fundraising industry

Provocative Thoughts on Donor Retention Math, and a Homework Assignment

There’s one big metric that is measured in most nonprofits: the “retention” rate. [See here why I think that’s bad terminology.]

Generally, the nonprofit sector has a problem with this. Most donors who give one year don’t give the next. The current benchmark is under 50%. That means fewer than half of those who give one year will give to the same organization in the next year.

But overall, philanthropy isn’t really growing or declining. In the United States, it’s been hovering about 2% of Disposable Income for the last 3 decades or so.

This basically means each year, the same people give, about the same amount, to charities (mission-driven organizations). They’re not giving more, or less, they’re just giving differently than the year before.

So, most of your effort spent acquiring new donors, or re-activating lapsed donors, is wasted. Because, in another year, you’re going to have to do it all over again.

Let’s Get Mathy

(Yes, that’s a bit of a play on my name. Sue me.)

The 50% retention affects you like this: if you just set a group of donors who gave a total of $100,000 this year on autopilot and let them run, the next year you’d receive $50,000. The year after that, $25,000. And then $12,500, $6,250, and $3,125. That’s the 5-year value with a 50% retention rate. Let’s call that $96,875 the baseline that you could get in the next 5 years (after the initial $100,000 “acquisition” year).

So, what happens if you increase your retention rate a little bit? Maybe instead of 50%, you have 55%. Is it that big a difference?

YES.

Year 2: $55,000;

Year 3: $30,250;

Year 4: $16,638;

Year 5: $9,150;

Year 6: $5,033.

Now, the 5-year total is $116,701.

That’s an increase of over $19,000. That’s a lot of money, for not a lot of change. Just 10% more donors sticking around each year (55 vs 50).

What Would You Be Willing To Spend In Order To Keep An Extra $19,000?

So how do you apply this kind of math?

Well, the first step is to start making projections. It’s easy to get into the habit of looking only at one year’s worth of data, or this year’s budget, or last year’s gift, and ignore trends or forecasts. Don’t do that. Go deeper. Start measuring you retention rate and making long-term projections to see what you can reasonably expect in the future.

A second aspect is to consider what you might have to do to get that additional retention. Because, let’s face it, doing what you’ve always done has gotten you to your current 50% value. You need something different, and that probably means spending money. On donor appreciation events, or another fundraising staff member (maybe part time) to make personal phone calls, or an extra mailing in the year, or whatever.

A good way to think about this is to decide what additional programming value you want to create from additional funds raised. If it’s that you want to get $5,000 additional value out of that $19,000, then you have $14,000 with which to do it. If you need $15,000 additional value, then you need to make it happen with $4,000.

Here’s how the math works out: Returning $19,000 (net $15,000) for a $4,000 spend (to improve retention from 50% to 55%) is an ROI of about 390%. Alternatively, it’s a Fundraising Ratio of a little under 40% (or Cost to Raise $1 of under $0.40). You may think that’s too high, but it’s not. It’s totally worth it. Because you brought in waaaay more money than you spent.

Another Example, Please

Or, you might need to think about it like this: if you need $15,000, what’s another way to get it? Well, suppose you’ve done some analyses and you feel you would need to spend $30,000 to increase retention enough to net that $15,000. How much do you need to increase retention then to get that additional $15,000? You’ve obviously got to figure out a retention strategy that’s going to work to bring you $45,000 additional money over those 5 years. Turns out that’s about a 61% retention rate. So, will your $30,000 spend increase your retention by 20% (61% / 50% – 1 = 0.20)? If not, you’ll need to find more efficient ways of doing it.

Working Out The Math

Spreadsheets are great for creating these solutions. You can use them to play around in just a few columns to see different projections with varying retention percentages.

Begin with your current retention rates, and project that out to an immaterial amount. Above, I went out for 5 years, and that seemed small enough relative to the initial cohort of $100,000. As you increase the retention rate, though, you’ll see that cohort of significance extend later and later.

[At that point you will probably also want to start adding discounts for interest, but that’s a bit more technical and doesn’t materially change the discussion, just the magnitudes of the numbers involved.]

For example, it takes about 7 years at a 50% retention rate to drop the annual giving to under $1000 ($781 in year 7). At a 55% retention rate, not only is each year’s value higher ($19k in the first 5 years above), but it takes longer to become immaterial. There’s a whole additional year of material giving at this level ($837 in year 8). And as you increase the retention rate more, the compounding effect gets greater and greater. A 60% retention rate adds 2 more years, and an 80% rate doesn’t become immaterial until year 21. Talk about impact.

Your homework challenge is to figure out the differential in giving that would come from that 80% retention rate, and then determine how much you could spend to improve that retention in order to have a Fundraising Ratio of under 50%.

Knowing what some of the possibilities are can enable the discussions you’ll need to have with your entire fundraising staff, from front-line to directors, on where your priorities should be and what you might need to do to materially change your results.

Conclusion

The point is, a small change in your retention rate can have a big impact. If you know just how big, then you can know just how much you can spend, and should spend, to make that happen. Until you start working out the math to actually make the changes, though, it’s going to feel like you’re forever running in place.

giphy[1]
When you just tryin’ to keep up
business development, fundraising industry

Nonprofits Don’t Have a Donor Retention Problem. They Have a Donor “Retention” Problem

The average donor retention rate in 2017 was 45.5 percent; 0.5% change from 2016’s
rate. The gift or dollar retention rate was 48 percent, no change from in 2016. Over the last 10 years, donor and gift or dollar retention rates have consistently been weak — averaging below 50 percent.

