Wherefore segmentation?

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?

Reactivating lapsed donors

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

How to measure retention

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

The basics of retention

I had the pleasure of speaking on an excellent panel last week with NonProfit Pro on the topic of donor retention, so instead of our regularly scheduled week, let’s look at retaining our donors.

As direct marketers, we often have every bit of data about an appeal or campaign at our fingertips.  We can track average gift and response rate, test versus control packages, open rates, click-throughs, conversions, and so on.

The thing that is often forgotten is that each number represents people.  Everyone who gets a piece of mail, email, phone call, or text (or fax blast, carrier pigeon, telegram, etc.) votes on it by their action or lack thereof.

Lost in the numbers of an appeal or campaign performance are the metrics that matter in the long-term: are our strategies helping you love those who support you more and/or helping your supporters love you more?

Yes, it sounds a bit hippie-ish, as if I’m going to get the drum circle out any moment.  And part of it is – these are the people who make our work possible.

But even if we must look at this from under our green eye shades through our decidedly non-rose-colored glasses, it makes both sense and cents to make donor retention a top priority.

Our direct marketing programs are like a bucket with a hole in the bottom of it.  If you want the water level to rise, you can only do one of two things – poor more water into the bucket, or decrease the size of the hole.  Given this analogy, you might wonder why you would bother to pour water into a bucket with a big hole in it.

Hand pouring water from a glass into a leaking pail
The image of a leaky pail of water that is legally required
to accompany all retention commentary.

And you would be right – retaining the donors we have is of greater importance than acquiring new ones.  While you certainly can’t stop acquiring to focus on retention (less you get down to one very very very loyal donor), keeping with donors with your organization is vital for several reasons:

  • It’s cheaper. There are very figures for this.  Some say it’s twice as expensive to acquire a donor as to retain one.  Others say it’s 12 times as expensive.  Someone out there right now is working on a study that definitely concludes that it is a hillion jillion times more expensive.  Bottom line, it’s cheaper to retain a donor than to acquire one, by a factor of X, where X is big enough to be important.
  • It’s easier. Picture addressing your acquisition package, email, or phone call to someone that you know already knows what your organization is, what you do, and kinda likes it.  Cuts a few sentences, maybe paragraphs, out of it, no?
  • Retained donors are of greater value than new donors. We’ll talk retention rates tomorrow, in that people who have only given one gift are far less likely to stay with your organization.  They also tend to give more gifts and more per gift.
  • Retained donors are of greater value, part 2. Major donors rarely come from the ranks of people who made one gift to your organization; that’s something that comes from a longer-term association with you.  Additionally, more than half of bequest givers have given to an organization 15 times or more.

So this week, we’ll talk about donor retention: how to measure it, why people stop giving, how to get that elusive second gift, and how to reactivate a lapsed donor.  Like many of these topics, each one of these could be its own book (and some are), so if there are areas of particular interest to you, let me know by email or in the comments and I will work to dedicate a week to the topic.

The basics of retention

Your first acquisition mailings

The first thing to know is that mail programs will generally lose money initially. Even if you have great donors and good packages at first, the cost of growing the program will likely outstrip the benefits of running it at first, especially because there are significant fixed costs in the mailing space (e.g., it costs just as much to copywrite a letter than does to 100 people as it does one that goes to 100,000).

Acquisition is where you can get into serious money. Acquisition is designed to lose money for all but the most (absurdly) conservative organization. It’s an investment in bringing new people into the organization and getting them to support you financially. Yet, it’s necessary to start to build your file and lower your marginal costs.

One way to do acquisition on the cheap is with warm and conversion leads. Warm leads are people who have engaged with your organization non-financially (e.g., remember those folks we got to download our white paper last week and give us their contact info?); conversion leads are people who have donated, but not through the mail (e.g., online donors, walkers, gala attendees, etc.). These are inexpensive ways to get new donors, as you don’t have to pay list rental fees.

The other way to get names is, not surprisingly, to pay list rental fees. Try to find organizations like yours to test their lists – often people who support an environmental/cultural/health/etc. charity support many of them. It’s much easier to convince someone to support something very like what they already support.

It also behooves you to put your list up for rental/exchange as well. This will lower your list costs because you will be trading lists with some nonprofits instead of renting theirs.

Charity Navigator will ding you for having a privacy policy that allows this, even if you allow people to opt out of list rental/exchange at any time. Like so many things in the nonprofit world, Charity Navigator is wrong about this. They would recommend, in fact, that you not mail your donors because of the cost involved and because they don’t believe that part of the mailing is a program expense designed to educate your supporters about your issue and promote awareness. That said, if you took the same mail piece and gave it out at a walk instead of putting a stamp on it, it could be considered almost entirely a program expense.

If this doesn’t seem burdened by an overabundance of logic, you would be correct. Generally, you would do well to take a George Costanza approach to Charity Navigator and simply “do the opposite” of their guidance.

In addition to rental and exchange markets, you can also work with cooperatives to get additional names. These coops include Abacus, Dataline, Datalogix, DonorBase, I-Behavior, Target Analytics and Wiland. I think I’ve tried almost all of these at some time or another. These coops share names among them and will build a model of response to get the best possible donor lists for your organization. Think of it as not renting from 10 different lists, but rather getting the best from 20 different lists. Some work better for some organizations than others and it may take a few to get it right.

The downside here is that your best names will start to get mail from a lot of different organizations. On the flipside, you have access to the best quality names from other organizations. Be sure to hold out part of your file to determine the impact of this mailing structure on your file.

After you look at your first bill for an acquisition and regain consciousness, you will rediscover the value of warm leads. Just because you started a paid mail program doesn’t mean that the free tips discussed earlier, especially about working to turn your Web site into a constituent generator, don’t still apply. On the contrary, free is often the best possible price. Adding to the original thoughts, now that you’ve run a program, look at lapsed donors as another source of (re)acquisition. Generally speaking, lapsed donors once renewed will be more loyal to your organization than an outside acquired name and they generally acquire more inexpensively.

So far, I’ve been talking about mailings – online and off – as one size fits all. In reality, if time and money were no objects, each communication you would send out would be handcrafted and uniquely personalized and there would be bespoke artisanal direct mail pieces coming out of Brooklyn and Portland in lavender scented envelopes.

In truth, you aim for something in the middle using customization. That will be the topic for the rest of the week.

Your first acquisition mailings