – that way you give yourself a chance to be wrong about a zip code long-term.

Demographics: Some nonprofits find that different messages work better for men versus women.  Age can also be helpful, as you work to avoid sending your one millennial donor your planned giving brochure (there’s optimistic and there’s delusional…).  With demographics, backtesting makes initial sense, where you see how people of different demographics responded to previous appeals and messages, then use that data to define your strategy.

Previous responsiveness: It sounds obvious, but it’s ignored by CRM: if someone like getting your calendar three years ago, they may like getting it again.  Replace “calendar” with member card, action alert, survey, etc., and you have the makings of a profitable add on to your usual list mix.

Those are some of the things you can add to spice up RFM.

I said at the beginning that this was intermediate segmentation.  Advanced segmentation is modeling.  The hacks above will help get you many of the benefits of modeling at a fraction of the cost, but it won’t get you all of the benefits, so definitely leave yourself open to building smarter and smarter donor modeling solutions.

Any other segmentation recommendations you’ve seen work?  Please leave them in the comments.

Beyond RFM – doing intermediate-level segmentation

My new book

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This is apropos of absolutely nothing in the nonprofit direct marketing world and I will have a normal post later today.  However, I did want to let you know that:

  1. My first novel has been published online.  It’s called Underling, and it’s a dark workplace comedy, where the workplace happens to be an evil mastermind’s lair.  Very much an homage to a certain British secret agent who will remain unnamed for copyright reasons.  It’s $2.99, because I can’t make it any cheaper yet. Mostly, I want to put it out into the world and see if people like it as much as I liked writing it.  So, please take a look here.
  2. In honor of the first novel being launched, I have made my other two books free of charge on Amazon through Saturday the 31st.  They are:

    Did I mention they are free for download?

  3. Finally, I’m making the prologue of the new book available below, so you can tell if it’s your particular cup of tea.

Prologue

It was considered an honor to be able to guard this particular room on this particular day. Benny knew it was really a great danger. He was senior enough to be competent, but not important enough that it would be a loss to kill him if things went wrong. That said, death might be a blessed respite from this management consultant droning his presentation with an unceasing march of complex, unnecessarily colorful charts. There is a reason no known language has a common simile “as beautiful as a pie chart.”

“On our SWOT analysis, we’d looked at our guards as an area of weak-ness.” The consultant said the last word slowly, as if he was explaining to a group of kindergarteners that it meant “things you aren’t good at.” “Let’s mind-scape some ways to turn this weak-ness into an op-por-tun-i-ty,” gesturing from the upper right to lower left quadrant of his slide.

The consultant wasn’t really sure if mindscape was a word and, if so, if it was a verb, but he’d found that if he said it instead of “brainstorm” or, even worse, “think about,” while wearing an expensive suit and glasses he didn’t need, he could increase his fees. This gig was certainly a bit unusual, in that he arrived at location blindfolded. And he didn’t quite know why he was being paid to deliver this presentation to this motley collection of nerds, knuckle-draggers, and freaks, rather than just talking with the big boss. He did know he was being paid handsomely for the gig, half up front, half after completion.

Dr. Frederick von Schlaukopf thrust his hand into the air, lifting out of his seat. Mike, Benny’s boss, leaned over to Victor and whispered “Chill, Hermione.” Victor chuckled.

But the consultant was happy to have audience participation and gestured to invite comment. Frederick straightened and permitted himself an almost smile. “I belief ve have overlooked ze potential for ze creation of supah genome soldiers zru ze use of ze nanobots.”

Mike Richards rose to his feet. When it looked like he was done rising, he rose another few inches. Then he brought his shoulders back to look even wider than before, his gray T-shirt on the verge of surrender to the muscles of this former boxer. He growled “We’ve been over this. You keep your needles away from my men, Freddy.” The target of these words shrunk back a bit.

Benny felt a warm wave of affection wash over him for Iron Mike. He’d seen what had happened to test subjects in the past. Even for this place, the German was a bit off.

Winston, the new head of human resources, jumped in with a query about whether they could use robot guards. Kevin, the IT whiz kid, snorted dismissively and said “Costa Rica.” Everyone except Winston, the guards, and the consultant acted as that closed the matter. Wei Fung leaned over to Winston and started to explain in a whisper.

The consultant realized that he hadn’t spoken for at least a minute and jumped back in. “I appreciate all of the outside-of-the-box” (here, he used his two forefingers to trace and illustrate the concept of “box”) “thinking, but I was thinking more about empowering the guards and allowing them more initiative.”

Mike showed Victor a drawing he’d done on his scratch pad of the consultant in considerable pain wrapped in the clutches of a giant snake. Victor snorted a laugh and passed his pad over. His drawing was a bit more rudimentary — having two mechanical arms impedes fine motor control — but it appeared he had drawn the consultant being thrown from a helicopter. Benny saw the exchange and bit his lip to prevent some un-guard-like laughter.

Cesar Aguilar, second in command over the guards, asked the question that the consultant was dying to be asked: “What do you mean… empowerment?”

