The ROI of Fundraising
Judy Keller is President of Keller Consulting, which provides fundraising solutions for nonprofits, and is a Business Member with Nonprofit Connect. Learn more.
I’ve recently been asked if there are any standard metrics by which the effectiveness of a development department can be measured. How can you determine the return on investment of your fundraising efforts?
There is no simple answer to this very valid question. With more than 1.5 million registered 501c3 organizations in the US, there is just too much variation to have a single, easy formula of any value.
As you know, each organization’s development function is determined by many factors. Here are a few of the most important:
- Organization, including sector, history, leadership, reputation, purpose
- Board’s and executive leadership’s role, commitment, expertise
- Existing donor pool depth, breadth, revenue mix.
- How much does the organization need and why? How compelling? How urgent, legitimate is need?
- Time horizon may take three years for a new development office to break even, 3-5 years for a planned giving program, for example.
- Staffing composition, time allocations, other duties, process and procedures
Prestigious organizations such as universities, art museums, and major medical centers tend to have the most sophisticated and efficient fundraising operations, while human services often realize a lower return on investment, given the cost of securing a larger number of smaller gifts. Large organizations realize economies of scale that help to improve the expense/revenue ratio. That's much tougher for grassroots organizations.
On average 4:1, or $.25 to raise $1 is reasonable, but much has been written about why that number can be misleading and why nonprofits should not be evaluated based solely on Return on Investment. The Nonprofit Fundraising and Administrative Cost Project1 found in 2001 that on average, for all types and sizes of nonprofit organizations, it cost 24 cents to raise $1.
According to Charity Watch, a good expense ratio to aim for is 35 percent or less. This means that for every $100 raised, your organization should have paid $35 or less. It is important to remember the expense ratio will vary slightly depending on the size of the organization.
The amount you spend usually depends on the age of your nonprofit and the types of fundraising you do. An organization that raises millions of dollars a year may spend 10-15% of its revenue on fundraising expenses. A start-up group, by contrast, may invest much more as it begins a direct mail program to acquire new donors. Acquisition programs are expensive, but in the long run, can offer ample return.
Recent studies commissioned by the Association of Healthcare Philanthropy found hospitals that spent more money on fundraising—particularly fundraisers—had better donor retention and higher revenue than those that spent less. In part, because the fundraising staff focused on major gifts and had more face-to-face meetings with donors.
All nonprofits, however, should evaluate annually their fundraising efficiency ratio (what they spend to raise a dollar). A low ratio may look appealing to the board or donors, but it could represent an insufficient investment to build a sustainable organization.
The bottom line is that each organization should take the time to study its sector, its market and its potential as part of a comprehensive strategic resource development plan.
About Judy Keller
Judy Keller offers expertise in nonprofit management and development, specifically in capacity building, operational development, and fundraising. Learn more.