RFM part 2 – segmentation goals beyond net revenue

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

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