“Well,” the consultant said, steepling his hands, “Zen Master Suzuki Roshi once said that to control your cow, you need to give it a bigger pasture.” He was proud of that quote, and it showed as he puffed up. He’d found it on a Web site of quotes about empowerment. He had even Googled to make sure that Suzuki Roshi wasn’t really a model of car. That, he felt, was dedication to the craft. “That’s the idea behind empowerment. You allow decision-making at the lowest possible level and, at your strategic level, you set goals, not dictates. That gets you to what I like to call The Empowerment Enclave.”

The SWOT slide zoomed out, rotated, and came back with a slide that had rainbow-colored concentric circles. Arrows ringed the circle interspersed with words like “Trust,” “Values”, and, of course, “Innovation.” The slide duly noted that The Empowerment Enclave was a trademarked phrase, with its own logo.

“In my analysis, these guards have been used as… um…”

Cesar jumped in. “Meat shields? Drones? Mouth-breathing lackeys?”

The consultant reddened a bit (as did Benny, but no one noticed him). “Drones is probably an accurate term for it. In essence, they have not been used to their full potential. For example, I’ve identified a lack of proper safety protocols…”

A guard was walking briskly down the hallway, speaking down into his collar mic. Victor came around the corner, followed by Benny and another guard. Victor and the guard walking against him collided at speed. The guard flew back over the edge of a gantry where any reasonable planner would have put a railing. There was none. The guard fell into the area where R&D was testing their giant subterranean drill. Benny looked over the edge to see what had happened.

The mess was serving spaghetti for dinner that night. Benny didn’t give the meal a second look or a first bite.

“Secondly, while I understand the need for military efficiency, the desire to control the minute details of their lives seems out of step with maximum effectiveness.” Benny agreed. Not that he wanted to grow facial hair, but a total ban seemed odd.

“C, guards have no input on the organizational decision making. You need to take your organizational pyramid (the next slide looked like the pyramid slide that is in every consultant’s presentation, from nonprofit donations to needs taxonomies to healthy eating) and turn it upside down. You work for the guards. What do they need from you to succeed?”

Just then, a green light that had been on over the consultant’s head turned to red. Z had been listening. Of course he’d been listening.

Cesar jumped to his feet, his face full of scars glinting in the change of light. “Thank you, sir, for a fine presentation. Let’s all give him a hand,” he said, with the hint of a smirk aimed at Victor. Victor gave him a death stare back. The audience, except the guards, who refrained from muscle movement, smattered applause. “We know your time is valuable, so we need to get you to your boat.”

The consultant briefly protested that he hadn’t even gotten to his section on social media recommendations.

Victor stood and said “Come.” The consultant shrunk an inch and complied. This man with the metaphorical iron jaw and literal iron arms scared him deeply. Victor ushered the consultant roughly through the door while ducking to avoid the top of the door frame. There was a rumor that the base was supposed to have eight-foot doors in all locations, but a builder used standard frames. This was supposedly to Victor’s great regret, who then made it the great regret of the builder.

Cesar, Benny, and the other guard (Vassili, Benny’s bunkmate) followed behind. Cesar threw an arm covered in tattoos over the consultant’s shoulder and talked like a hyperactive tour guide, pointing vaguely to the galley and the restrooms (“it’s called the head here!”) and the nuclear reactor and the server room as they sped-walked by.

They piled into an elevator, which ascended slowly while playing an orchestral version of “Walk This Way.” The elevator emptied out onto a short hallway, leading to a harbor. Cesar gestured the consultant onto a boat and traveled out about 100 feet. Then, before the consultant could protest, he was heaved effortlessly by Victor’s bionic limbs into the water.

The thoughts from the consultant were rather chaotic after that, along the lines of:

So that’s why I didn’t have to wear a blindfold it’s a giant glacier or is it an iceberg which is it when they break off iceberg like Titanic but it’s a ship too must swim back maybe a joke very cold clothes wet should take off clothes can’t swim have to stay above (gasp) so very cold shoes heavy clothes (gasp) heavy climb iceberg ship slick (gasp) must stay up must swim can’t swim (gasp) no arms legs (gasp) shit.

Cesar turned the boat around and returned to the harbor inside the tip of the ersatz iceberg. He cracked a grin and said “Glad we put him on ice!” Victor stared at him, then turned and lumbered off. Cesar backhanded Benny’s chest and said “On ice! Oh, I kill me!” and wandered off.

Not for the first time, and not for the last time, Benny wondered what he’d done to deserve this. He knew his sins, knew their variety, scope, and number. Some of them woke him up at night; others got laughs when he told them in the mess hall. But what do you do in your life to deserve to be an underling on Commodore Zubrosky’s fake iceberg-base?

Thanks and you can buy the full thing here for $2.99.

I’ll be back to the regular stuff later today.

My new book

RFM part 2 – segmentation goals beyond net revenue

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From yesterday, we had a sample membership mailing with these results from last year, and we were going to cut any segment that didn’t get $.33 per piece or more, since that is what the piece costs.

To do so would actually cost us dearly.  As we discussed this week, there are more goals than just the immediate gaining of revenue.  Looking at mail pieces alone with a “here’s a piece; here’s another piece” mentality can ignore what other things a mailing can do for you.  Let’s take a look at this chart of historic gross per piece by segment with two ideas in mind: groups we want to invest in and testing opportunities.

