How to calculate donor acquisition costs

How to calculate donor acquisition costs

All charities need new donors, just like all businesses need new customers. Studies tell us again and again: it is cheaper to retain an existing donor (or consumer) than to acquire a new one. Good to know, but that doesn’t address the issue at hand. My charity needs new donors. Where do we find them, and what will it cost?

Hopefully, you have been keeping good records, because if you have the data, you can do the math.

Where do you find them?

Screen Shot 2013-10-13 at 8.52.27 PMDonors can come from anywhere. Direct mail campaigns. Special events. Friends of friends. Service recipients. In short, every activity undertaken by the charity can generate new donors. If you don’t know where some new donors are coming from, then it is time to start tracking that too.

Two donor acquisition costs recommendations

1. Focus on activities whose primary purpose is to find new donors.

2. Calculate the acquisition costs for each activity – don’t lump them into a single calculation.

Keep it simple, but be specific

Treat your organization’s budget as status quo management. All organizations spend near all of their budget for the purpose of running programs, serving clients, communicating with stakeholders, raising money from existing donors, etc. For example, resist the temptation to lump your entire marketing budget into a donor acquisition formula – because your marketing budget serves many more purposes than that. Same goes for outcome measurement – you may use outcome stats for marketing purposes, but their primary purpose is program and/or contract management.

Next, identify the exceptions to the status quo. What costs are specifically serving the purpose of acquiring new donors? For a direct mail campaign, consider creative services, materials, list purchases, postage, etc. For an event, consider planning, production, and post-production activities. For online appeals, do not amortize your communications or CRM software – those are sunk costs to the organization that will be incurred whether or not you initiate an online appeal.

Finally, for all types of activities, add in staff time. Again, be specific. Don’t assign 50% of the Development Director’s salary to donor acquisition because 50% of his/her time is supposed to be spent on donor acquisition. Break it down activity by activity. How many hours did staff spend on a particular activity, times what rate?

What does it cost?

For each activity, add up the total costs over a certain period of time, and divide by the number of donors. Simple enough. But it begs a really important question – how do you know where your donor came from? Does your donor database code the gift so that you know what activity or appeal generated it? This is called “meta data”, and it is really important to understanding your organization.

Why is this important? For starters, your donor acquisition costs vary by activity. You need to be able to measure the effectiveness of each one. Most enterprise CRMs support this capability. Many custom built or older systems do not. Check your data structure.

For our purposes here, let’s assume you have the data you need. You’ve calculated your donor acquisition costs across three different activities. Congratulations – you have more work to do!

A word about workplace giving

Keep in mind there are always exceptions to donor acquisition cost formulas. Consider workplace giving, where companies sponsor annual employee campaigns and matching gift programs that support many, many charities in a single campaign. Our friends at AmeriGives, specialists in workplace giving, remind us that the recipient charities benefitting from these programs will have a greatly reduced cost of donor acquisitions through workplace giving programs. You will still want to run an ROI on workplace giving: what resources do you devote to corporate relationships and those workplace giving programs, how many donors did you acquire, how much money did you raise, etc.?

Also, to our earlier point about knowing where your donors come from, do you tag which ones come from workplace giving.

And our final word on workplace giving comes from Steve Greenhalgh, Managing Director of AmeriGives Consulting:

Be careful not to convert those workplace giving donors to your standard year-end campaign fundraising program. The temptation for too many charities is to do just that, but it is a mistake. The average gift from a workplace giving campaign donor is $250 per year. Before you convert those donors to a different outreach program, be sure to compare that gift to the average gift you receive from other fundraising efforts.

It’s a start

Knowing how to calculate donor acquisition costs is important, but you need to know more. If you have the data, you can learn even more about your organization. Helpful analysis might include:

• Comparing donor acquisitions costs to average fundraising costs

• Amortizing donor acquisition costs over the life of the donor

• Comparing the costs of average donors to major donors

• Comparing both new donors and new dollars raised across all activities

It’s not perfect, but you are going in the right direction

Any good formula can probably be refined. Get a baseline, discuss it with leadership, and determine what else you want to know.

Remember, there are a lot of answers in the numbers … if you are tracking the data. If you can’t get the answers you want, then it’s time to look at your donor database. Mapping data against the business objectives of your organization is the only way to accurately measure your fundraising success.

If you have the data, you can do the math.

About Gary Carr

Gary is the founder and president of Third Sector Labs. With more than 20 years of experience delivering software and data solutions to a wide variety of clients, Gary turned his attention to the overwhelming problem of data. Third Sector Labs is committed to making sense of data for the nonprofit industry.

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