Converting Prospects

How a Donor Becomes, Well, a Donor

As fundraisers, we spend the vast majority of our time persuading people to act now.

We raise more money when we mobilize our existing supporters than when we engage people who haven't the faintest idea about our work. Customized appeals are always more successful than general appeals that try to interest everyone. Relevance to donors is paramount.

So how do we grow the pool of relevant prospects?

Let’s remind ourselves how our current donors became, well, donors.

In this blog, we'll define the five key steps that all donors go through before you're aware of their gifts. Our next blog will share a case study about one of our clients, which applied these principles to its direct mail program.

Awareness
The first step is for people to be aware of the causes and social change movements that your nonprofit belongs to. For instance, Kiva.org connects donors with entrepreneurs in emerging markets. Kiva.org belongs to the social entrepreneurship and microfinance causes.

If you're Kiva.org, both your current donors and prospective donors are, at some point, aware of social entrepreneurship as a movement.

This awareness leads adults to fall into two buckets: those predisposed to become donors and those who are not.

Although this five-step process is not always linear for donors, let’s start with people already predisposed to contribute to your organization because of their awareness about your cause.

Image Matching
At some point in the contribution process, donors visualize themselves as belonging to your cause. They co-brand themselves with your work because of the positive association your cause brings them.

Fact Matching
People who see themselves as connected to your work begin to educate themselves about it. They might Google broad industry terms or they might speak with friends or colleagues to learn more about the depth and breadth of your cause.

Organization Matching
While donors are researching your cause, they will inevitably come across your organization as well as your competitors. They've strengthened their engagement with your movement and are looking for opportunities to express their values. Make sure you are easy to find!

Gifts
You did it! Donors just completed the important journey to find you and make a contribution.

Lapsed Donors: Top 10 Ideas

1. Do a matching gift. Raise a set amount that you can leverage for a direct mail appeal. Have the appeal come from the donor and share why s/he cares so much about your cause.

2. Tell the story of why your cause matters from the perspective of a volunteer or client.

3. If you have a local community leader engaged in your work, have an appeal come from him/her.

4. Do a micro-campaign. Launch a small campaign around one, tangible outcome - say it costs $5,000 to provide a medical service to a patient – and build your appeal around improving that one person’s life. Remember, have a launch, beginning and celebration.

5. Remember, in difficult economic times, more people give – but they are more likely to give smaller amounts. Create an appeal around that concept. Select a low per person cost service – maybe it costs $10 to feed a family for one day – and ask small gift donors to help one family.

6. Start with an email ask; 7-10 days later, follow up with snail-mail (or vice versa). Snail-mail everyone on your list – or just those who opened the email but didn’t contribute.

7. Reacquaint donors with your mission. Many donors simply forget why you matter. Focus on what still needs to be done, rather than what you’ve already accomplished.

8. Reinforce donors’ image of themselves as important philanthropists. Phrases such as “as somebody who makes a difference in the community, you…” strengthens giving as part of their value systems.

9. Offer donors the option of making special occasion gifts. Tie in your appeal with holidays or other mission-based events – say, Mother’s Day for breast cancer.

10. Create multiple engagement opportunities. Prospects who write letters or volunteer will become donors. Donors appreciate that you value more than just their contribution.

Measuring Donor Growth Rate

Perhaps the most important metric in analyzing your nonprofit's long-term sustainability is your Donor Growth Rate.

Donor Growth Rate measures the net change in the number of donors to your nonprofit.

Use the following equation to determine your Donor Growth Rate:

(Number of New Donors – Number of Lapsed Donors)/Active Donors

New Donors: Donors who make their first gift to your nonprofit

Lapsed Donors: Donors who gave last year, but do not the next year

Active Donors: Total number of donors who gave last year

Donor Growth Rate is measured in percentages: a Donor Growth Rate of 25% means you have 25% more donors this year, relative to last year; a Donor Growth Rate of -10% means that you lost 10% of your donors over the previous year.

Let's look at the impact on your gross revenue of various Donor Growth Rate scenarios.

For simplicity's sake, we've controlled the average gift and assumed other constants over a five-year period. We've also excluded inflation or the time value of money from our analysis (this analysis would result in lower revenue values after year one).