RFM Gross

Take a look at our $50-99.99 37-48 single donors.  They have an anemic response rate of .3% and an average gift of $80, so they would only gross $.24 per piece to mail to (and thus lose $.09 for each piece sent out).  Should you mail these donors?

There are some organizations that would say no – they think that every segment should net positively in a donor mailing or that they should only do no net cost acquisition.  I’ll try to demonstrate why I think these people are wrong.

With a response rate of .3%, it would take 333 1/3 pieces to generate one donor.  At a net loss of $.09 per piece, that’s a cost of $30 to acquire that donor.  Chances are that that is higher than you are spending in your acquisition mailings to get new donors.

But you aren’t acquiring just person off the street.  You are getting someone who then slots into the 0-3 $50-99.99 M segment for the next mailing.  You can see if the person got this mailing again for their next one, they would be predicted to gross $3.62 per piece sent to them or people like them, which is very nice.

Let’s run the numbers assuming that their average gift is $50, your retention rate per year for lapsed reactivated donors is 50%, your retention rate per year for multi-year donors is 70%, and it costs you approximately $10 to mail your $50-99.99 donors for one year.  To make the math easy, we’ll assume only one donation per year (it should higher) and we’ll assume that any donation is worth a net of $40 knowing the mailing costs (in reality, you would want to look at both the possibility that someone will give multiple times per year and that you will have to mail someone even when they don’t give).

This works out to:

.5 * 40 + .5 * .7 * 40 + .5 * .7^2 * 40 + .5 * .7^3 * 40 … .5 * .7^n * 40

(Can you see why I simplified the math?)

What this basically says is that there’s a 50-50 chance of getting any future gift from this person and they have a 30% chance of lapsing every year thereafter.  We aren’t using a discount rate because interest rates now are so low.

To simplify, it’s $20 + $14 + $9.80 + $6.68 and so on.  A bit of high school calculus later and this donor will likely return an average of $66.67 to your organization.  All for the cost of $30.

If you had a magic box where you could put in $30 and didn’t know what it would give you back, but knew the return would average over $60, you’d put money in.  I myself would ask if I could put in more than $30 to speed things up, like asking the genie for more wishes.

See the full comic and other fun stuff here

In general, your multi donors are going to be far better donors.  However, you need to communicate to single time donors in order to get those multi donors.  You also need to talk to those people whose last donation has been a while to renew them for future support.

The corollary to this is that you shouldn’t just look at this segmentation and see what to cut; you should also be adding back in.  Looking at these gross revenues per donor, you are probably (hopefully) wondering why you wouldn’t want to mail 7-12 month single donors of $100+, or deeper into your $1000+ donors, or more.  These are all correct thoughts.  Looking farther back into your pieces, you might see that someone has made the previous mistake – they looked at a small sample size of a $1000+ mailing, found that no one responded, and cut the segment.

Thinking further about this, you can see that perhaps the $1000+ donor shouldn’t get this piece, but they probably should be communicated with.  These are your best and best potential donors and there probably is a way to increase their value more so than not communicating with them.

Similarly, you’d love to renew those $15-$19.99 13-24 month donors, but this also isn’t the way to do it.  Now we are going to break out of yes/no segmentation and into using segmentation to create differentiated communications.  For simplicity sake again, we’ll assume that we have four treatments we are going to try:

  • This mail piece, plus a pre and post email, for our “normal” donor segment (red)
  • This mail piece with “lapsed” language, plus a pre and post email, for our lapsed segments (green)
  • A high-touch invitation-style mailing to higher-value donors with first-class postage to invest in getting their gift (with email and higher-touch telemarketing as well) (blue)
  • A prerecorded outbound voice mail campaign, coupled with an email ask to less valuable or less likely donors to attempt to renew them without high marginal costs. (yellow)

I’ve oversimplified here.  With the high-touch piece, we’d almost certainly want to test borderline segments part with the high-touch and part with the control to see if the additional investment is worthwhile.  You’d also want to test what segments telemarketing works best with.  And so on.  But for first steps, it’s directionally correct.

So let’s color in the mail plan with these four layers.

RFM four color

Note that you are able to contact more people with more appropriate language with this strategy.  Segments that a pure net perspective would have ignored are renewed in this new model and our most valuable donors are treated that way.

But that’s still just RFM with some embroidery on top.  It’s a fine model, but there’s more that can be done.  We will go beyond RFM tomorrow to add a few other pointers tomorrow.

RFM part 2 – segmentation goals beyond net revenue

The building block of donor segmentation: RFM

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Over 80 percent of nonprofit marketers know the term “communication segmenting” according to a Bloomerang survey.  Over 60 percent say they segment their files.  This means that almost 20 percent of them don’t know what segmentation is and 20 percent more know about segmenting, but don’t.

Let’s see if we can reduce those numbers.

Segmentation, as you can see from my last two posts, really is for everyone, regardless of the size of your file. We’ve talked about, obliquely, two different types of segmentation – yes/no segmentation (will someone be communicated with or not) and segmentation to help create versions or customizations.

