How to ‘WOW’ your trustees by reducing your ROI
On June 11, 2015 At 2:00 pm
Responses : 2 Comments
So what’s the problem?
Income – expenditure = profit. This is one of the fundamentals for anyone in business. However, when these same business people come into a charity’s trustees meeting, profit, or net income as we fundraisers would call it, goes out of the window. What matters is increasing income and reducing expenditure. Annual ROI is king. I cannot count the number of times I was asked how I could “improve “ ROI. And always feeling “That is the wrong question“.
The charity sector usually looks at the wrong metrics.
So what is the right question ?
Once I was asked, by the NSPCC’s new treasurer, (Jon R Aisbitt, then a partner at Goldman Sachs) “ If you reduced ROI, how much additional net income could you raise?” (You had to be pretty sharp to be a partner at Goldman Sachs). I was knocked off my feet. Here was a trustee actually suggesting we spent more, not less. And he seemed to understand that if we spent more, we’d raise more, even at a lower ROI. This extraordinary insight got carried into our actions.
An increase in net income enables you to do more for your beneficiaries. Expenditure on fundraising drives net income. But how often have we been asked by our trustees to spend more on fundraising, and reduce ROI ? In order to optimise the net income available for services? Not often enough.
So what did you do?
One of the best things we did was to invest in regular giving. Donors often prefer to give a small amount often rather than a single larger sum. And most people are paid monthly. For the charity monthly giving works well not just because it’s popular and easier but because inertia can act in our favour. People have to take positive action to cancel a direct debit, but can easily just decide not to give a cash gift.
Measures of propensity to give such as RFV (recency, frequency and value), which were highly unsatisfactory at the best of times, became irrelevant. In regular giving, you look at recruitment, upgrading, extra cash gifts, additional touch points, (e.g. trading, challenge event, volunteering, campaigning) and retention. And find suitable measures for each of them.
Fundraisers now should be looking at improving retention – dramatically. I discussed this in my blogs on relationship fundraisingI and relationship fundraisingII a little while back. Retention (reducing attrition) really is the silver bullet of fundraising. Upgrading, cash gifts and touch points, I will discuss in a later blog.
Get back to recruitment
You need to explain that chart, and tell us what it says. (copyright Giles Pegram)
It shows two ways of investing £1m of your reserves. In the first scenario, on day 1, you leave them in the bond market, and over ten years you get the return in the red line. This is what most charities do with most of their free reserves. An investment committee at your charity probably spends hours looking at whether the red line could be 10 per cent higher.
However, the purple line shows what would happen if you invest that £1m in recruiting regular givers, stewarding them, upgrading them and keeping them. This is the return you would get on that £1m. (All on 1st April, to keep it simple. In practice no charity would actually invest all the year’s recruitment budget in one day)
This slide illustrates research commissioned by me and shows actual results compiled from a basket of charities, small and large. It doesn’t take any account of the improvements in attrition I talked about in my earlier blogs on relationship fundraising.
Hmm. I can see why this might not take on. For the first two years you are running at a loss, and it takes five years before it looks respectable as an alternative to the security of the bond market. You don’t break even until year two, and after three years you have made just £500,000 profit. Hardly a risk-free way of looking at your reserves?
Yes. Most charities have a short time horizon.
But if you look at a five or ten year horizon the outcome is phenomenal. The results are totally compelling. And, because of market ‘volatility‘, the results may even be more surely predictable from investing in donor acquisition than in the bond market. You need to tie up the reserves for three years. Few charities couldn’t afford that.
As you get to ten years, overall return is near 3:1, unheard of in any stock or bond market. And the line is continuing upwards, as you are left after ten years with a cohort of loyal donors. The LTV of these donors is unknown. But a lot of evidence that I have seen indicates that donors who have given for ten years lapse slowly. A statistician would be able to extrapolate the graph over a longer period of time. But I reckon we’re heading for 4:1, all at net present value.
In truth, how many of our investments, in fundraising and in reserves, get a return like this?
The theory sounds great. What did you actually do?
In a similar chart at NSPCC the shape was, of course, roughly the same. An enlightened finance committee, chaired by Jon R Aisbitt, agreed that we should increase expenditure by £1m each year on regular giving recruitment, until the crossover point for break-even became unacceptable. As a result of this, the income from NSPCC’s regular giving programme increased by 17 times, from £5m p.a. to £85m p.a.
So your CFO, your CEO, your treasurer and your finance committee agreed that money, that otherwise could be spent on services, could be siphoned off on a venture that would only pay dividends after they had probably left the Charity?
Yes. Because we had carefully and fully taken them through all the evidence provided by the figures
Pipe dream figures?
No, actual figures based on previous actual results, not adjusted for any improvement we might make. And not counting the legacy potential of long term regular givers. Many charities have already started to see legacies from long-term regular givers. And we were lucky to have a senior management team and trustees who took a long-term view.
So, what would a master’s degree student say?
I presented the slide at a lecture I gave to the master’s course in fundraising at Cass Business School. They couldn’t understand why any charity wouldn’t put business school principles to work in a charity that could afford to release £1m, (or £100k, dependent on the size of the charity) for a period of two to three years, for effectively a guaranteed return.
I couldn’t answer them, except to say that some trustees would say that some donors wouldn’t like it. Yet I have never heard a donor complain that we shouldn’t invest a proportion of their money on recruiting new donors. In fact, I have asked donors if, after a small amount is deducted for governance and central administration, they would be happy if 20 per cent of their donation went on finding new donors, and 80 per cent on the cause. They have always said ‘yes ‘.
You could be on to something here.