Apples and Pears: The Curse of the ROI Fundraising Ratio
On October 19, 2015 At 2:00 pm
Responses : 10 Comments
Some years ago, I had a charity Board insist that my fundraising programme should deliver a return on investment, or fundraising ratio, of 4:1; that is, not cost more than 25% of gross income. On the face of it, that would seem a reasonable goal, given the concern donors have about how their money is spent, the media scrutiny on charity admin, a desire to maintain a level of funding on programme, and what was perceived to be market competition, with other charities claiming 80p, 84p, even more, “going to the cause”. Admin and fundraising is perceived to be ‘bad’, and there’s then a race to the bottom, each charity bragging how little a percentage it spends, talking about what it spends money on rather than focusing on what difference the charity makes.
The fact is, ROI is not a reasonable goal. ROI shouldn’t be a goal that governs organisational fundraising strategy at all. ROI is a metric that helps you determine the best investment choices between activities, all things being equal. “All things being equal” generally means it is only a useful internal metric, between fundraising streams, between donor groups, between recruitment channels, even between TV spots or magazines for ad or insert placement, or online banner placement. And even then, the more important choices that involve investment for longer-term income need a 3 or 5-year ROI metric. Some call that a life-time-value measure (LTV), although it is properly called the net-present-value (NPV).
When you compare things internally, what is equal is the cause, the strategy, the brand – things you can by and large control. What you’re testing and looking to find out is which variable delivers the best overall ROI based on the unit cost, the response rate and the average gift, to see if you can improve your income by switching investment.
Of course, it might be nice to know what ROIs look like across your competition. It might be reassuring. But it doesn’t tell you anything about your own performance. There are too many variables in the equation you just don’t know about.
I argued against using ROI with my Board, as I thought we should invest more to recruit more supporters and deliver both more longer-term net income, to give the programme both growth and a more sustainable income base. I won the argument, helped by the fact that the Board’s own contribution to our fundraising, voluntarily organising a Gala Dinner every other year, cost 42% of the income raised. Not including staff time needed to support their efforts!
More recently I’ve worked with a charity anxious about its ROI that actually does deliver an overall 4:1 ratio, but is still rather keen on that being the minimum for everything it does. That’s the way to inhibit your fundraising potential, not maximise it.
It seems you can never explain too often, why ROI is a bad organisational metric to use.
It’s like comparing apples and pears. Here are the three main things people don’t understand when they want to manage fundraising to an organisational ROI, and compare themselves to the market. (Funders who like to look at ratios as a way of choosing charities might want to pay attention too).
Apples and Pears Part 1: Organisational budget and income portfolio
It might seem obvious, but everything within a fundraising portfolio operates to different dynamics, and a different ROI. So a total organisational ROI will be influenced by the shape of your portfolio. Legacy income has a very high ROI, so if your legacy income is high, you’re overall ROI should be good. Grant and contract income also has a very high ROI, because it deals in very big numbers. If you look at those charities claiming a fundraising ratio of just 15% or so (in other words, 85% of every pound, euro or dollar raised goes to the cause), it is almost certain that statutory income makes up half or more of their total income. The challenge with contract income of course, is that it is restricted income, and that matters. I know of a charity having to consider whether to reduce staffing that raises restricted income in order to meet pressure on general fund budgets. The cost to unrestricted money could matter more to organisational health than the restricted income raised on a huge ROI.
If you don’t have large amounts of legacy or statutory income (which was the case at my 25% charity), then of course the more cost-intensive forms of public fundraising come with a worse-looking ROI (anything from 2 to 4:1). They can also deliver greater net unrestricted income giving the charity scope to be responsive and deliver greater impact.
There you have it: you can’t manage your ROI and compare it to another charity without understanding the mix of income, and the mix of restricted and unrestricted income.
Apples and Pears Part 2: Strategic Choices
One charity I know is almost 100% funded by voluntary income, and operates at a fundraising ratio of about 40%, maybe a bit higher. That might sound awful, until you understand that the charity has tripled its net income over the last ten years. Is that charity worse for accepting a higher fundraising cost ratio, when its strategy means it has tripled its net income and consequently tripled its service reach?
Some fundraising expenditure is a net cost in terms of annual ROI, particularly if the objective is longer-term income. Direct marketing supporter recruitment is an obvious example. Is it wrong to invest more to grow net contribution and future income, if the ratio is then lower? Acquisition takes a while to break even, even two to three years. A focus on ratio can cause organisations to make the wrong choices on investment, cutting ‘cost’ and losing sight of longer-term return. Or they can choose not to invest a bit more for a greater net return in future, for fear of the ratios looking bad. Who loses? The charity’s service-users and beneficiaries. There are more than a few charities that should have known better who have cut acquisition investment in recent years to improve the immediate net position, only to see income fall and recovery take years.
So the overall ROI is just a snap-shot of our own strategic choices, and so is the ROI of every other charity. It doesn’t tell you how it reflects their organisational strategy, or where they are in an investment cycle. Are they investing a lot in fundraising, making their ROI look worse, or have they cut back making it look better? Are they focused on the more important goal of maximising longer-term net income, so not worrying about ROI too much at all? Maybe a good-looking fundraising ratio just means the charity isn’t investing enough and so not securing its longer-term future.
Apples and Pears Part 3: Cause, Size and Brand Awareness
As I said earlier, “all things being equal”. But in the outside world, they are not. We all know that cause plays a part, and some are easier to raise money for than others. When I ran the supporter recruitment for the UK’s leading international development charity fifteen years ago, our agency’s other big charity clients were a children’s charity, an animal charity, and a cancer charity. We did compare notes from time to time. They always did better than we did, across all media channels. Their causes just spoke to more people than ours did, so their response rates were better, and their ROI better too.
Size matters too. Charities with deeper pockets can afford to invest and wait for longer-term returns, can achieve economies of scale, and can afford less-profitable activities and a bit more risk in their portfolio. In the case of my children, animal and cancer competitors, that meant they could make some activity work that we couldn’t. It’s no surprise that bigger charities (those that don’t mess it up – see above) are able to grow bigger.
We also know that brand builds trust and better known charities can have an advantage when it comes to public support. The reverse is also true, that a well-known charity brand can be hit harder by a big negative story. With some fundraising streams, a strong brand and cause might attract support more easily. But it doesn’t have to. Some of the charities most dependent on face-to-face fundraising are those with lower profile, less investment and more difficult causes, because face-to-face is more affordable and predictable and allows for conversations about more difficult issues. How do you compare your ROI across the sector taking all that into account?
Is there a right answer to this? Only that managing your fundraising programme to a metric of ROI fundraising ratio, based on what you think feels acceptable, is a mistake. It is a blunt tool that takes no account of important variables, and is best kept for comparing tactical choices internally. Of course, efficiency matters. But so does growth and volume of total income, long-term sustainability, risk mitigation through a spread portfolio and innovation, and in the end, making the most net income you can for your cause. If you understand all of those things, you can decide which metric matters most to you and your organisation. Maybe you’ll still decide ROI is the one. But I hope not.