RFM analysis can help with both of these.  It stands for:

  • Recency: Usually used as how recent was someone’s last donation to the organization. You may occasionally also look at their last interaction with the organization, but we can put that aside for now.  This is perhaps the primary driver of segmentation and, if there is an answer to the “how many people do we have on file?” question, it’s when it phrased as “how many people have donated to us in the past two years” or the like – with a time horizon and action attached to it.  Do yourself a favor and add “recency” to your Microsoft Word dictionary; you are going to be using it a lot and Microsoft Word doesn’t know that word exists.
  • Frequency: We go from the most often used to the most often ignored – how many times someone has given to the organization (or interacted with in non-donor contexts). This is often simplified to single v multi, as this dyad makes it easier to plan your communication.
  • Monetary value. This is usually measured by another TLA (three-letter acronym): HPC or highest previous contribution – what’s been the highest amount the person has made in any one gift. This is an area of some debate, as if someone makes gifts of $20, $20, $20, $20, $500, $20, $20, $20, and $20, it is fairly predictable that they are probably better grouped with the $20-$24.99 donors than the $500-$999.99 donors and their ask strings changes along with this (more on ask strings here).  One solution is to use a formula like 2/3 of their HPC + 1/3 of their most recent contribution or half of their HPC + half of the average of their last five contributions.  But this is something worth testing how it works best for your file.

Let’s do a yes/no segmentation with RFM.  We have a membership mail piece that has historically very well with a number of segments.  It costs $.33 to mail and you are looking for segments that net.  Here are what your RFM response rate, average gift, and gross revenue per piece would look like from last year.

Response rate:
RFM RR

Average gift:
RFM AVG

Gross per piece:
RFM Gross

(these are intentionally realistic, but false, data)

To explain, the first numbers are the months (so 0-3 is someone who last gave a gift in the past three months), S & M stand for single and multi (get your mind out of the gutter), and the dollar amounts across the top are that person’s highest previous contribution.

Looking at this, to maximize net revenue, we can cut some of the segments to lower HPC groups and to one-time donors.  Anything under $.33 per piece isn’t going to net us money.

This is a decent baseline that answers the question “I have this mail piece going out in February; to whom should it go to maximize the net revenue of the mailing?”.

However, we are going to look at it as “how do we maximize the value of this donor by treating them appropriately?” and layer in some treatment segmentation tomorrow.

The building block of donor segmentation: RFM

Wherefore segmentation?

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Yes, wherefore.  As long as we are starting from first principles, we can go a little bit Elizabethan.  In the one and only famous “wherefore” quote, Juliet isn’t asking where Romeo is (below the balcony).  Hers are existential questions – for what reason does Romeo exist and what cruel twist of fate made him a Montague, her family’s mortal enemy?

For more of this, check out my likely-never-going-to-be-written book The Bard Does Nonprofit Direct Marketing (All’s Well that Ends with a Donation).

But wherefore segmentation – why does it exist?  We covered a lot of this in the last post, but we’re going to be going into them more granular than that as to who gets what communication when.  Why are we doing this?

The simple answer is “to maximize revenue.”  In this world, every mail piece would be opened and responded to, every phone call answered, every email and online ad clicked upon and donated to.

In this world, the ideal model would be one that gets this 100% response rate – it would read people’s minds and get them the lowest possible cost means of communication to get the maximum gift at the precise right moment.

This is not a horrid definition and, in fact, that would be a really cool (if magical) model to apply.

But it ignores two things: how people give and what your goals are.

Let’s say you have a person who, every year, like clockwork, gives to your membership mail appeal every January.  She’s on your email list, gets your e-newsletter, and a number of other mail pieces each year, but only gives to that one membership mail pieces every single year.

Do you think she would still give to you if that was the only communication she got from you throughout the year?

Probably not. I once walked each year for an organization that will remain nameless.  Every year, I started getting emails from them a couple months before the walk encouraging me to walk (whether I’d already signed up or not) and I would stop hearing from them after the final walk email for another 10 months.

Please notice I say I “once” walked for this organization, not that I still do that.

The bottom line is that even the most loyal of donors (especially the most loyal of donors!) want to hear from you.  Look at Professor Adrian Sergeant’s surveyed reasons why someone stopped giving to an organization:

reasons for lapse

The full study is here; it’s real and it’s spectacular.

Many of these involve someone not being communicated with enough (not acknowledging support, don’t recall supporting, no longer needs my support) or not being communicated with effectively (other causes more deserving, not informing how money was used).  Now look at the bugaboo of many an ED or board member: inappropriate communications is less than 4%.  More people defect because we don’t talk to them than defect because we talk to them too much.  So we can’t do just the pieces that “work” for a person without cutting the heart out of our communications.

As mentioned earlier, it also ignores other goals you have for your direct marketing program.  In a classic, Mal Warwick’s The Five Strategies for Fundraising Success articulates there are five goals you can set:  Growth, Involvement, Visibility, Efficiency, and Stability (GIVES).  He further says these are to a large extent mutually exclusive.

I’m not going to ruin the book for you, but this is just to say that there are things you want beyond maximizing short-term revenue.  You may want to get long-term revenue, volunteers, advocates, awareness of your causes, and more.

