Donor segments: lifetime value in the list selection process.

Donor list evaluation should entail more than simply considering the cost per dollar raised (CPDR) on a mail piece. Incorporating lifetime value (LTV) in the list selection process will enable an organization to segment its donors into high- and low-value lists and determine how to most effectively appeal to each list, according to a speaker at the 2006 Direct Marketing Association Conference in Washington, D.C.

At a session entitled Bending the Financial Mindset of Premium Mailers, Colleen Norton, director of direct mail and donor management, Children's Cancer Research Fund (CCRF), in Minneapolis, Minn., walked the audience through a strategy CCRF recently incorporated into its direct mail list selection process: the lifetime value of a donor.

By going beyond the traditional metrics of response rates and cost per dollar raised (CPDR), said Norton, CCRF is now better able to balance its donor acquisition success with improved donor retention, and ensure that it is acquiring donors who meet the profit and loss (P/L) benchmarks in its renewal program.

Cautioned Norton, "acquisition metrics are sometimes at odds with renewal goals. Decisions made to 'improve' acquisition metrics are sometimes made to the detriment of renewals." Thus, she advised integrating an organization's acquisition success with its renewal goals.

The traditionally events-based CCRF began its direct mail program in April, 1999. Because of its limited direct mail benchmarks, new donors were combined into six-month list groupings based upon the date of initial gift. The groups were then standardized to reflect giving during the 12-month period following the acquisition of the new donors, and two indices, the LTV index and the Acquisition CPDR index, were developed.

Norton defined the LTV metric as the subsequent value per donor per year. The LTV index, she said, is calculated by dividing the average LTV metric of a list within a specific time period by the average LTV metric of the entire file, which was calculated over a similar period of time.

The CPDR metric, or the up-front acquisition cost to raise a dollar, was indexed against CPDR metrics for all the other lists within the group, resulting in the CPDR index. The two indices were then combined to form a new index, the combined metric index, by which acquisition lists were then judged. This index, said Norton, enabled CCRF to evaluate both the up-front and the back-end performance of a donor list, "so we see how it does on cost to raise a dollar on acquisition and then it allows us to look at the same time at the donor's (LTV)."

The study's findings opened up a new universe for CCRE. For example, files with high acquisition costs, such as files rented from public broadcasting stations and high-end women's apparel catalogs, showed a much stronger LTV, or revenue per donor acquired. "They were expensive to acquire, but then after we watched them over time, the economics played out," said Norton.

The study also found that new mover files that had a ZIP select, combined with a higher household value select ($250,000 or more), and compiled donor files (with ZIP select) experienced better than expected back-end, or LTV, performance. Norton ultimately moved some lists with a high CPDR to the top of the file list because of high response rates.

Moreover, CCRF is now better informed to mail its non-donors more effectively, placing emphasis on the more profitable segments, said Norton. Whereas in 2004 non-donors accounted for 38.8 percent of the organization's direct mailings, in 2005 that number deflated to 26.6 percent. More attention was given to those non-donors on compiled lists, mailings to which increased from 12.7 percent in 2004 to 17.5 percent in 2005. Mailings to non-donor subscribers decreased from 11.8 percent in 2004 to just 2.7 percent in 2005. And buyers accounted for just 5.6 percent in 2005, down from 13 percent the previous year.

Norton described this as letting the lower dollar donors sift out. "We acquire a lot of donors not knowing who will stick," she said. "So after a year of mailing renewals with no response, we made the decision to let them sift out, to drop them." But, added Norton, this was unique to CCRF: "This was a new strategy and a young program, so we were trying to see how donors responded to our direct marketing program, our fundraising program and our organization."

Norton estimated that CCRF has seen a 17-percent increase in initial gift, a new donor revenue increase of more than 14 percent, first-year renewal revenue increase of 31 percent, and steady multi-year retention rates. Overall, said Norton, CCRF has seen a healthier, more productive direct mail program.

"Using both of these indices (LTV and CPDR), you can get the whole picture," said Norton. "It allows an organization to expand its universe."

The Children's Cancer Research Fund has more than 200,000 12-month direct mail donors and mails nine acquisition appeals annually. In Fiscal Year 2005, the organization raised approximately $13 million, with close to $7 million coming in via direct mail. Its direct mail donor pool is mainly premium-based and premium-renewed.