The Tragedy of the Donor Commons
“Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. … the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another… But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. Each man is locked into a system that compels him to increase his herd without limit–in a world that is limited. Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons.” – Garrett Hardin, “The Tragedy of the Commons”
How do we know this tragedy of the commons has arrived when it comes to donor acquisition through list rental and exchange? There are a few signposts:
Our donors are reporting it. According to one study, people who get more solicitation requests say they write down when they gave to a charity last, try to find out when last they gave before donating, limit their giving to charities of a certain type, and/or put the “maybe” solicitations in a box or pile for later reference. And, not surprisingly, the more mail they get, the more they agree with the statement “I feel I must protect myself from the mail I get from charities.” Cumulative exposure to nonprofit appeals erodes donors’ likelihood of donating.
We are hearing some arguments for volume that stretch credulity. As recounted here, a couple years ago, I asked a panel of folks participating in list cooperatives when they see diminishing marginal results.
The representative from the co-op said there wasn’t such a point: everyone who gives to another organization is always ever more likely to give to the next one.
This is mathematically impossible.
Somewhere on that co-op’s file is the person who gives to the most nonprofits. Let’s say 70. Since they have never seen anyone give to 71, that would have to be the point of diminishing marginal returns. It’s probably before then, but there is (by definition) a point.
In other words, the co-op’s answer is like saying people get healthier and healthier and healthier until the moment they die, when they are at the peak of their health. Until next year, when their decomposing body will be even healthier.
I love list coops; I have found better results from them than from most cold lists. But it’s in both your best interest and their best interest to try to stick a vacuum cleaner in their best donors’ pockets and suck ’em out until there’s nothing but lint.
We are seeing experimental evidence. Hopefully, you know by now about the study from Donkers, van Diepen, and Franses that shows that 63% of the “new” revenues from a new mail piece are cannibalized from those that surround it. (If not, there’s a summary here). Thus, only 37% of a new mail piece’s revenues are new to the organization.
One other thing from this study: an additional 10% of mail revenue isn’t new revenue to the sector; rather, it is cannibalized from other organizations in the sector. Thus, only 27% of a new mail piece’s revenues are new to nonprofits.
This is the tragedy of the commons. There exists a place between 27% and 37% where an organization has an incentive to add a mail piece because it increases their net revenue, but it decreases the overall net revenue for the sector.
We are seeing sector-wide evidence. There was a 19% decrease in new donors to organizations in 2017. And results so far in 2018 aren’t so promising either (hat tip to Ben Miller of DonorTrends for the presentation). It’s tougher to get new donors than it was.
What’s to be done? Not a lot. As long as we don’t have monopolies, oligopolies, or cartels, there isn’t a way to change the incentives within the market for acquisition. (A little Mergers & Acquisitions wouldn’t go amiss, though.)
What we can do, however, is become less dependent on “more” and more dependent on “better.” If we are acquiring and retaining donors who are uniquely qualified to give to our organizations, whose identities fit our missions, they will be tougher to pry away from us.
Nick
8 responses to “The Tragedy of the Donor Commons”
Behavioral Science Q & A
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Nick, not so sure you can generalize across all co-ops. We have seen some truth in the statement “everyone who gives to another organization is always ever more likely to give to the next one.”, when it comes to membership-based organizations. Otherwise, the remainder is sad but true.
Organizations still need to acquire new donors. Since the assumption is that the amount of money in the entire donor pool is fixed and that when one organization acquires $$ another loses $$, how can we make $$$$ for both?
I’m all for a little consolidation, but who would lead the charge? Since approximately 400,000 organizations exist with the exact same mission across NTEE codes, it’s more of founder’s syndrome (https://en.wikipedia.org/wiki/Founder%27s_syndrome) than anything else. It’s hard for those who lead the organization to pivot, merge, or adjust anything about the direction. It’s simply not in their DNA.
So where does that leave us? Most organizations know you have to “spend money to make money”, the question is – are they looking in the right places? Does anyone know of these places? Where do they start? With more and more competition for each dollar, it’s critical organizations deploy new strategies to uncover opportunities in areas never explored before. We should be doing more to help.
Obviously retention is a tried-and-true strategy, but unfortunately donors don’t live forever, which leads us back to square one.
I have no doubt that “everyone who gives to another organization is more likely to give to the next one” is true to a point. It’s the “always” to which I object.
If the donor who gave to the most organizations gave to 150 nonprofits, work backwards. Did this person really pick up organization #150 as quickly as she did organization #100 or #149? If not, then there is, at least somewhere, diminishing marginal returns. If so, at best, you can say that this rule holds true until 150, beyond which you don’t know.