So how do we restate our goal?  How about:

The goal of the direct marketing program is to maximize the lifetime value of each of your constituents.

This isn’t just financial lifetime value if you have other non-financial goals, but it likely helpful to help quantify what you are willing to pay to get, for example, an advocate in order to put everything on the same scale.

This is important to have as a definition because it will help you transcend many obstacles.  When should your direct marketing donors get a major gift officer working with them?  When it will increase the donors’ lifetime value (and shame on you for saying “your donors” – donors belong to no individual within an organization). Should your national office or field offices do communications to donors?  Well, which mix will maximize lifetime value? These will likely need to be tested, but won’t it be nice to have an objective answer to some of these?

We’re going to initially talk about RFM analysis, which takes a look at which donors should get which communications.  This is absolutely necessary as a baseline.  However, if you are looking to maximize the lifetime value of each constituent, you will have to look at things differently.  It’s a minor difference, but you will need to think of “should this donor and donors like them receive this communication?” rather than “who should this communication go to?”.  It’s when you get to the point of thinking about donors first and make your communication vehicles reflect that rather than taking your communications and seeing to whom they should go.

Wherefore segmentation?

Why “mail everyone” is never the answer

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I’ve had my first request – to talk about the basics of segmentation. Thanks and keep them coming!

The question will eventually come, if it hasn’t already: “how many people are on our list?”.  The answer?

The-Meaning-Of-Life

For those who may not get the reference, it’s from The Hitchhiker’s Guide to the Galaxy.  When assigned to find the Ultimate Answer to Life, the Universe, and Everything, the computer Deep Thought ponders this for 7.5 million years and comes up with the answer 42.  It then says that:

“I checked it very thoroughly … and that quite definitely is the answer. I think the problem, to be quite honest with you, is that you’ve never actually known what the question is.”

The question of how many people are on our list or in our database is similarly ill-formulated.  You may have a list of X people, but are you really going to ask for a donation the person who called your executive director a [redacting] [redacter] at the gala 11 years ago and never corresponded with your organization thereafter? So your list is X-1.  How about dead people?  You need them in your database so you know not to solicit them.  And so on.

Every time you communicate with these folks, you are losing something.  Usually, for methods like mail and telemarketing, there is an additional marginal cost for each person reached.  With email, there isn’t, so email tends to be the least segmented direct marketing method.  This, however, ignores that there is a cost for not segmenting an email file; the less people open your emails (and especially in cases where you are emailing an account that no longer exists or is checked), the more likely systems are to think you are a dirty dirty spammer and cast you down into the ranks of personal attribute enhancers, Nigerian princes, and your great-aunt who thinks that you absolutely need to know about the ecstasy-lased gummy bears “epidemic.”

The bottom line is that even when you aren’t paying the bill, you have every incentive to make sure your list is as trim as possible.  That means not communicating with the deceased, opt-outs, those with incorrect communication data (although you should be doing NCOA (national change of address), eCOA (electronic change of address), and corrective phone appends on those people you would still like to talk to), and those who have opted out of the medium (e.g., email opt-outs) or message (e.g., solicitation opt-outs).

You may think that once you clear those people out of your list, you should have a defined number.  However, different people are at different stages of interaction with your organization.  Here are a few:

  • Some guy (aka suspect)
  • Prospect
  • One-time giver
  • Multi giver
  • Sustainer
  • Mid-major donors
  • Major donor
  • Planned giving donor

These are frequently presented in a pyramid because there are only so many easy-to-use graphics in PowerPoint.  Some may say it’s because suspects and prospects are the base of the program and they grow from there in smaller and smaller numbers, but you and I know the truth.

The truth is that these are like the stages of grief, in that they don’t always apply, don’t often go in order, and abstract over significant parts of the donor journey. For example, take a look at the types of retention you should be measuring and you’ll see that there are categories – first-year, but not first-time, givers and reactivated lapsed – that this pyramid doesn’t take into account.  Similarly, you will see people who are major donors on their first gift, people who you didn’t know about who leave support to you in their will, and the former sustainer who no longer wants to support your organization.

I take inspiration from Stephen Jay Gould, who critiques in many discussions of evolution the ideal of progress or, worse, inevitability:

Progress is not merely a deep cultural bias of Western thought…it is also…the explicit expectation of all deterministic theories of evolutionary mechanism that have ever achieved any popularity, from Darwinian selection to Lamarckism to orthogenesis. I do not, of course, mean progress as an unreversed, unilinear march up the chain of being; Darwin did away with this silly notion forever. But even Darwinism anticipates that an imperfect, irregular, but general ascent should emerge from all the backing and forthing inherent in a theory based on a principle of local adaption to changing circumstances.

Stephen Jay Gould, “The Paradox of the First Tier.”

In reality, the donor journey isn’t a net gradual march from suspect to prospect to one-time donor, to multi-donor, and so on.  But the general theme of this – that you should treat different types of donor different based on what you want them to do for the organization, what they want to do for the organization, and their means and interest – is a good one.  A suspect and a potential major donor are very unlikely to want the same communication in the same way.

