via forentrepreneurs.net

The 3 costliest tech problems in advocacy and nonprofit engagement and how to calculate their cost. No. 2 — Huge CAC, Low LTV.

Translation: You’re spending too much to get people into the funnel, then not enough to keep them engaged.

This is the second of a three-part guide. If you already read part 1, Big Bad Data, you should skip down to the header “The Problem: Huge CAC.” Otherwise, the intro is pretty important.

Because studies show that you’re very unlikely to read this whole post, here’s the one thing I want you to take away if you quit reading now: Do not buy software, ever, unless you’re laser-clear on the problem you’re trying to solve and what it would cost your organization to leave it unsolved.

As Director of Advocacy and Brands at NationBuilder, my core responsibility is to sell our community organizing platform to enterprise-scale advocacy groups, nonprofits and big associations. Often, when these groups come to us for help, they’re in a rush to see a product demo.

This is the wrong approach.

You can’t effectively evaluate a solution before you’re clear on the problem you’re trying to solve. And if it’s my job to show you the solution, I can’t go in blind either.

Here’s the right approach.

  1. Do an honest exploration of your organization’s challenges. Identify the big problems, and the seemingly little ones. Prioritize them, in order of urgency to solve.
  2. Calculate the cost of leaving your top problems unsolved.

Calculating the problem cost is fundamental to making the right decision because it’s going to help you confirm that you need to buy a solution, and show you how much you should pay.

For example, say clunky technology is reducing your staff efficiency to the tune of 50 wasted hours per month at $20/hour labor cost, for a monthly organizational cost of $1,000. There’s a clever software tool that promises to boost efficiency and turn those wasted hours into productive ones, but if that tool costs $2,000 per month, it’s still not a good investment, right?

The Problem: Huge CAC, Small CLV

Many large advocacy organizations are dead set on list growth. This makes sense because marketing (whether you’re selling gelato or a social mission) is a numbers game. The more people you reach, the more people might donate, send a legislator email, or show up to an event. But in pursuit of scale, many organizations are accruing a huge Customer Acquisition Cost, or CAC. They spend aggressively on advertising to acquire new supporters/email addresses then fail to cultivate those people into long-term supporters. Guess what supporters do when you ignore them or spam them with non-personalized fundraising asks? They churn (i.e., they unsubscribe). When they churn, they can’t donate, or fundraise, or host events, or most importantly, introduce you to their friends. Consequently, their Lifetime Value to your organization is low. High CAC and low LTV is, as extremely well-explained by venture capitalist/entrepreneur David Skok, an “out-of-balance business model” that ends in only one way: Organizational failure.

Image via forentrepreneurs.com

So, what are the most common drivers of high CAC/low LTV for advocacy organizations and associations?

  1. Why is the CAC so high? Big spending on advertising, without crystal clear calls-to-action, and without a clear engagement ladder for new users. Marketing invests a ton of cash in traditional advertising, including print and broadcast, that doesn’t nudge the audience to a compelling call-to-action that involves an email capture. You need the direct contact so you can then nurture them to your valuable actions, like donate, or lobby their legislator, etc.
  2. And why is the LTV low?: The campaigns begin and end with the initial conversion: There’s a landing page to collect emails, or take donations, and maybe there’s an auto-response. But after that, user engagement is un-targeted, infrequent, and full of impersonalized calls-to-action, usually fundraising asks. This leads to high churn (i.e. unsubscribe), which obliterates the average LTV. Without a clear new supporter engagement funnel, an organization will also tend to lack any kind of recruiter program. A close-to-home example: Two years ago, I gladly signed up for a local charity race, the kind of peer-to-peer fundraising effort that big nonprofits have relied on increasingly for the past decade-plus. It was for a cause that I care deeply about — homelessness — and I raised more than $600. I had never previously donated. The charity gave me a nice sweatshirt. And that was it. I would have preferred a phone call, or maybe an invitation to get more involved and learn more about how the organization was using the funds I raised. I also checked with the dozen-ish friends and family members who gave money — not one of them ever heard from the organization. So, they spent a big chunk to put on this event (it costs a lot of dough to close down streets, buy swag for thousands of participants, and buy media to promote it for weeks before-hand). I’m guessing it worked really well to acquire new supporters. Then they apparently ignored everyone who came into the funnel. I didn’t do the race the following year.

