Explaining cost of fundraising to the giving public is not only complicated – it is often not a real issue for donors until we nonprofit people make it so! Sean Triner gets agitated about ensuring our focus is on what really matters: net income.

Explaining cost of fundraising to the giving public is not only complicated – it is often not a real issue for donors until we nonprofit people make it so! Sean Triner gets agitated about ensuring our focus is on what really matters: net income. COF a dangerous measure for public consumption

At a recent meeting with a small nonprofit, I was told that the chief executive officer of a very, very large nonprofit had been on TV talking about his organisation and how the public can support it.

Within his conversation I am told he mentioned that the cost of fundraising and administration at this organisation is incredibly low. The nonprofit is a client of mine; I have seen the figures, and their cost of fundraising (COF) is indeed very low.

However, COF is a really dangerous measure to be talking about in that context. It is really complicated and needs too much explaining. The COF for donor acquisition, for example, is usually more than the funds initially raised; it needs a lot more than a sound bite to explain that to the giving public.

I have written at length about cost of fundraising, including a useful exercise in my white paper ‘Ten Steps to Fundraising in a Recession’ which helps demonstrate why COF is not a real issue for donors until we nonprofit people make it so. A previous agitator column, also covers this issue. As well as not being particularly useful for complexity reasons, it is also unfair and not even a useful internal measure.

Net income is the way to go

I would argue that net income is the single most important measure. It is the only financial measure on impact. Net income is what a nonprofit uses to ‘buy’ services to implement its mission. Other impact measures then kick in, for example, lives saved or improved, land protected or policy implemented. But for us fundraisers, net income is the driver.

Put simply, it is better to raise $500,000 at the cost of $200,000 (40% COF) than $100,000 at the cost of $10,000 (10% COF). You can do more than three times the ‘work’ with the $300,000 net raised in the first example, than the $90,000 in the second. And if a charity is growing, it will be experiencing much higher COF than when it is stable – so higher COF tends to hint towards growth.

While COF agitates me, I am more agitated about making sure we have a focus on the right net income. Like anything in maths, it really isn’t black and white.

Take this mail example. (The same lessons apply for email, phone or other media.)

A charity decides to take a new approach to its Christmas warm appeal. The new approach, B, costs much more to produce than the old style; A. Approach B has a bigger pack and includes telephone calls to top donors.

The charity does a 50/50 split test of the two approaches.

Approach A brings in $150,000 at a cost of $30,000 from 3,000 donors. However, approach B raises $180,000 at a cost of $60,000 from 3,600 donors. The average was about the same, the net was the same. The only differences are that approach A had a COF of 20%, while approach B had a COF of 30% and also received 600 more donations.

Which one won?

As always – it’s the long term that matters

The instinctive reaction, and the one the accountant will go for is A. But approach B is much better, and bodes better for the future. The reason for this comes down to thinking beyond this campaign.

We know that the two biggest variables that indicate whether someone will donate are the number of gifts they made in the past, and how recently they were made. Approach B got 600 people to donate another gift, which means 600 people donated more recently than before the campaign. That is 20% more viable donors for your next autumn or tax appeal.

The message of this agitator is not unusual: think long term. Think beyond the next campaign, balance net, COF, number of donors and even average donation. They all play a part; it isn’t as simple as it seems at first.

I wish that the chief executive officer of the big charity had been concentrating on the impact of his charity’s work, and the number of Australians motivated to give – not the COF. COF is a nearly irrelevant and confusing statistic that doesn’t demonstrate anything about the good that a donation and the donor is doing now and into the future. © Sean Triner