The Toughest Fundraising Calculation
I’ve been hoarding some recent posts by Seth Godin that are especially pertinent to fundraising.
Yesterday I talked about a post where his message was, in effect. don’t ask for money on the first date … cultivate, then ask. I suggested that his dictum might apply in the increasingly challenging world of new donor acquisition, where "cold" prospecting is getting mighty tough.
Here’s another Godin post, called Embracing Lifetime Value. His main observation:
"So, a chiropractor might see a new patient being worth $2,500, easily. And yet… how much is she spending on courting, catering to and seducing that new customer? My guess is that $50 feels like a lot to the doc. Instead of comparing what you invest to the benefit you receive from the first bill, the first visit, the first transaction, it’s important to not only recognize but embrace the true lifetime value of one more customer.
Write it down. Post it on the wall. What would happen if you spent 100% of that amount on each of your next ten new customers?"
What would happen? Your nonprofit would go broke!!
Absolutely, fundraisers must look at lifetime value when calculating how much they can afford to subsidize new donor acquisition. But if you spend 100% of the average donor’s lifetime value on acquiring a new customer, then a) you’re chasing your tail from a growth standpoint, and b) your fundraising has contributed zero to accomplishing your organization’s mission.
Since his wording is a little unclear, I’ll give Godin the benefit of the doubt. Maybe he is saying: OK, somehow magically a new customer/donor has appeared on your doorstep; now, spend that person’s entire lifetime value on cultivating them, retaining them, keeping them happy. But of course that investment approach, while possibly doing wonders for donor loyalty, also yields nothing for the program pot.
Clearly fundraisers, when deciding how much to invest in acquiring a new donor (and then retaining that donor), must have an accurate fix on the lifetime value — and more particularly, the net lifetime value (revenue minus the marketing costs) — of their donors.
Knowing that, fundraisers (more likely their Boards) then need to decide how much of their net income (i.e., profit) they are willing to devote to subsidizing new donor prospecting (assuming an upfront loss on new donors). Do they want to re-coup the prospecting subsidy in one year, eighteen months, when?
That’s not an easy call to make. Aguably it’s the toughest calculation for nonprofit fundraisers to make … because upfront costs exceed revenue, because of the risk involved in banking on (and miscalculating) future donor performance, and because fundraising is then perceived to be "raiding" funds that "should" go into programmatic activities.
Of course, there’s one way to avoid all this stress. Just prospect at an upfront profit. Any Agitator readers doing that these days?!
Tom
3 responses to “The Toughest Fundraising Calculation”
Behavioral Science Q & A
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I disagree, slightly with this, if you embed the cost of cultivation into the costs associated with running your program. That is–if your cultivation of donors is entirely based on their participation in your programs, then the costs of cultivation are easy to bear, even at an initial loss. So, my objective as a fundraiser is to get people to come to our events, in prison, and interact with our participants and graduates. That’s part of our mission, so we have more incentive to get people involved–and cultivated–than to just look at everyone as a “donor” and only a donor. When our volunteers come to prison and work with our guys, they are costing us money–we have to have food, staff, materials, etc–but that money almost always translates into huge revenues–roughly every dollar spent on prison events yields $19 in revenue since almost all of our donors, major and minor, come to our events at some point. We maintain a healthy positive cash balance, but in effect, it makes sense for us to spend a lot of money on cultivation because it’s really just programming.
Too many organizations don’t look at the ways to make sure that they involve and cultivate their donors–and also usually fail to see that a reduced cost because a volunteer is doing work you would otherwise have to pay for is a donation–just not one that can be receipted and counted for the IRS.
I don’t donate much money to organizations, but I do “donate” a ton in the form of referrals, consulting, and other benefits. There is one organization that I work with that is able to provide free executive level consulting services to nonprofits–I consider making the connections and making sure that the follow-through is done on both ends a form of donating because my referral is free for the nonprofit consulting group (otherwise they would have to pay for it in advertising, networking or staff time) and it yields substantial benefits for the nonprofit. Both nonprofits win–and so do the executives who get to see how great most nonprofits are–but I never get a receipt for the economic benefit captured and created because of the pairing.
I think that’s really, really important, especially when we look at cultivation–if you are only looking at the monetary value captured and not the actual value captured and created by “donors” then don’t even bother to worry about whether or not you’re doing cultivation correctly. We thank our volunteers lavishly–pictures, emails, follow-up calls, increased opportunities to get involved more deeply–because they create the most value for us. In fact, we treat our volunteers many times better than our donors because the real value is in the time and effort and not in the money that is what is generally considered the fundraisers objective.
One last thing–since foundations account for a pretty big part of our revenues each year–it’s important to keep in mind the kinds of cultivation that you do. Even with our foundations, the objective is never just to look at them as pools of cash for our benefit–the real value is in the fact that they require us to think about our programs and offerings, and then again that throughout the year they require us–sometimes in very thoughtful ways–to measure and assess what we’re doing. I’ve learned that most foundations treat honesty and candid feedback about what happened as their primary form of involvement in our organization. They’ve never come to us and said that we should run our program a certain way, they just ask us to think about what happened and there is tremendous value in that since most individual donors never do that.
I just wrote a long comment on the last post, so I’ll try to make this one shorter.
Why do so many professional fundraisers feel they need advice from a marketing guru who doesn’t seem to have much experience with fundraising?
In my experience, if you spend a lot of money cultivating someone who hasn’t yet made a contribution, you’re likely throwing your money away. While most of us have few metrics to back this up, we have the battle scars to prove that inviting people to free lunches, cocktails, site visits, theater experiences, catalogues, folders filled with color photographs, DVDs, etc., usually leaves you with a list of people who like to get things for free.
A prospect needs to indicate they’re philanthropic and have an interest in what you do. If they’re a prospect worth their salt, they probably won’t let you spend a lot of money on them before they make a gift.
So what are we talking about?
If by cultivating, we’re really talking about investing in donor acquisition in a larger sense (e.g., conducting research, building a database, paying for first class postage, designing good looking printed materials, etc.), then I agree that we need to spend money to make money. But doesn’t everyone?
Great tips it really is important to have your calculations down especially if you are going to be spending a lot in investing in your non profit. If you know what your return on your invest will be on average you can put more more into the marketing methods that really do bring in new supporters and donations.