A nonprofit board has a fiscal duty to make sure that resources are raised and allocated to meet the organization’s missions. Often, however, boards have unrealistic expectations about how much money can actually be raised. They have no way of knowing, and thus planning for, how many resources should be allocated to fundraising. Both in terms of monetary and staff time investments.
What fundraising metrics do your board use to evaluate your fundraising success? How do they know if your agency’s revenue generation efforts are good or not? How do they know they are succeeding at overseeing the wise allocation of resources? How are they evaluating you on your financial performance? Do you know how your fundraising efforts are faring?
Costs to Raise $1
It takes money to make money. Fundraising involves an investment today that produces results tomorrow. Most often, you incur costs before you start realizing revenues, particularly staff costs. What kind of results are reasonable to expect from your investment? How do you know your fundraising staff are doing their job? What does the data tell you?
Generally speaking, to raise $1 through various activities it costs:
- Capital campaigns and major gifts, including labor: $0.10
- Grant writing, including labor: $0.20
- Direct mail renewal, including labor (with a 50 percent or better return rate): $0.20
- Special events, not including labor: $0.50
- Direct mail acquisition, including labor (with a 1 percent or better return rate): $1.25
To calculate your costs to raise $1, divide your fundraising expenses by your fundraising revenues. For example:
$300,000 fundraising expenses/$1,000,000 fundraising revenue = $0.30 to raise $1.
You want to calculate both your overall cost as well as your costs by fundraising channel. You want to know your overall costs so you can budget correctly. You want to know how much it is costs to raise $1 via your different fundraising activities so that you know which areas you can improve on. You will use gross revenues as your revenue number. For the most accurate results, use your total costs as your expenses number. If you use total costs as your expenses number and you can get your cost to raise $1 below the industry averages, you will be doing quite well. Both your direct and indirect costs will be accounted for. Just note that the average cost to raise $1 through special events of $0.50 does not include labor. If you include your labor costs in that calculation, your cost to raise $1 may well be over $1. In our experience, once you account for salaries, most special events lose money or, at best, break even.
If your cost to raise $1 is at or below the industry averages, then you want to maintain your current program. If your costs are more than these averages, you want to work on streamlining your fundraising program and see where you can cut costs. Track your trends over time to monitor progress toward your goals. Remember, changes in your fundraising program and its procedures will probably take time.
Donor Acquisition Rate
You need new donors so that your donor base keeps growing no matter what fundraising activities you choose to implement. After all, there are only two ways to make money: more giving or the same people giving more. Usually, you see a combination of both. So, how do you know if your donor acquisition efforts are up to snuff?
To thoroughly analyze your acquisition efforts, you need both the actual number of new donors you acquire each year as well as your donor acquisition rate. Your donor acquisition rate tells you your rate of donor growth. Your goal is to maintain a constant rate of growth, maybe even improving it. Knowing your trends in donor growth can help you forecast donor base growth when you are setting goals. Knowing and sharing this benchmark with your board will help them project how the organization will fare in the future. Because you need new people to replace the donors who have lapsed or left, for whatever reason.
You can calculate your donor acquisition rate by dividing the difference between the number of donors this year minus the number of donors last year by the number of donors last year. For example:
(1,275 donors this year – 1,260 donors last year)/1,260 total d0nors last year = 1.2 percent.
The 2020 industry donor acquisition rate was 7.3 percent. More detailed statistics by size and type of agency are collected by fundraising software agencies, combined, and then then released by the Fundraising Effectiveness Project. The Fundraising Effectiveness Project is a free product of the Association of Fundraising Professionals.
Donor Retention Rate
Donor acquisition, though, does not tell the whole story. Donor retention is equally, if not more, important to calculate. Your donor retention rate tells you the percentage of your donor base that made a second or subsequent gift. An optimal donor retention rate hovers right around 80 percent, give or take a few percentage points.
It is much less costly to retain a donor than acquire one. In fact, it typically costs six times as much to acquire a new donor than it does to retain an existing donor. Therefore, contrary to popular opinion, you will raise more money by increasing your donor retention rate as opposed to your donor acquisition rate. Don’t get me wrong. You need donor acquisition. Life happens and people can’t donate anymore for a variety of reasons - they die, they move, they lose interest, their financial circumstances change, and so on. You need new donors to replace those lost through attrition. But the majority of your fundraising investment should focus on retaining donors as opposed to acquiring donors. If you invest in improving your donor retention rate, your costs to raise a dollar go down, increasing your net income.
Your overall donor retention rate is calculated by dividing the total number of donors last year by the number of repeat donors this year. For example:
600 repeat donors this year/1.260 donors last year = 47.6 percent
The above example means that for every hundred donors that nonprofit acquires, 52.4 of them will not give again. That’s more than half the total donor base. This means you are recreating more than half your donor base every year. That’s a lot of time, effort, and money. Want to raise more money with less resources? Focus on improving your donor retention rate.
The 2020 industry overall donor retention rate was a poor 43.6 percent. The first-time donor retention rate was even more dismal at 19.2 percent. No wonder many nonprofits are struggling. For every five donors they acquire, only one will give again.
For practical idea on how to recruit and engage donors, see Donor Acquisition: How to Find People Interested in Giving to Your Nonprofit and Donor Retention: How to Get People to Give Again and Again.
Wrapping It Up
Benchmarking is the first step in determining where the leaks in your fundraising system are. If you know where the leaks are, you know how to make better fundraising decisions. Your board knows why you recommend allocating fundraising resources the way you do. They will have data to back up the budget they are asked to approve. They will have evidence of their good fiscal oversight.
Benchmarking also helps you and your board really know how your agency is faring compared to other nonprofits. That means you have objective data on which to base expectations, increasing the likelihood that your nonprofit will meet its fundraising goals. And that’s how you grow your mission, leading your board to a sense of achievement and purpose. Which leads to more board engagement and better executive director-board relations.
So, teach your board industry benchmarks. Calculate and share your nonprofit’s costs to raise $1, donor acquisition rate, and donor retention rate. Set data-based goals and expectations. Lead your organization forward in its fundraising endeavors with the full support of your board.
Benchmarking is just one step toward achieving fundraising success. It is also important to identify your fundraising strengths and gaps, mobilize your staff, and excite your community.
To learn what your nonprofit can do to move ahead, schedule a complementary 30-minute strategy session with me. During our time together, we will clarify the fundraising issues your nonprofit is facing, explore possible solutions, and develop a plan of action.
When you make your appointment, you will be asked a few brief questions about your situation so that I am best prepared to help you. I look forward to our conversation!