Negative Donor Growth Rate

Assumptions

Active Donors = Number of donors who gave in the prior fiscal year

Donor Growth Rate = Annual Total of -5% (any combination of lapsed donors and new donors that totals -5% of Active Donors)

Average Gift = This value remains unchanged at $75

NEGATIVE DONOR GROWTH RATE
	Y0	Y1	Y2	Y3	Y4	Y5
Active Donors		5,000	4,750	4,513	4,287	4,073
Donor Growth Rate		-5%	-5%	-5%	-5%	-5%
Annual Net Donors	5,000	4,750	4,513	4,287	4,073	3,869
Average Gift	$ 75	$ 75	$ 75	$ 75	$ 75	$ 75
Gross Revenue	$ 375,000	$ 356,250	$ 338,438	$ 321,516	$ 305,440	$ 290,168

The impact of negative growth rate is significant over five years:

• Number of donors declined by 23%
  
• Absolute revenues dropped 23%
  

Zero Donor Growth Rate

In this scenario, your nonprofit adds exactly as many new donors as it loses. Assuming your average gift does not change, your gross revenue remains the same over the five-year period.

Positive Donor Growth Rate

Assumptions

Active Donors = Number of donors who gave in the prior fiscal year

Donor Growth Rate = Totals 5% (any combination of lapsed donors or new donors that total 5% of Active Donors)

Average Gift = This value remains unchanged at $75

POSITIVE DONOR GROWTH RATE
	Y0	Y1	Y2	Y3	Y4	Y5
Active Donors		5,000	5,250	5,513	5,788	6,078
Donor Growth Rate		5%	5%	5%	5%	5%
Annual Net Donors	5,000	5,250	5,513	5,788	6,078	6,381
Average Gift	$ 75	$ 75	$ 75	$ 75	$ 75	$ 75
Gross Revenue	$ 375,000	$ 393,750	$ 413,438	$ 434,109	$ 455,815	$ 478,606

The impact of a positive growth rate is equally significant:

• Number of donors soared by 28%
  
• Absolute revenues grew by 28%
  
• Not only are these metrics impressive, but you've also positioned your overall fundraising program for further growth:
  
  • You'll likely need to re-segment your Major Donors from your Annual Fund Donors and maybe expand the number of donor segments.
    
  • You may need to begin offering new giving vehicles to match the new and emerging needs of your new donors. New vehicles might include estate planning giving options, stock contributions, or automatic giving via credit card.
    

Below is a chart that diagrams the difference between a positive Donor Growth Rate and a negative Donor Growth Rate.

Donor Growth Rate Effect on Dollars Raised Over Five Years

Don't bother squinting to see the individual values; this chart demonstrates how quickly a relatively small variance between positive (the orange line) and negative (blue line) Donor Growth Rates quickly escalates to a significant gap in just five years.

In addition to determining whether your Donor Growth Rate is positive or negative, you should consider the impact of your Donor Growth Rate on your revenue. For instance, you might find yourself with a negative Donor Growth Rate, while your total revenue increased. This is likely caused because you added new donors who gave gifts large enough to compensate for your volume losses. At best, this is a stop-gap strategy for the short term, but it won't sustain your organization into the future.

Your Donor Growth Rate gives you valuable information about the effectiveness of your appeal and your communication of your value to all donors. If you have a positive Donor Growth Rate, you're messaging well and the community generally believes your organization is a valuable asset.

However, if you have a negative Donor Growth Rate (sustained over a couple years), you need to re-examine your communication with donors. Explore investing in e-communications strategies and testing new messages about your mission and work that are relevant to your donors.

Most organization's fundraising goals are set based on last year: let's look at what we did last year and improve slightly. However, if you are off - even just a little - year-over-year, your nonprofit can quickly find itself in a significantly weakened financial situation.

Knowing your organization's Donor Growth Rate, on a multi-year basis, should be one of the first metrics you consider when forecasting your current year-end outcomes and when creating next year's budget.

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=FC/(AG*RR-VC)

Where:
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:

BEQ=(FC+PR)/(AC*RR-VC)

The table below shows an example:

Sample Nonprofit
Constituents		10,000
Fixed Costs:
Mail set-up		$250
Design		$2,000
Total Fixed Cost		$2,250
Variable Costs (Per Unit)
Printing		$0.5
Envelopes		$0.25
Reply envelopes		$0.25
Postage		$0.2
Variable Cost		$1.2
Average Gift		$75
Response Rate		0.03
Necessary Profit		$10,000
BEQ=(FC+PR)/(AG*RR-VC)
BEQ		11,667
Constituents		10,000
Variance		(1,667)

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.

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.

To Mail or Not to Mail?

