By Sean Triner
We all want to have our cake and eat it. High average donations, great response rates, excellent long-term value. But in the end, it all comes down to balance. Doing better in one area may mean another doesn’t do so well. Below I explore some of those balancing acts.
Fundraising doesn’t get easier as you grow
Any nonprofit that wants to grow needs to get new donors at some point. When fundraising from individuals, the first few hundred donors you acquire are likely to be your best donors – possibly your best donors ever. They are also relatively cheap and easy to obtain. This is the tactical phase of growth for a charity.
To put this in context, imagine that you are doing a sponsored challenge, let’s say running a marathon. The first people that you ask to sponsor you all say yes. This first bit of fundraising is easy – of course your mum, best mate and husband are going to sponsor you.
You ask 20 people and get 20 people to sponsor you; a 100% response rate! But to meet your target, you need more people to donate. So you ask your mum, best mate and husband and the others to ask their friends. The hit rate comes down quite a lot, to maybe 30%. Then you go to those people on Facebook or LinkedIn who you haven’t really interacted with for ages … it just keeps getting harder, so much so that raising the last 20% of your target takes more than 80% of your time.
It is just like that for a nonprofit. The few hundred donors are friends, friends of friends or people with a great personal connection with the cause. The next ones are other ‘low hanging fruit’ – cheap and easy to get to, but as soon as you start to widen the net, it gets harder and harder.
The first phase, getting those start-up donors is the ‘tactical’ stage of growth.
After that initial effort obtaining donors becomes more and more expensive. To increase the database from 4,800 to 5,000 could cost as much as it did going from 0 to 1,000 donors. To acquire each new donor you have to work a little harder than you did acquiring the last one. This means more time, stronger asking, more frequent asks and more expense is required.
We need to balance growth against constantly increasing costs.
Economies of scale
Economies of scale take a frustratingly long time to kick in. You would expect it to be cheaper per donor to recruit 10,000 donors than say 500. It is possible, but unlikely.
For example, in direct mail acquisition, the savings in reducing the print costs will probably be negated by the fact that you have to go to cold lists that don’t perform as well to find the volume. From the sponsorship example above, this is like going to your friends’ friends’ friends.
The higher the volume that you go to, the lower the average response rate is going to be.
When you are planning growth, you may want to set some benchmarks to help you with your budgeting. So, you ask people how they have done with their donor acquisition.
This is great, but make sure that you get the right context. Someone who tells you that they ‘got 8% response rate’ to their acquisition mailing, it sounds like a great response rate. But if it was just 1,000 people that they mailed this is not such a useful benchmark.
You need to know other factors: What was the size of the mailing? Where did the names come from? What was the average donation?
One of my clients achieved 8% on a volume of 50,000 recently. Sounds good, but let’s ask those questions.
Size of mailing
As mentioned above, the larger the volume, the lower the response rate is likely to be. The very best lists will get the best response rates, but they’re likely to be small. There are simply not that many great lists.
For example, imagine a list of bought names, List A. This is a list of 65-year-old and over women, paid off their mortgage, have filled in a survey, said they would give to your nonprofit, have used a credit card and donated to other nonprofits – it’s likely to be a great list for most nonprofits. But there are maybe only 10,000 of them.
That is why bigger mailings get lower average donations. The nonprofit client I mentioned above mailed 50,000 entries from bought lists, and got 8% response rate. As they rollout and mail more, they study the cold lists and see how many they can replicate, how many similar lists they can find, and how they can increase the volume by changing the criteria.
List A had only 10,000 people, but List B has 20,000 – this is a list of 55-year-old and over women, who otherwise have the same attributes. More potential people, but we know younger people are not as good prospects; so we may only get, say, 5.5% from this list.
Improving response rate … will reduce average donation
If you ask for higher donations, you will get higher donations. But the higher the ask, the lower the response rate, while average donations are higher. It is absolutely essential that you test, test and test again on ask amounts.
The nonprofit client above got 8% on a 50,000 cold mailing. But if its average donation had been $5, then this would be not that good a mailing after all. It received about $35 as its (mean) average donation – which helps with your contextual budgeting.
For example, which is better? A pack realising a response rate of 1.5% at $80 average or one achieving 3% at $40? It will, of course, depend on second gift rates and upgrades, but I think in a growth phase I would prefer the latter.
The same applies to warm mailings. Ask for larger amounts and you will suppress response rates. Ask for lower, and you increase them.
The more donors you have, the lower the average value
The more donors you have, the less valuable the ‘average’ donor is. By this, I mean their expected lifetime value is, on average, lower. This is the rule of diminishing average value.
As I mentioned above, it often costs more per donor as you acquire more donors. Yet those you are paying more for are rarely better than the ‘cheaper’ ones. As your volumes increase, the average second gift rates, average donations and average number of gifts per annum are likely to decrease.
But, if you need to grow, you can’t just do it from your current donor base. You need new donors.
Your balancing act here is usually knocked off kilter at the planning stage, when the rule above was not taken into account. The best recruitment channels (by volume) get you the worst regular givers (by implied lifetime value).
Face-to-face regular donors are not ‘as good’ as other sources. They are more likely to stop giving, very unlikely to give additional gifts and not likely to leave you a legacy. Yet face-to-face provides by far and away the majority of new regular givers to Australian nonprofits.
The fundraiser must balance value per donor against volume. The correct strategy is to recruit both types of donors.
What is good for the long term… is often good in the short term, too
Someone giving a donation today is one of your best prospects for becoming a monthly donor. Also, obtaining the longest-term gift – the bequest – is made much easier if someone has donated frequently. Getting donations now is great for a bequest program – provided there is a bequest program.
As a bonus, getting a donation right now is the best way to increase the chances of a donation in the future. The more times someone donates the more likely they are to donate again.
However, asking for all three (donation, regular gift and bequest) all at the same time is rarely a good idea. So, fundraisers needs to balance which communication goes out with which ask, and when.
As you plan for growth, make sure that you are on top of all of these balancing acts. Get the right context from others. It is likely that a board member heard something about a great response rate, and expects that from you. Be careful!
And stay safe on the high wire.
