By Larry C. Johnson, CFRE
Every organized effort to generate revenue – be it a commercial one or an effort to generate gifts – has a “business” model. Both generate revenue but the similarities end there.
Here in Idaho we are very familiar with charity auctions, galas, sponsored golf tournaments, bake sales and other events that are designed to generate revenue for a worthy cause or project. These efforts are using what is known as a “transactional” model to raise money. That is, they depend upon a transaction and exchange of some material value to yield residual income for the charitable undertaking.
Translated into business terms, this model is very similar to that of the retail grocery industry. Both are characterized by a short cash cycle, high volume, inventory dependence, price sensitivity and low margin – simply stated, a lot of effort for modest returns. Transactional fundraising efforts cost, on average, between 50 and 70 cents per dollar generated, not counting staff and volunteer time costs.
The second model is what can be called the “strategic” model. This approach sees fundraising as seeking direct gifts from interested parties who have a serious belief in, or shared values with, the charitable cause or project. A donor is identified, informed, cultivated and then asked for a direct gift based upon shared values. Success using this approach is dependent upon the donor or investor having a relationship with the recipient organization.
The strategic model resembles the aircraft design and manufacturing industry. Both are characterized by a long cash cycle with significant up-front, long-term investments; relatively low volumes of donors or “customers;” and considerable price elasticity, with much of the ongoing revenue generated by donors who return to give again and again often in increasing amounts (or customers who purchase renewal parts for airframes that have a lifespan of a couple of decades). Costs for a fundraising or development program using this model are between 18 and 25 cents per dollar generated.
In 2009, more than $303 billion was given to philanthropy in the United States. Over 75 percent of those funds came (and have always come) from individuals (see chart). When bequests are included, as well as the one-half of all foundations that are family foundations, individuals drive almost 90 percent of all philanthropy.
Of the total amount, the “transactional approach” accounts for only about 0.5 percent. The overwhelming majority of giving is based upon a philanthropic relationship between donor and nonprofit. Several factors influence this.
First, strategic fund development is designed to take advantage of known donor behavior. About 80 percent of what is raised in a direct giving setting comes from only about 20 percent of those giving. The strategic approach seeks gifts reflective of an individual’s ability whereas transactional efforts treat everyone the same – the price, is the price, is the price. Overall gift sizes are much, much larger than purchases at an auction or sponsorships for a golfing event.
Second, strategic fund development engages potential donors on the basis of their values: their desire to participate in and accomplish a worthy outcome. Transactional vehicles often focus on corporate participants and individuals with a marginal connection to the charitable organization – if any. Relationships and loyalty are enduring. The drive for the lowest price is transient.
During the past three years, there has been considerable economic upheaval, and philanthropy has not been immune. Foundations have seen their portfolios considerably reduced; corporations have retrenched. Direct giving by individuals – giving built upon a relationship – has (and has always) defied the odds, however. Giving by individuals declined in 2008 and again in 2009 but only about 5 percent. Individual giving is on track to increase this year, however – even as unemployment remains just under 10 percent.
Transactional giving, by nature discretionary, hasn’t fared so well. Many fundraising events have seen their net receipts plunge 50 percent or more from prior years. For those organizations heavily invested in the event model to raise critical funds, the impact upon their bottom lines has often been severe.
As nonprofit organizations in Idaho begin to shift away from a heavy dependence upon transactional fundraising toward the strategic model, they will at once expand their donor bases, significantly enlarge their fundraising capacities and be much less exposed to the effects of economic turbulence in the future.
Larry Johnson is the principal of M.E. Grace and Associates in Caldwell.