Nonprofit fundraising is a story of haves and have-nots
The have-nots tend to be smaller, local organizations. They don’t have to raise as much money, but have fewer resources and draw from a more limited donor pool. Small organizations often have only one paid development person, or they outsource fundraising altogether; tend to be highly focused on immediate funding requirements; and concentrate on a local donor base.
Many of these small nonprofits use internet-based fundraising methods. But some can also resort to more questionable methods, such as “donate your car” campaigns (a legitimate technique often marred by misrepresentation and a small percentage of proceeds actually going to charity). They often fail to understand or capture the full scope of fundraising costs.
There’s a perennial revolving door issue: Development director positions exhibit high turnover rates (the directors stay in their jobs less than two years on average), lengthy vacancies (the mean time to fill vacancies in small nonprofits is over 21 months), and a shrinking pool of qualified candidates.
Fundraising has elements of a zero-sum game
Ways to improve fundraising effectiveness
Total fundraising, net
This is the amount of money that fundraising efforts provide to spend on an organization’s mission. It’s defined as total amount raised minus total fundraising expenses.
Example: If an organization raised $1,000,000 and spent $200,000 on staff and other expenses to raise that money, its total fundraising, net is $800,000 ($1,000,000–$200,000).
This measures how dependent a charity is on its top donors to fund its work. Generally, a charity wants a lower dependency quotient. It’s the sum of contributions from the five largest funders divided by organizational spending.
Example: If an organization’s top five donors contributed $250,000 during the past three years, and the total organizational expenditures for the same three-year period were $1,000,000, its dependency quotient is 25% ($250,000/$1,000,000), meaning it would have to replace 25% of its budget if it lost its top five donors.
Cost of fundraising
A measure of efficiency, the cost of fundraising measures how much it costs to raise money within your organization. All else equal, a lower cost of fundraising is better. It’s calculated as total fundraising expenses divided by total fundraising.
Example: If an organization spends a total of $50,000 to raise a total amount of $150,000, then its cost of fundraising is 33% ($50,000/$150,000). Or, stated in dollars, it spent $0.33 to raise $1.00. It can be hard to achieve both a low level of risk (low dependency quotient) and a high rate of return (low cost of fundraising). That’s partly because the dependency quotient and the cost of fundraising tend to have an inverse relationship—a low cost of fundraising typically exists alongside a higher dependency quotient, and vice versa.
Broad-based fundraising efforts—tactics such as direct mail campaigns or special events—typically bring in a larger number of low-level to mid-level donors and are often more expensive compared with major gift solicitation or foundation fundraising. These latter approaches tend to bring in a smaller number of large-scale gifts that cost less but result in greater dependency.
Consider these additional best practices that can boost your fundraising effectiveness:
- Match donor behavior. We encourage nonprofits to study why their donors donate to their organization specifically and tailor their messaging accordingly.
- Leverage analytics. Charities need to know their own data to understand the demographics of their core contributors and identify new prospects.
- Reduce obstacles to giving. Charities must update their donation channels, including online and mobile giving platforms, to keep pace with changing consumer behavior.
- Improve donor communications and impact reporting. What story does a charity want to tell its stakeholders? What does mission success look like?
- Be transparent and consistent in reporting. Report data at least quarterly to keep stakeholders apprised. Share metrics and finances broadly.
Key questions, issues, and recommendations
Moving forward, you may find it beneficial to ask some pointed questions about your organization, and to think about some recommendations:
- Who are your donors and why do they give to you?
We are struck by how often nonprofit boards can’t answer this question. Knowing the demographics of your donor base is critical in terms of what types of fundraising you choose to emphasize, how you communicate with donors, the information you provide, and more.
- What type of fundraising best fits the profile of your donors?
Nonprofits shouldn’t use any and all methods, but should instead focus on the methods that best fit their situation and are most effective for their donors. Remember that even the largest and most sophisticated nonprofits can’t be all things to all people. There are good reasons Harvard doesn’t run radio ads encouraging listeners to “donate your car, working or not” and why your local food bank doesn’t have a staff of 20 looking for major gifts with naming rights.
- Your executive director/president and the board must play a role.
It is essential that the leadership of any charity be ready, willing, and able to serve as the face of that nonprofit and help raise funds. Donors don’t give just because they identify with the mission of the charity, but also because they feel connected to and have trust in the organization’s leadership.
- There are no shortcuts to success.
Four full-time equivalents will most likely produce reasonable sums in five or six years, but you can’t short-circuit the process. Hiring one person and firing them because they haven’t produced results in two years will only ensure that you never escape the revolving door of fundraising failure.
- Think twice before you engage third-party fundraising firms to save money.
The problem with this approach is that the third party, not the nonprofit, develops the contacts, knowledge, and expertise. We encourage nonprofits to use internal resources to build and control the organization’s knowledge of donors.