Shades of Green

One of the most misunderstood, misreported, mistaken, or simply missed factors at many nonprofits is how much it costs to raise a dollar. In our series of posts about the five dimensions of fundraising, the final and often most confusing dimension is “cost.”

Charity watchdog groups have made an art form of comparing fundraising costs between nonprofits. (We’ll share our feelings about the futility of that in a future blog post.) What most nonprofits do is roll up a “fundraising efficiency” number for external reporting that divides the fundraising costs by the revenue generated. Most hope to keep that fundraising efficiency number at 20% or less.

That has some external value, but to get the real benefit of understanding costs requires a deeper look into your revenue streams. We believe that tracking costs can pay great dividends when it comes to making decisions about how to invest in your future fundraising success.

Here is the desired state from our perspective:  A nonprofit identifies and defines each of its revenue streams and tracks costs associated with fundraising for each specific stream. This creates a “cost-per-dollar-raised” or CPDR, for each revenue stream and allows the nonprofit to understand where to invest, what the right investment level might be, and what funds will actually be available from each revenue stream.

Most nonprofits have between 7 and 15 distinct revenue streams. Examples: major gifts, appeals via direct mail, online giving, crowdfunding, bequests, capital campaigns, conference fees, membership dues, corporate partnerships, and government grants.  Clearly defining each revenue stream and getting dollars into the right “bucket” makes planning the future far more predictable. We like looking back three to five years at each revenue stream to understand the rate of growth since that is a good predictor of future growth.

Some nonprofits do a good job of separating revenue streams but then don’t do much in terms of allocating expenses between each stream. Sometimes the costs of one revenue stream are in another budget. One nonprofit we know had a substantial  calendar which they sold as a revenue source.  The problem was that the printing costs for their calendars were in the marketing division’s budget! Once this was corrected, the “product” was clearly selling at a loss.

 A common problem we have seen is that most fundraisers work across several different revenue streams and his or her cost is simply treated as “overhead.”  Some reasonable way to allocate these costs needs to be created in order to understand the true CPDR.

The CPDR for different revenue streams can vary dramatically.  The CPDR can also vary dramatically between nonprofits. Here are some recent examples from our work showing the variation in costs:

• A mid-tier nonprofit spends 15 cents to raise a major gift dollar; 9 cents to raise a bequest dollar; 34 cents to raise a foundation dollar; and 21 cents to raise an annual fund gift.
• A nonprofit that relies primarily on events to raise its funds targets a CPDR of 50 cents. As it evaluates its events, it targets that no more than half of the event proceeds be applied to event expenses.
• A direct mail appeals program spends $1.75 to raise a dollar from each new donor. So the program is “upside down” until a future date when donations from that donor “catches up” to costs.
• One nonprofit has learned that the cost to raise a dollar in a capital campaign is less than half of its typical major gift cost. So campaigns are a regular practice of its fundraising strategy.
• A decentralized nonprofit uses a forecast CPDR for three years ahead to determine level of fundraising staff investment. They apply 25% of the projected revenue to fundraising and place those fundraisers in offices that can meet that projected CPDR rate.

Not all dollars are the same color of green.

Cost is one of the five dimensions that we encourage clients to consider as they look at fundraising growth. Our previous posts highlight the others: Adaptability, Renewal, Time, and Scale.  Looking at the funds you raise through these filters, and managing the type of funds you want to raise, comprise true fundraising strategy.