Once we're comfortable with average gift and response rate, we can figure out whether we should even do a direct mail appeal.

First, we need to calculate our revenue and expenses. For revenue, we multiply: number of constituents (people on our list), average gift and response rate.

For expenses, we multiply constituents by variable costs. Then, add fixed costs (table 2 shows the costs, expenses for net revenue for the chart above):

REV=CON*AG*RR
EXP=CON*VC+FC

Where:

REV =Total Revenue
CON = # of Constituents in Database
AG = Average Gift
RR = Response Rate
EXP = Total Expenses
VC = Variable Costs
FC = Fixed Costs

Table 2
Revenue		$15,000
Expenses		$14,250
Net Revenue		$750

Fantastic! We made $750 (roughly $.05 per $1 spent).

WHEN EXPENSES ARE GREATER THAN REVENUE

There are two situations when expenses exceed revenue:

1) when Variable Cost (VC) is greater than the Response Rate (RR) multiplied by the Average Gift (AG) and

2) when Break Even Quantity is greater than the number of constituents you have.

For the first case, do not continue with the mailer. Each time you put a solicitation in the mail, you're losing money!

In this instance, you need to rethink the costs of the mail piece. In the model below, you'll know this is this case because you get a negative BEQ! Bad news (see table 3 below).

Table 3
Sample Nonprofit
			BAD NEWS	CAN WORK	ADJUSTMENT
Constituents			10,000	5,000	5,000
Total Fixed Cost			$2,250	$2,250	2,250
Variable Cost			$1.2	$1.2	1.2
Average Gift			$75	$75	75
Response Rate			0.01	.02	.03
Per Unit
Revenue			$0.75	$1.5	2.25
Expenses			$1.2	$1.2	1.2
Per Unit Net			$-0.45	$.3	1.05
BEQ			-5,000	7,500	2,143

The second case is a little more nuanced. Here, you are making money each time you put a solicitation in the mail, but you do not have enough people to mail to cover your fixed costs (FC).

To remedy this, you can:

• Send your mailing by bulk (~$.27) instead of regular mail ($.42). Your mail will take a couple weeks to hit, but it may well be a trade-off worth making;

• Reduce the number of inserts, cutting your paper and printing costs;

• Identify which geodemographic cluster has the lowest response rate and eliminate that population from the mail piece. This drives your response rate up, perhaps to profitability.

• If removing that geodemographic cluster improves the response rate to 3%, then the BEQ becomes 2,143 (above). Because we started with 5,000, but by removing that 1,000, the appeal goes from losing $750 to making $1,950.

The point is: we can make these decisions before investing a single dollar in this appeal.

Average Gift & Response Rate

We want to drill down on the two datapoints that make the previous direct mail posting a nice, easy formula. The first is average gift size. The second is response rate.

AVERAGE GIFT

Finding your average gift is easy: look at your most recent year-end direct mail. Add together all the money raised from that mailer and divide by the number of gifts made. This is a rough estimate.

But, you know how you always get a $5,000 gift from a donor who met with your CEO two weeks before and just dropped her check in your direct mail envelope? That gift probably isn't representative of your direct mail program. Sometimes, it's easy to know which gifts to exclude, but often, it's not.

When you know which really big and really small gifts to exclude, just do that.

When you don't, do this:

• Find your average gift by adding up all the revenue raised and dividing by the number of gifts. This is your average gift.
  
• Next, figure out the standard deviation (an Excel formula will do this for you).
  
• Then, start at your average gift and add your standard deviation to your average. Add it again. Stop. Exclude any gifts above that amount.
  
• Then, take your average and subtract your standard deviation from the average. Subtract it again. Stop. Exclude any gifts below that amount.
  

These extra steps stabilize your average gift by removing that $5,000 gift and that $1 gift from the mix. It gives you an average of the most common contributions you receive (roughly 95% of all donations).

RESPONSE RATE

Response rate is the total number of donors who gave to your year-end appeal divided by the total number of people who received your year-end appeal.

If you're new to your organization, use industry standards as proxies to estimate your response rate.

For instance, a prospect or acquisition mailing has a .7% response rate (or 7 people out of every 1,000 mailed will give).

For a loyal donor mailing, 2% is a typical response rate (or 2 out of every 100 mailed will give).

If your mailing is a mix of donors and prospects, use 1.5% as a response rate.

We'll dig deeper with more sophisticated forecasting tools in a future article, but these proxies will get you started.