So there are some folks you may want to get some communications, but never others.  Other such groups:

  • Board members
  • Organizations
  • Recent donors
  • The people you serve
  • Public officials and opinion leaders
  • People who have requested a certain number of communications each year

That’s the broadest type of segmentation – what type of people do we want to include?  But we’ll want to increase revenues and save costs by sending the most effective communication possible. So in this week of segmentation, we’ll talk about the philosophy of segmentation, then start with a basic segmentation – RFM analysis – and build from there.

Why “mail everyone” is never the answer

Reactivating lapsed donors

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Getting lapsed donors to reactivate is second only to getting the second gift in terms of its importance on keeping your program from bleeding donors.

I often give Blackbaud a hard time, but the point in their report that you much treat lapsed donors differently is vitally important. The cost to (re)acquire is usually lower than the cost to acquire a new donors, and they almost always have better retention rates (remember how I said to track lapsed reactivation retention separately? This is why) and higher average gifts than a newly acquired donors. In fact, because of this, you should be willing to spend more to reacquire donors than to acquire them anew.

But at the same time, you can throw money away in lapsed reactivation just as easily as you can in acquisition. It’s little use to try to get someone back who, well,

He's just not that into you
Or she.

In an ideal world, you would be using modeling to find out which of your donors are most likely to reactivate. But in that ideal world, there would be no need for nonprofits, so it’s pretty clear we don’t live there. Yet.

So what can you do quickly, easily, and most importantly cheaply? Here are a few ideas:

Catch donors before they lapse. Look in your file for two things – people who don’t give as much as they used to and people who don’t give as often as they used to. You can view these folks as “relative lapsed.” They are telling you that they don’t value you as much as they used to relative to other charities or other things going on in their lives.

Identify lapsed donors who are giving to other organizations. An ideal way to do this is by joining list cooperatives, as recommended in the acquisition post. This will lead to the modeling discussed earlier. Another way of doing this is in your merge/purge process. As you rent outside lists, you run those against your file to make sure you aren’t paying for people who already have as donors. If you mark these donors who match outside lists, you will have a good indication of who are donating to other organizations (and, hence, are still alive and philanthropic generally). These lapsed donors will generally perform better than the average lapsed donors.

Identify people who just aren’t responding. Unfortunately, you can’t tell who is or isn’t opening an envelope and people may not answer a phone call for a few reasons not having to do with lapsing. However, you can tell who is and isn’t opening your emails. If you can run a report for people who haven’t opened an email in the past, say, six months, first of all, don’t email those people as much. This is a topic for a separate post, but just because you can email everyone at no marginal cost doesn’t mean you should email everyone. Suppressing these supporters for most emails will help your delivery and open rates and also help you specialize your tactics. The more salient lesson for lapsed donors is if someone isn’t opening your emails, yet their email address is still good, chances are they aren’t in love with your organization anymore and less likely to renew.

You also may want to see how many times you have mailed someone and see after how many times people in your file generally have their response rate fall off. If very few in your organization give after being solicited 24 times without a response, you may want to make this a part of your lapsed suppression criteria.

Go to the familiar. If a piece worked for someone before, send it or something like it to them again to try to reacquire them (whether an acquisition or a donor piece). This is why I recommend mailing deeper into lapsed categories for people who have given to that piece in the past. Similarly, finding messaging similar to what someone has responded to in the past makes someone more likely to respond.

Vary your messaging. This seems like it might contradict the previous one (and it does). But after so many times, messaging can also lose its effectiveness, so you might try a new tactic someone hasn’t seen before to attract them back.

Know who is worth getting back. Remember that lifetime value calculation? You will want to make sure that you aren’t investing to get people who will not pay back their investment in the long term. If someone donates $5 per year and it costs $5 to get that donation, then no amount of investment should be expended to get that person back.

So those are some retention basics in terms of technique. But the biggest thing is to treat your donors like humans – addressing your appeals to their desires and treating them politely and like an individual.

Thanks for reading and let me know if there are other topics you’d like covered.

Reactivating lapsed donors

Onboarding for donors and supporters

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According to the Online Fundraising Scorecard, 37% of non-profits did not send an email within 30 days of a person signing up for emails. Only 44% asked for a donation by email within 90 days.

Let me put this in an approximate pie chart:

online supporter pie chart

We’ve seen this week that getting the second gift (or lack thereof) is where there is the greatest retention leak – people who donate once and don’t get enough out of the experience to donate again. Online donors, in particular, are the most fickle and least likely to retain.

This could be because of the medium. But it also could be that over half of all non-profits do engage people right when they express the most interest in the organization – immediately and unequivocally. To demonstrate this, try to remember what email newsletter you signed up for a month ago today.

Chances are, you can’t. Thirty days is a long time to remember you signed up for something, especially if no one reminds you that you did. Replace “the guy” with “the donor” in this quote and you have a pretty good idea of how people think about your organization, at least initially:

Never assume that the guy understands that you and he have a relationship. The guy will not realize this on his own. You have to plant the idea in his brain by constantly making subtle references to it in your everyday conversation, such as:

— “Roger, would you mind passing me a Sweet ‘n’ Low, in as much as we have a relationship?”
— “Wake up, Roger! There’s a prowler in the den and we have a relationship! You and I do, I mean.”
— “Good News, Roger! The gynecologist says we’re going to have our fourth child, which will serve as yet another indication that we have a relationship!”
— “Roger, inasmuch as this plane is crashing and we probably have only about a minute to live, I want you to know that we’ve had a wonderful 53 years of marriage together, which clearly constitutes a relationship.”

