Tuesday, August 13, 2013

As promised: The second best way to reduce your fundraising income

The second best way to reduce your fundraising income

First thing I would like you to do is think of your favourite cause (but not one you work for, or are on the board of).  Write down what do you do to support that charity and why.

Now hold that thought and please read on. 

Looking at the data from the transactions of seventy NZ and Australian charities, I noted recently that a sure fire way to reduce income and cripple an organisation's ability to do good was to switch money from fundraising to brand awareness.

I promised a second technique to use to hammer your long term 'net good'. 

This one is usually championed from above, maybe at board or senior management level. 

Despite such awesome ammunition as common sense and Dan Pallotta's book and TED talk, this second approach to crippling your cause still lurks menacingly - sneaking up and destroying hope of growth and usually increasing fundraising staff turnover. 

This scourge is 'reducing cost of fundraising'.

Seems a sensible and popular idea really, a lay person without access to insider knowledge would struggle to disagree with that goal.  And sometimes for a relatively mature charity with a clear plan it may make sense.  But the reality is that fundraising can be very, very expensive and pretending it isn't doesn't help an organisation grow.

It is possible to 'cheat' cost of fundraising and admin cost ratios - for example, by being able to report that some fundraising expenditure is 'education', or by demonstrating that fundraising costs are met by investment returns or a generous donor or two.  Most charities can't do this. 

But I  believe that it all comes down to unrealistic expectations. 

With only a few exceptions, growth in fundraising income comes from the acquisition  of new, individual donors. After being identified (by the fact that they made a contribution) these lovely new supporters are then communicated with on a regular basis and reminded of the opportunity to feel great again by making another donation.

In the long term, some of these donors may go on to make very large bequests (legacies) and some may make very large donations. Bequests and major donations have a fantastic return on investment (ROI) and effectively bring a charities cost of fundraising down.  But in the short and medium term...

In Australia and New Zealand around 90% of all new regular givers (RG) come through 'face to face'.  By this, I mean strangers signed up to automatic debits in person from door to door, street or event canvassing. 

Around two thirds of ordinary (non-RG) donors are brought in by direct mail.

Just looking at these two mainstream acquisition methods, a reality check tells us that when everything is taken into account, it takes between around twelve and eighteen months for subsequent donations from these donors to cover their costs. In other words, a charity is in the red for a very long time before income from new donors begins to overtake expenditure.

With between 40% and 50% of new face to face and direct  mail donors choosing not to support a charity again after around twelve months you can see that a high rate of success (motivating lots of new supporters) would be reflected by a high cost of fundraising.

This inherent contradiction causes us charities a problem if we rate our success on cost of fundraising - which parts of the media tell us we should.

In the long term face to face donors who do stay should end up donating considerable amounts, well in excess of their original acquisition costs.  We also know that after many years, direct mail donors will return a good profit if the program is managed well.  After a decade, they will have also contributed considerable sums through bequests and regular giving too.

The charity will have been able to much more 'good' because of the investment than it would have otherwise been able to, but probably at a higher cost than what was desired.

Why this desire to keep costs low? Dan Pallotta has his theories about the beginning of charity but mostly nowadays it is a throwback to a golden age when charities were all volunteers and a niche group of people sacrificed lifestyle and everything else to help.

Since then demand and expectations, regulations and laws, outcome measurements and government insouciance have placed a huge burden on charities, requiring them to raise magnitudes of revenue more than before.  And this is expensive.

The public are told by bits of media that cost of fundraising is an important measure for them to consider, and uneducated (about fundraising) legal authorities rule on it as a measure.  Ostensively to protect from fraud, but in reality punishing and restricting growth opportunities from legitimate activities.

In reality, whether you personally want cost of fundraising to remain low is a moot point.  If you want your favourite charity to do the best it can, then surely you want it reaching as many of the people willing to back them as possible?  Surely you want it raising as much net income as possible? And surely you want it to do as much good as possible?

Put bluntly if a charity can raise $10m at a cost of $5m or $1m at a cost of $100,000 and it costs $1,000 to save a life - which is best?

Or look at it another way,

Cost of fundraising ratio 50%, 5000 lives saved.
Cost of fundraising ratio 10%, 900 lives saved.

Of course, we would all probably prefer $10m raised, $100,000 cost, 9900 lives saved - but it just doesn't work like that for most charities, most of the time.  We need a reality check.

The public, many boards, CEOs, senior staff and some bureaucrats simply have completely unrealistic expectations.  They imagine this beautiful, pleasant, pretty world where people just up and give.  The reality is sophisticated programs of trained professionals buying creative services, data services, print, postage, travel, training, processing, opening mail, computers, software licences and so much more just to get those dollars.

A few charities in Australia got hammered in the press for their high cost of fundraising a little while ago. A quick look at their annual reports or benchmarking data shows that it didn't put donors off giving to them.  

In fact, the big fallout from these stories was self inflicted.  Only charities who decided to cut their cost of fundraising suffered.  Unless you are making some big mistakes with your fundraising, aiming to cut costs will almost certainly cut acquisition which in turn will inevitably hurt your future.

I know, you may be thinking 'it just isn't right.  Donors demand low cost of fundraising.  But just think back to your favourite charity.  

Did you choose them because their cost of fundraising is low?  No of course not.  

Do you even know their cost of fundraising?  

I have done that exercise with thousands of people, and dozens of boards and senior staff teams - and I have only had a handful of people know what the cost of fundraising of their favourite charity is.

We think cost of fundraising is important to donors, when we ask donors they tell us it is important to them, but we look at the data we find out it turns out it is not that important after all.

Check out Dan's video below.

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