FAQ: Evaluating Fundraising Costs
What are some guidelines for evaluating fundraising costs?
Fundraising is a process that has many components, and investments must be made to complete the process. Individual components of the fundraising process should be evaluated as part of a total development program, and boards of directors of nonprofit organizations should determine a reasonable rate of return on investment for their own organization based on prior results.
If only three to five percent of the donations from a particular campaign actually go to the cause, donors may want to look elsewhere. On the other hand, it may not be reasonable to expect that 90 percent of the contributions go directly to the cause. Just like for-profit entities, charities have operating expenses.
Consider the following factors when evaluating an organization's fundraising costs and returns:
- Age of the organization. A well-established organization will likely have a greater return on investment than a newly established nonprofit.
- Age of the fundraising department. A mature, professionally run development program will be expected to produce a higher return on investment than a newly formed department.
- Source of funds. Nonprofits that rely heavily on small gifts from individual donors will have higher fundraising costs. In contrast, organizations that receive support from the federal government, corporations, foundations, or large gifts from wealthy donors, tend to have lower costs.
- Different methods used in the fundraising process will produce different returns. For example:
- A donor acquisition mailing will have a much lower return on investment than a donor renewal mailing.
- A capital campaign will produce a much higher return on investment than an annual fundraising program.
- A new planned giving program may have zero return on investment for the first few years.
- The return on investment for a special event will be lower than that for a major gifts program.
- Size of an organization. The return on investment may be affected by the size of the organization.
- Profile of the constituency. The economic and geographic profile of the constituency being solicited will affect fundraising costs and return on investment.
- Location of the organization. An organization located in an affluent region should expect a higher return on investment than one located in a less affluent area.
- Popularity of the cause. The cause and its level of community acceptance will affect the return on investment.
- Competition for funds. Within the community or constituency that the organization is appealing to for support, competition by other organizations may lower the return on investment.
- Sometimes, a fundraising campaign may lose money in the short term, but generate significant returns in the long run. The cost of direct mail acquisition (mail solicitations sent to potential new donors) may range from $1.00 to $1.25 per dollar raised. However, once new donors have been identified, a second mailing to that group may cost only $0.20 per dollar raised. Thus, while the first mailing may not bring in much money, the second mailing should bring in a substantial number of contributions. These newly identified donors may ultimately donate even larger gifts to the nonprofit (e.g., land, stocks, charitable bequests).