Dave Barry, Dave Barry Complete Guide to Guys

You want to strike while the iron is hot – this person cares about your cause now. So you want to set up a welcome series for your donors online. There are some great guides on how to do this and I promise to write one in a future blog post. For now, here are some key tips:

  • Start with a thank you. This person is interested in your organization. They have given you their time and attention. They sound like a pretty cool person who is giving you a fairly valuable thing. This should be rewarded with good manners.
  • After that, if you have a key offer, lead with it. For some, you may be emailing them a temporary membership card. For others, it’s an opportunity to get involved with advocacy. Surveys are also good. Whatever people like to do with your organization online, use it to build their engagement and learn about them.
  • Yes, within the first 30 days. If they donated already, ask them to become a monthly sustainer. In fact, you may want to test whether a sustaining ask works better generally.
  • Test getting them into your mail, telemarketing, and other direct marketing channels. Just because someone started with your organization online doesn’t mean they don’t also have a mailbox and a phone.

This gap of time can be even acuter in the mail. At least with an online donation, you get (or really really should get) an immediate email receipt. With an initial offline gift, there’s the time that it takes the mail to get to the cager (or another person who will open it), the time to deposit the check, print the thank you, batch it, and send it, and the time it takes to get word back to that donor. That alone is pretty bad.

But what happens next is worse: nothing. Let’s say someone makes a donation on January 1st. They may not get into the data pull for a mail piece until March or April, depending on the lead times you have in printing. Picture making your donation, getting a thank you three weeks later, and then radio silence for months afterward. Doesn’t sound like a recipe for retaining that donor or striking while the iron is hot, no?

So instead, create a couple of mail packages that fill that gap that are sent automatically post the initial gift. The same principles apply here as online – things that help you and that your donors like are the perfect here: petitions, member cards, new supporter surveys, etc. You can expect these pieces not only to help your retention rate but also to provide some additional net revenue as well.

Onboarding for donors and supporters

Why do people stop giving?

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This has, unlike so much in the fundraising realm, been objectively researched and I commend the paper to you.

This paper tested six attributes of connection between people and causes they support.  Guess which ones actually mattered to donor loyalty (I am paraphrasing their points somewhat):

  • The nonprofit shares my beliefs
  • I have a personal link to the cause
  • The nonprofit’s performance is strong
  • I trust the organization
  • I have a deeper knowledge of the organization
  • The quality of the donor services they provide me is high

A hint: four of these matter; two don’t. I’ll pause here why you contemplate.

(pause)

I’m Henry the 8th I am.  Henry the 8th I am I am.  I got married to the widow next door.  She’s been married seven times before and all of them were named Henry – HENRY.  Henry the 8th I am.

Second verse!  Same as the first!  Little bit faster and a little bit worse!

henry the eighth2
Does anyone else find it weird that in this “romantic” movie, he got his first date with his wife by aurally torturing her. Stalker much? (Also, this is Ghost for you young’uns.)

Oh, you’re back.

The four that were important were:

  • The nonprofit shares my beliefs – One of the key drivers of giving and support is the desire to be a part of something bigger than yourself. Knowing the organization is like you and has a similar core system to you is vital.  This is something you can use in your writings – “You know how vital art instruction in elementary school is to raising creative, happy, and well-rounded children and that’s why we…”
  • I have a personal link to the cause – Not surprising. Those impacted by a disease, an injustice, a crime, a whatever, are going to likely be among the strongest to support a cause about these things.  The next step, however, is not done often enough – you often can see a significant retention lift if you can reference this: “You know better than most the heavy toll of…”  Beyond this, if appropriate for your cause, work with those who have a personal link to the cause to celebrate this.  Techniques like anniversary cards (congratulations on three years cancer-free today!) can work well, but more than that, peer-to-peer fundraising can allow a person to celebrate those anniversaries on their own behalf.  You cannot craft a message better than: “I believe in X because of Y. Because you are a person like me, please support X also.”
  • I trust the organization. Trust is, I would argue, a necessary but not sufficient condition of support. No one who does not trust you will support you.  You can borrow trust with social proof techniques like the BBB seal on your donation form, but generally, running a tight ship nonprofit is sufficient.
  • The quality of the donor services they provide me is high. Another necessary but not sufficient condition.  In my experience, a good donor relations person can help turn around a less positive donor experience more easily than trust can be repaired, but it’s important to treat the people who help you serve people well. This starts with customization and if you missed the initial post on this, here it is.  Letting the donor know you know them is critical to quality donor services.

The converse of these is what causes people to lapse: if they no longer trust you, they think you share their values, their link to the cause is diminished or severed, or have a bad donor experience, they are more likely to not give in the future.

