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.

No comments: