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Exploring the Complexities of Fundraising Efficiency

We all know raising funds are critical to a charity’s survival but while non-profits, donors and the board are all united in doing ‘good’ for their chosen cause, they all have very different expectations of how to measure a charity’s fundraising efficiency and what this entails.

Evaluating an organisation’s Fundraising Efficiency is not just something that is used internally by management, but also by prospective donors keen to support organisations that offer the most impact for their contribution.

While donors who contribute to charities want to know that as much as possible is going to the cause and not on administrative, marketing and fundraising costs. This puts pressure on a charity to get the most of every dollar raised, instead of focusing on how it could be innovative to make a greater social impact.

In this first of a two-part series we explore the topic in more detail and speak to Carl Young, Fundraising Director of the Peter MacCallum Cancer Foundation to discover what Fundraising Efficiency means to him, if there is a uniform approach to measuring the cost of fundraising and how to best approach it.

1. Is there such a thing as Fundraising Efficiency?

Carl Young, Fundraising Director of the Peter MacCallum Cancer Foundation, struggles to describe the perplexity of Fundraising Efficiency.

“It’s almost like an onion, where each time you peel off a new layer you cry a little more.”

He was quick to acknowledge that when it comes to Fundraising Efficiency there isn’t a single response.

In part he feels, it has to do with effective management of the whole fundraising operation with clear KPI’s, applicable to each of the fundraising streams with no ‘one size fits all’ solution. He believes Fundraising Efficiency isn’t just about ROI, it’s about strategic direction, good fundraising principles, good operational planning and good management, which often gets neglected.

“It’s having clear business rules that your staff and key internal stakeholders can understand, clear donor service standards, consistent backend processes, constant and real time measurements, and analysis, which plays a part in good staff retention and knowledge transfer. It’s not just ROI it’s about looking at your programs holistically and looking at the many different cogs that play a part in generating net revenue and ensuring that all the cogs are well oiled and effective and you don’t look at any of them in isolation,” says Young.

Young believes, this is one of the biggest weakness in the fundraising sector, as it gets focused on one particular area instead of taking a holistic approach. He also affirms that staff attrition and boards focusing on just ‘the cost of fundraising’ creates inefficiency.

2. How do you execute and improve your cost per dollar raised?

While Young believes this is a good question, it is the wrong one. He feels that we shouldn’t focus on what the cost of dollar is, but what our net return is, and this is where the misconception within the industry is.

Young believes:

“To actually generate maximum ROI and cost of dollar raised you need to look at scalability and sustainability. So yes, while you put a lot of energy to generate a lot of net returns in the short-term, it doesn’t mean it’s sustainable in the long-term so it’s not going to be particularly efficient.” 

3. Is there one uniform approach to measure the cost of fundraising?

Young, believes that there isn’t one approach to measure fundraising efficiency. Yet the sector does a massive disservice to itself by imposing a 15-30% metric on overall fundraising costs, which is risky as it can restrict growth and the sectors ability to pay appropriate wages to retain good staff.

Young believes, that essentially there are many ways to measure fundraising efficiency but they are complex.

“When people focus on ROI on the cost of fundraising, it becomes a restrictive model that can lead to great inefficiencies and a lack of growth. But unfortunately, this is the model many board members and donors expect. You can start at donor acquisition and look at all the different components of the program holistically, like response rates, net returns, ROI and your average gift yet there isn’t one uniform approach to determine fundraising efficiency,” says Young.

To change this model what the sector desperately needs to do is, focus on education. Education of the donors, education of the board and all key stakeholders. Because once donors and key stakeholders understand what a good long-term return on investment is, they usually get on board and start to be less focused on just the short-term cost of fundraising.

“Unfortunately it becomes a self-fulfilling prophecy, the cycle continues because we don’t invest adequately in the sector or the breadth of fundraising activities as people don’t fully understand it, or appreciate the sector’s sophistication. This just fuels the inefficiency in the sector. When there is an overemphasis on the annual cost of fundraising it generally leads to a lack of investment in fundraising to achieve scalability and sustainable net returns. Ironically, what is a well-intentioned focus is actually putting a charity’s long-term income at risk,” says Young.

“If you look at the corporate sector, for most people it’s understandable if they have a five-year investment plan that allows businesses to go through the journey of growing increased net returns incrementally. Yet in comparison charities are measured on an annual basis and their cost of fundraising percentage which can greatly limit them and ultimately the beneficiaries they seek to help.”

4. What is the average fundraising efficiency ratio?

Young believes:

“There is an expectation of around 15-30 percent but realistically it’s actually not necessarily good that we are asked this question!”

“What we should be looking at are the net returns that were distributed to our beneficiaries. What are the benefits that beneficiaries are receiving, and the impact charities are having as a result of the impact of the donation? The real focus and question should be, what are the measurable impacts on the beneficiaries as a result of raising much needed funds?”

5. How can a charity’s fundraising efficiency be improved?

Young is firm to remind us that we shouldn’t focus just on the cost of fundraising but, take a more ‘holistic approach’ that includes, operational planning and making good investments in donor recruitment and engagement. He also believes, ideally staff need to be working within an organisation for at least five years to help maintain that corporate knowledge and to keep building the relationship and trust with donors.

6. What impact do different activities have on a charity’s fundraising ratio?

Young highlights the importance of having a diverse portfolio of income streams, and not putting all your eggs in one basket. After all, if we wish to be donor centric we must appreciate that donors have communication preferences and respond differently through various channels. He also believes that each fundraising program has various levels of income potential and life-span; even a profitable gala ball is likely to eventually hit a threshold in its income potential and won’t keep generating revenue at the same rate, year on year.

“Charities should ideally invest in fundraising programs with growth potential as well as short-term returns; there is a need to look at the five-year income objectives. And not to just look at particular income streams that are understood more by internal stakeholders, “liked” or perceived to be “good for the brand”, the board (and fundraisers) need to know which fundraising activities generate the best returns relevant to their current place of development and focus their energies and investment accordingly. As each fundraising activity and ROI will be different, as will the breakeven point for each program’s investment,” says Young.

7. How do you maximise fundraising efficiency to protect your bottom line?

Young also firmly highlights this point:

“Always look to increase your individual donor base, look at programs that can be scaled up. Measure and monitor ROI, breakeven points for your investment and retention rates. But certainly seek to diversify your portfolio in order to mitigate dependency and risk,” says Young.

Another point Young is keen to emphasise, is how misunderstood this sector is, and how it needs to be prouder of what it achieves and perhaps less apologetic regarding the cost of fundraising.

As Young reminds us, “We need to remember why we work in this sector – to benefit and improve people’s lives and environments. It’s why I work in the NFP sector. The benefit and our impact isn’t being discussed or emphasised enough, or gets lost in the discussion when we’re made, in part, to over-rationalise fundraising investment and expenditure.”

“After all, I don’t know of any fundraiser who doesn’t aim to maximise every dollar received to help the cause for which they so passionately advocate.”

To read Part II of our series, please click here where we spoke to Stephen Mally, Director of FundraisingForce.

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