Fundraising Strategy

When a 90% Cost of Fundraising is a good thing

By Clarke Vincent

Perhaps a 90% Cost of Fundraising ratio is a good thing when your fundraising provides a better ROI than your charity’s investment portfolio receives as a return on your financial reserves.

In the last issue of Pareto Talk, Sean Triner wrote an article called “How to convince your board it’s raining on a bright sunny day“. Sean outlined some of the arguments he uses to help some charity Boards recognise that significant financial reserves can occasionally be spent, and not indefinitely left for the future. Sean suggests that a strong fundraising program can offer as much stability and  growth as classic investment strategies, property or shares. This led me to question – how much should a charity invest in growing their fundraising program? Here’s one approach to answering that question that is designed to help Fundraisers who take the question to their Board.

In my role at Pareto Fundraising I talk to quite a few senior fundraisers and charity Board members with one thing in common – they all want to raise more money. Most understand the concept that you need to invest money to make money and so enjoy a conversation about investment options and likely ROI. But, many then falter or even become paralysed by what that investment will do to their Cost of Fundraising (CoF) ratio. The media enjoy headlines berating charities for spending money to make money, and Australia regulates against it too, so it is a sensitive area. But it needs to be tackled head on by fundraisers, because in the wrong hands, managing by the CoF ratio will stop a charity from achieving its vision.

I think there is a lot to be gained from adopting a polar opposite approach to the concern expressed around CoF ratios, to help shake up conventional conservative caution. Doing so is a strong negotiation tactic, referred to by psychologists as anchoring, and just might help to set the tone for some future defining Board investment decisions.

How much money should charities invest in fundraising in order to grow? Tempered by a concern to keep CoF low, the typical response to that question is “as little as possible”. But perhaps the answer should be “as much as possible”.

Perhaps the answer is simply – Every dollar that offers a better return in a fundraising strategy than in a classic investment portfolio. What have typical Australian long term investments returned per year over the last 10-20yrs? About 10% it seems.

Perhaps the CoF should be pushed from the typical 15 – 25% up as high as this formula:

100% – (minus) your best investment return rate

In other words:

If $100 invested on the ASX returns 10% pa you have $110 after a year. If you accept a CoF of 90% then for every $110 you get at the end of the year, you needed to invest $99 in fundraising. So that’s a 1% better return than the ASX. So why wouldn’t a charity (and legislators) let charities be more like business (that’s the typical capitalist, paternalist criticism fired at charities within publications as eminent as The Economist) and make a decision to push UP the cost of fundraising as far as basic economics allows? To 90%.

Perhaps risk is all that is standing in their way. Or perceived risk, inertia and safety in numbers. Most people tell you that they invest in property and shares because everyone else does, or because the long term returns are good. But thanks to recent and ongoing global financial crises, we’re all starting to question this incumbent attitude. So, build in a buffer that reflects your perception of the variance in risk between your current investment portfolio and investing in a sustainable fundraising strategy.

So how risky is fundraising? Sure it has its risks – when you invest $250k in a single mail campaign, you risk a poorer than projected response rate. But professional fundraisers manage programs with a scientific test and learn ethos that gives them much steadier track records of investment return than many financial organisations. And some fundraising investment opportunities are phenomenally low risk. Many face to face fundraising agencies only charge for the new donors they acquire. So whilst the cost to a charity to start up face to face fundraising is significant, the risk is minimal because you don’t pay for donors who attrite early. Breakeven eventuates within approximately 10-15 months and then decades of donor growth (and much higher ROI on an individual donor basis) follow if donor stewardship communications are managed with common fundraising integrity.

So, next time your Board sets the goal of increasing income, I’d suggest asking if a 90% Cost of Fundraising ratio is acceptable (as a temporary measure, during donor acquisition) and see if that helps shift the conversation in your favour. I seriously doubt that many charities will make a radical shift to pushing their CoF to 90% (especially where legislation forbids it – so be sure to check on legislation and any exemptions that might be granted to you). But perhaps a few fundraising early adopters (the game changers) will question if CoF is not something to be minimised but to be managed somewhere in the middle ground as part of a sustainable, organisation-wide investment strategy.