The Consequence of High CAC, Low LTV

Growth is slow and costly. Worse, you’re actually on the road to total failure.

Calculate the cost

When calculating CAC, here are the classic costs to remember to include:

  1. Advertising and marketing.
  2. Staff time, for staffers directly responsible for audience engagement and growth (usually the marketing team)

Now divide the total cost by number of new supporters acquired during the same time period as your spend. That’s your CAC. You’re not done, because

Remember: CAC doesn’t tell you anything if you don’t also know your LTV! What you’re really after is your LTV:CAC ratio.

Lifetime value is:

LTV = (total monthly payments by all customers / number of customers) x average customer lifespan, in months

The above formula will work if you’re a nonprofit that does aggressive individual fundraising or relies on recurring donations. It won’t work for everyone, since in the nonprofit world, supporter value is not purely monetary. An advocacy organization that relies on foundation funding cares more that a supporter is active in advancing the cause, which in turn helps the organization write a more persuasive grant application. How do groups account for that non-monetary value? There are 2 ways that I do it.

  1. The Grants:Supporters Ratio: When foundations are deciding where to spend their money, they typically want to see that an organization can demonstrate success, i.e. policy wins. A cultural nonprofit (a museum), wants to show attendance numbers. In order for you to demonstrate success, you need to point to the data. Something like:
“In 2015, we regularly engaged our 250,000 supporters via email, and 125,000 of them responded by emailing, calling or Tweeting at their legislator, or by turning out to our action events. Our supporters’ combined efforts helped us grow our email list by another 20,000 people, who also took our desired actions. During the same time, we got 200 new officials to take our pledge, and our proposed law now has a sponsor.”

Take any grants or major donations received after your organization shared this story. We’ll assume 5 grants worth $2.8 million. Divide the grant proceeds by the 155,000 supporters whose collective actions helped you win the grants, and you have an annual value of $18, or $1.5/month, per supporter. If your average supporter remains active in your system for 2.5 years (30 months), their LTV = $45. If it costs you ~ $10 to get someone in your advocacy funnel, then you’re in good shape. 3:1 is considered optimal LTV:CAC ratio.

2. How much will it cost to meet your goal?: This is not a scientific calculation, but it’s in the spirit of the exercise. Simply identify how many total supporters you think you will need in order to reach you advocacy milestones. If you think it would take a list of 1 million people to effectively persuade your target legislature, and your list today is 250,000, you need to acquire 750,000 new people. If your CAC for the existing list is $500 per person, you don’t need a complex LTV analysis to know that you can’t afford to spend $375 million to reach your acquisition goal. You need to reduce your CAC!

Do you need to solve the problem?

If your LTV:CAC ratio is less than 3:1, then you absolutely need to solve it. The good news is that you know how to prioritize your solution criteria. You need tech and process to:

  1. Help you lower CAC by making it easier and cheaper to ID potential supporters.
  2. Help you increase LTV by doing targeted outreach to new supporters in a way that emphasizes loyalty and retention, i.e. LifeTime Value.

Why this is SO MUCH EASIER for advocacy organizations, associations and nonprofits (than for-profits)

In the consumer world, peer-to-peer programs usually require financial incentive. I recruit my cycling and camping buddies to join my favorite outdoor/fitness e-commerce site TheClymb.com, which I do truly love, because anyone who signs up with my own link triggers monetary credit in my account. But nonprofits can use recruiter links too: they’re among the easiest/most powerful ways that NationBuilder helps organizations build recruiter programs. And in advocacy, we have a huge advantage: Our supporters don’t need financial incentive. They are motivated by shared story and shared mission. To activate them, you only need to give them access to an authentic relationship with you and your organization. Bring them in, engage them in a long-term relationship (listen to them, acknowledge their support!) and they’ll bring their friends at no charge to you.

I am the Director of Advocacy & Brands at NationBuilder, where I help large organizations implement technology, strategy and process to develop leaders and community.