Other than that, you highlight the discussion I was going for. Are there too many nonprofits and, if so, how do we consolidate? What practices do we want to set up for “our” donors for rental, exchange, and coop use? How do we want to go deeper to get more out of “our” donors?
Nick you bring up some excellent points, and thanks for the nod.
I agree with you that acquisitions and mergers need to take place, but the shift needed is bigger than just that. It is important that non-profits start using metrics like Life Time Value, Cost to Acquire, and Internal Rate of Return IRR, to guide their decisions rather than assumptions.
For example if it costs $45 to acquire a donor with a LTV of $245 and this yields an IRR of 35%. If the organization establishes a hurdle rate (otherwise known as lowest acceptable IRR) of 20%, then this particular investment gets the green light if it yields an IRR of 15% it is an investment that gets passed on.
I think in general the non-profit sector must start talking like their for profit counterparts. In fact, I wrote a post about this just yesterday. http://donorretention.donortrends.com/fundraising-analytics/fundraisers-and-finance
Absolutely and love the post. There’s a classic principal-agent conflict at work here as well. The goal of the CEO may be to maximize net revenue for the year so they can get a bonus and leave the organization, which isn’t (or shouldn’t) be the goal of the organization.
There’s a common misconception that tragedies of the commons are irreversible and that when they happen, well, you’re buggered, basically.
But that’s not true at all. Tragedies of the commons can be managed, controlled and prevented and the US political economist Lin Ostrom won the Nobel Prize in Economics for her life’s work demonstrating how this can be done.
And it’s not by monopolies or government intervention. It’s by self-regulation. Communities the world over faced with a potential tragedy of the commons in their ‘common pool resource’ (CPR), be that fisheries, forestry, water or whatever, have solved that by self-regulating their use of it.
There’s not a priori reason why charities should not be able to come together to regulate their own access to any particular pool of donors to make access to that pool sustainable for all concerned. If fact that regulation has already happen in relation to street fundraising where in the UK, the Public Fundraising Regulatory Association put in place a self-regulatory regime that (unknowlingly) adopted Ostrom’s eight design principles for self-regulating CPRs.
Rather than revisit how the PFRA worked this all out, I’ll leave you to take a lot yourself in this Critical Fundraising blog – http://bit.ly/1LZlgjI
I think the PFRA was the most successful fundraising regulator there’s ever been (full disclosure – I used to be their head of comms). It shows how self-regulation in fundraising can work to avert tragedies of the commons and protect CPRs of donors and potential donors. For sure, it won’t be easy to get charities and agencies to buy into this and co-operate sufficiently to make ti work well. But it’s far from impossible.
More on Lin Ostrom – https://en.wikipedia.org/wiki/Elinor_Ostrom
Ostrom’s 8 design principles for managing CPRs – http://www.onthecommons.org/magazine/elinor-ostroms-8-principles-managing-commmons#sthash.bhI979XV.dpbs
Thanks, Ian, for the well-thought-out discussion of this. The post is very helpful.
I wonder if this may not be even an order of magnitude more challenging than canvassing — although, as you put it, not insurmountable and worth the fighting for — for a couple of reasons:
– The difference of renewal and acquisition programs. With street fundraising, you are self-regulating access to potential donors; with a renewal program, for better or worse, you have an audience where you feel a sense of ownership (whether justified or un)
– Economic incentives for sameness. Don’t know if this is also the case in the UK, but many print vendors will gang run, for example, all of their calendars simultaneously to save costs, so one can get a bevy of them in a narrow window. Likewise, vendors will drop many nonprofits’ mail on the same day to take advantage of lower postal rates. The agency system gives incentives to gang up currently.
– While with street I’m sure some times and places are more valuable than others, imagine being the organization that can send emails on December 31st… or not send them.
Again, not insurmountable – just thinking aloud in the hope of someone smarter than me taking up the mantle and working toward this. (Or trying to make myself smarter to be that person. :-))
Thanks – lots of food for thought.
Yes, I agree that it wild be very challenging, Nick, and that self-regulation the retention market this way poses different challenges to acquisition. And it might turn out that those challenges are insurmountable. But as far as I am aware, no-one has even thought about how it might be done, much less tried to build any self-regulatory regime. Even a few blogs and conversations that would in effect be little more than thinking out loud about how this could work would be a worthwhile exercise.
A bit of a perspective from an historic viewpoint.
Commons were indeed where everyone was allowed to graze their animals.
In the mid 1700, the Enclosure Movement began in England, whereby common lands (those for farming as well as grazing) were to be fenced or “enclosed”.
Smaller farmers who had only one small plot and the use of the commons could often not afford to fence, enclosed or protect their land, which was then often sold to larger land owners for far less than its market value.
The big got bigger. The small got pushed out.
Let us hope history does not repeat itself…