Wednesday, December 31, 2008

Forecasting Net Revenue from Direct Mail

At your Executive Staff weekly meeting, the CEO turns to you and says "can we net $10,000 from the next direct mail appeal?"

How do you answer?

Well, let's say you've already found your Break Even Quantity (BEQ). Since it's less than all your donors and prospects, you're ready to undertake the mailing. How do you determine whether the mailing can realistically make the desired profit?

By the way, don't let the word "profit" scare you – in this case, every penny of your profit carries out your mission. So, if you, your CEO or Board eschew the concept of profit, position this as money that pays for program expenses to impact your community.

To figure out your profit, you need to expand your BEQ Model.

Currently, your BEQ looks like this:


BEQ = Break Even Quantity; total number of people who must receive your appeal
FC = Fixed Costs; may include staff time
AG = Average Gift; total revenue raised divided by total number of donors
RR = Response Rate; what % of donors who receive your direct mail will give
VC = Variable Costs (e.g. postage, printing)

To include profit in your model, simply add the desired profit (PR) to fixed cost (FC).

Your new formula looks like this:


The table below shows an example:

Sample Nonprofit



Fixed Costs:

Mail set-up




Total Fixed Cost


Variable Costs (Per Unit)





Reply envelopes




Variable Cost


Average Gift


Response Rate


Necessary Profit









In this example, there simply aren't enough donors to meet this goal of raising $10,000. You can tell your CEO that you won't be able to net the desired $10,000 from the direct mail. If the need for these funds is urgent, perhaps you should seek those funds from a major donor or Board member.

In future posting, we'll discuss what you can do to increase the response rate and/or average gift.

Monday, December 8, 2008

Fundraising Effectiveness vs. Efficiency

A donor's dollar is a finite resource—especially in today's economic times—and likely, your mission has become even more relevant in today's economic reality.

Among the most difficult decisions for Development Professionals is the choice between the most effective fundraising strategy and the most efficient one.

The most effective strategy maximizes the % of each contribution that goes toward your organization's program costs.

The most efficient strategy produces the best return on the organization's development investment.

The "Effectiveness vs. Efficiency Matrix" listed above outlines the possible places an organization can be along the effectiveness vs. efficiency spectrum.

Obviously, no organization wants to find itself in the "Not Effective, Not Efficient" quadrant (lower left). Organizations here are spending too much money to raise a dollar.

As a rule of thumb, organizations should spend no more than $.30 to raise $1. (To calculate your cost to raise a dollar, divide your total fundraising expenses by the total revenue the department earned).

The next two quadrants are where many Development Professionals find themselves.

In the "Effective, Not Efficient" (upper left) quadrant, the Development team is raising a substantial amount of money, but it's costing them well above $.30 to raise $1.

This may be understandable for certain periods of time, such as at the beginning of a capital campaign or during an intense acquisition period.

But, if high costs are sustained, many donors will likely stop giving to the organization because not enough of their dollar is going to execute the mission. An outrageous example of this would be an organization that raises $50 MM, but spends $40 MM to do so.

On the other hand, nonprofits in the "Efficient, Not Effective" (lower right) quadrant are spending very little to raise a lot of money. This nonprofit may even lack a full-time Development Professional. A large single grant or donor may be underwriting the bulk of the organization's expenses.

Another outrageous example would be if this organization spends $25,000 to raise $1,000,000; it costs $.05 to raise $1.

When it costs below $.10 to raise $1, it's very easy for organizations to raise money, but you're leaving lots of money on the table because you have no one to steward these gifts and identify and cultivate new gifts. You could have a much greater impact on your mission if your organization invested in fundraising.

It's likely that such organizations don't reach out to new donors, but return again and again to the same donors, who are, for the most part, responsive (because your needs are high and your organization has a good mission). This keeps your ratios down because you are not spending money on unsuccessful donor cultivation attempts.

Of course, this organization isn't growing and will eventually begin to shrink, because you have a negative donor growth rate.

Finally, we all strive to be in the upper right quadrant, "Effective and Efficient." Organizations here allocate between 70% - 90% of each contribution toward programmatic expenses – which are executing the organization's mission and having strong community impact.

An additional characteristic of these organizations is that they have a positive donor growth rate. They are successfully maintaining current donors and are effectively recruiting new donors to replace the 30% or so of donors who inevitably lapse.

Organizations in this sweet spot are maximizing revenue and minimizing costs. Concurrently, they are accomplishing this with an appropriate amount of staff and other resources.

We'll discuss donor growth rates and lapsed donor rates in depth in future postings, but suffice it to say that a positive donor growth is an important metric for an organization's long-term fiscal and fundraising health.

There's lots more to be said about effectiveness versus efficiency because it is central battle in the decision-making (consciously or not) of most nonprofits. But, we hope we've given you a taste for how to approach this important decision.