Return on Investment in Philanthropy
Many Boards and non-profits spend unprofitable time agonizing about return on investment in fundraising. The cost per dollar raised can range on average from 10 cents to 90 cents. Yet, the IRS is disturbed that 25% of all non-profits filing 990s, and reporting contributions of $500,000 or more annually, report $0 (Yes, that’s “Zero!”) on fundraising costs. As a rule, if an organization tells you that the overall cost is less than 20 cents, or more than 80 cents, per dollar raised – there is something wrong or not revealed, and you need to check how they are counting, especially for labor, what labor they use and the type of fundraising.
Some major, well-known nonprofits count unrealized bequests in their fundraising totals, some shift the costs to other centers (e.g., the university administration) or simply call them something else. Still others have missions more readily amenable to gaining many federal, state and private grants, and a grants staff can be highly productive in terms of return on dollar. Unfortunately, some non-profits are not telling the truth and others simply do not know what to count or how to count fundraising costs. Both of these groups do the NFP sector, and development professionals in particular, a grave disservice.
Many good institutions such as the Center for Philanthropy at Indiana University are putting time and effort into researching fundraising costs. Others like Greenfiled in his good work, Fundraising Cost Effectiveness, offer some sound benchmarks based on observations of national experience. I do not pretend to match the quality and depth of their work, but as a professional for over 15 years and as someone who has consulted with over 100 nonprofits I can assure you that fundraising cost-effectiveness is not determined by pro forma ratios. The Better Business Bureau says not to give to organizations with fundraising costs exceeding 35% of each dollar raised. This is based on little fact-based analysis and it does a great disservice to those who really understand fundraising. There are thousands of highly effective and successful non-profits that spend $1 to raise $2, or 50 cents on a dollar.
So how do we determine what is right in the way of benchmarks? First, let us review factors most crucial in determining a Return On Investment for fundraising:
- Public view of the importance and prestige of the organization’s mission and vision.
- Quality and number of trained volunteers raising funds.
- Age and history of the organization for which funds are being raised.
- Type of organization (e.g., United Way, church, Hospice, private secondary school).
- Area in which fundraising is done. More specifically, the wealth of the potential donor base in the community and the prospect base for the not-for-profit organization in question.
- Donors interest in, and loyalty to or affinity for, the cause and organization. (A $250 gift to my local hospital does not preclude a $1,000 gift to my college or a $500 gift to my high school.)
- Age and stability of the fundraising program.
- Number of fundraising staff dedicated to fundraising (not secretarial or support staff).
- Focus of the fundraising strategy. Planned / major gift programs and capital campaigns can return $5 to $8 on a dollar. Special events and annual funds range from $1.70 to $4.50 per dollar invested, and grant programs can range from $1 to $8 per dollar invested. Each activity has a different return and the mix of activities affects the overall return.
- Donors’ perceptions of the quality and significance of the projects to be funded.
Check the organizations you are familiar with. How many of them have wide variations in hese 10 factors?
A comparison of the fundraising effectiveness of different organizations in the same community is often a useless exercise. Yet the analysis can be useful in deciding which strategies to employ (e.g., point #9) and in assessing year to year progress. Benchmarks of fundraising effectiveness should include:
# of donors – Is it growing annually?
# of donors making more than one gift in one year
# of donors increasing their gift size annually
Is overall amount of giving exceeding the rate of inflation?
Is the overall amount of fundraising going up and staying ahead of any increase in expenses?
We need to make ourselves – the development professionals – the real experts in fundraising effectiveness and management, not business associations, the IRS, state regulators, or other groups no matter how well intended. Our colleagues, the donating public, and the many people who depend upon us to help provide a better quality of life, deserve no less.
Michael W. Gerrity is President of the St. Joseph Hospital Foundation and President of the Western New York chapter of the Association of Fundraising Professionals (AFP).