What of the two that don’t matter?  Performance of the nonprofit is what the Charity Navigators of the world attempt to quantify, first by pretending that percent of overhead means anything to impact, second by feigning that checkboxes around transparency mean someone is active in their community, and now with Charity Navigator 3.0, which has non-subject-matter experts reviewing the statements of subject matter experts to gauge impact and achieving the same level of impact as me commenting on neurosurgical techniques. It turns that those who can’t don’t teach; they rate.

It’s this type of performance that doesn’t seem to matter as much to loyalty.  People give to something because it feels good to give – to plant the tree whose shade you may never enjoy.  Getting into performance and numbers and such can sap the joy from the process.  Or at least that’s my theory on what that didn’t rate.

As for depth of education, it’s great to educate the people who actively want to learn more about your cause.  Donor telephone town halls, reports back, impact statements and the like are all good ways to do this.  But so much of education from nonprofits comes from the false belief that “if only people really understood the problem, then more of them would give.”  In fact, it’s probably that curse of knowledge I mentioned a couple of weeks ago that makes you speak in buzzwords and feel like you can educate the passion into someone.  A story, told well, means far more.

So now you know a little about why people lapse.  And it should be no surprise that retention is worst after the first gift.  There isn’t a built up trust.  There may or may not be a connection to the nonprofit (and if there is, the nonprofit may not know about it yet).  Communications haven’t been established and you haven’t told the donor the great things they did with that first gift yet.

Increasing that percentage of second gifts is the biggest area for almost any retention effort.  So I’ll cover that tomorrow.

Why do people stop giving?

How to measure retention

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Often, you will see people ask “what’s your retention rate” and get answers like 50% or 60% or whatever.  But there are different types of retention that add up to that overall retention rate.

Yesterday, I said that your direct marketing program was like a bucket with a hole in it.  We’re going to change this a bit today to say that your program is like a pipeline with a bunch of holes in it.  This is the lifecycle of your donor.  To define some terms:

  • Prospective donors are people who haven’t given yet, but might.
  • New donors are donors who are giving their first gift to your organization. I said we’d be defining terms.  I didn’t say they’d be hideously complex.
  • Converted donors/second gift donors/first-year donors are all terms for people who have gotten over the hump and given to your organization within the next year
  • Multi-year donors are people who have given reliably over multiple years
  • Lapsed donors are donors who haven’t given in a while. In a lifecycle analysis, this is frequently put at a time horizon (e.g., given the past year or past two years), but in reality it’s often militated by a broader analysis.  For example, if someone donates $5, you will stop trying to retain them much sooner than someone who donates $100).
  • Deep lapsed donors are lapsed donors, only really lapsed. Again, when this is is defined by your organization.
  • Lapsed reactivated/reinstated are people who were lapsed and have since given a gift. This is an important category often overlooked, in that these reactivated donors can’t be treated like people who just gave their second gift, but neither are the part of that key multi-year donor group.

Blackbaud indicates that the average retention rate is about 50% — that is, of your file, half will give you a gift in the next 12 months.

But as you can see, that’s oversimplified.  First-time donors are less likely to retain with a retention rate about 27%; multi-year retention is 58%, according to Blackbaud’s white paper on the topic.

But they only look at these two categories for retention.  It’s best to look at your retention rate in four buckets:

  • New
  • First-year
  • Lapsed reinstated
  • Multiyear

This is why retention rate as an overall metric camouflages what is happening in your file.  You may have a higher overall retention rate than you did a couple of years ago, but lower retention rates in all of these categories, similarly because you have more multiyear and fewer new donors than you did in years past.

If you prefer, lapsed could be included in here; I don’t because I think of lapsed retention as reactivation – there has to be an effort to reacquire donors, rather than talking to those whose attention you have already.

The other reason it’s important to look at each of these groups separately is that they require different strategies for retention.  With new donors, you have been a first date.  You have learned a tiny bit about them and they about you.  Also, to stretch the dating analogy, your relationship at first is new and exciting.  You can explore things early on like sustainer asks and that person might be in the afterglow of giving and your outstanding onboarding process (more on this later this week) and willing to entertain that notion.  Testing different messages and learning instruments like surveys are par for the course.

Conversely, for your multiyear donors, you should know what they like and don’t like.  Do they give only in the fall and when their gift is matched?  Do they love advocacy appeals?  Is your calendar hanging in their house and are all of their mailing labels yours (i.e., premium donors)?  Not only can you know these, you are expected to know and play back to them – see Ellinger’s Peak of Ideal Customization for details.

One additional retention metric to be aware of is an output from retention rate: lifetime value.  Here’s the formula for lifetime value:

clv-equation
Because everyone loves calculus

Wait!  Please don’t leave!

This is the overly complicated version.  You can ignore discount rate because the cost of money is so low. What you really want are “what is the net value of a person’s donations to an organization going to be?”  The key inputs to this are:

  • What are they giving?
  • What does it cost to get them to give that, initially and ongoing?
  • What is the likelihood that they will give gift 2 from now (and three and four and five) – that is, what is their retention rate? That’s the calculus portion of this – you sum each donation that someone will give, discounting it by the likelihood that they will give it

Retention rates, like compound interest, are magical, rippling through your program for good or ill for years to come.  Tomorrow, we’ll look at the inverse of the retention rate – why people stop giving.

How to measure retention