2018 Fundraising Effectiveness Survey Report

My friends, this is a problem. It’s no secret. This is not a recent trend. In fact, most nonprofits seem to be resigned to this as “just the cost of doing business these days”.

For every $100 they receive in donations this year, they can count on less than 50 bucks next year. That means if you’re receiving $100,000, you can reasonably expect about $50,000 next year. And likely less than $25,000 2 years from now.

This measurement of the # of dollars given year over year, or the # of donors giving year over year, is called the “retention” rate, and it’s widely considered a pretty good metric for the health of an organization.

I think it’s also indicative of deeper change that must come. But before that:

Higher “retention”, that must mean higher satisfaction, right? Keep those refrigerator magnets coming!

Lower “retention”, Uh oh, we better do something! More thank-you cards! More phone calls!

Does it work? Not according to the statistics. Otherwise, wouldn’t we see those numbers increasing rather than decreasing?

Ultimately, that is not a very good way to create sustainability, in anything you do. Bloomerang does the math for you pretty well. I was going to do this same presentation, but they beat me to it. [By like only a decade, but who’s counting?] Check it out. 

Why Does This Happen?

Is it because of competition? So many nonprofits asking for money each year that the pool is so diluted that nobody can effectively give, so they all give up and stop with the charity?

I don’t think so.

Is it because of poor “stewardship”? By that I mean, do donors not feel appreciated enough? Don’t they get enough calendars, mailing labels, stuffed animals, t-shirts, hats, note pads, coffee mugs, sweatshirts, pens, personalized phone calls, thank-you notes, birthday cards, appeals, e-mails, annual reports, invitations to special members-only events, or newsletters?

Maybe. Probably not.

Is it because the organization uses too much “we” language in their appeals, and not enough “you” language?

Maybe. More likely than either of the above. Even this, though, could just be a false front.

I don’t think this is the real problem. Anyone can replace all the “we”s in a letter with “you” without changing beliefs about those you’re writing the letter to.

I think the real problem is something deeper. More fundamental.

More at the heart of how that organization views itself, and how it views its donors.

So what? Is it even a problem? Just have another gala and raise the money that way.

Sure, there are compensations you can make to plug the $50,000 hole in your budget next year. Have that gala, or that golf tournament. Host a trivia night. Participate in a multi-channel “acquisition” campaign. Direct mail. Board member networking. Have a garage sale. Dig up the coffee can your great-great-uncle buried in that abandoned mine shaft down the old dirt road. Get the money somehow. Meet your budget. Breathe a sign of relief.

And then hitch up your belt buckle, to do it all over again.

Because those donors you just found, to meet that $50,000 gap in your fundraising plan, are going to trickle away again, at the same 50% rate, in another year. $25,000 coming in next year, $12,500 after that, $6,250 the 4th year, and so on. Did you really do anything to move the needle?

Throw them some more merch! Let them advocate for us! Remind them that they’re the heroes!

Won’t work. Hasn’t worked.

The Giving USA 2019 report shows that charitable giving in the United States is about 2% of disposable income, and has been for a while now.

Like, the last 40 years a while.

People gave 2% of their disposable income last year. They’re likely to do so the next, and next, and next. This isn’t moving off that benchmark much, if at all. That’s just how much this society cares about philanthropy.

That extra $50,000 you raised with your gala didn’t create more giving, it just shifted it around from one group to the next. Pretty much regardless of your trinkets and your mailing labels, people are going to do what they’re inclined to do.

And one of the things people are inclined to do is to think of themselves as people, not objects.

Do you do the same? Do you treat donors as people? Or as objects?

Let me read your mind:

YOU TREAT THEM AS OBJECTS.

Now, you might get quite defensive on this one.

No we don’t, you’ll say. We love our donors very, very much! We care about each and every one of them! We let them know in every communication that if it weren’t for their $10 donation, we wouldn’t be here!

Let me ask this question, then:

Do you have a “retention rate” measurement?

If yes, then the answer for “do you treat them as people? Or as objects?”, is obvious:

YOU TREAT THEM AS OBJECTS.

Because you don’t “retain” people. You “retain” forces that would, of their own volition, do something else.

What is a retaining wall? Something holding back the rock, dirt, and mud from rolling out where it would rather be.

retaining_wall
Wallis Landscape (internet search)

Are your donors “dirt” that just wants to follow the pull of gravity, but you’re putting barriers in their way?

What else might you “retain”? You could retain an asset, like buying a municipal bond or a stock certificate. You retain these and hold on to them, so that they appreciate in value. You have control of them; you choose what to do with them, when to dispose of them, and you get the value from them.

So – if you think of “retaining” your donors, doesn’t that mean you think of them as objects to be manipulated for your benefit?

Look at all the tips and tricks that will help you “increase” your donor retention rate: 12,800,000 results.

Will those work?

Perhaps. If you want to continue thinking of your donors as “assets” that you control. If you wish to continue to view your purpose as “stewarding” those major gifts and “directing the journey” of those who gave them.

It’s a matter of mindset.

I believe that how you think of your donors will eventually shine forth in all your actions.

When you speak of “retaining” donors, that tells me that you believe that those donors want to do something else, but you want to hold them back from that very thing. You want to redirect their donations to you, not to the animal shelter down the street.

You want control.

You want power.

You want authority.

You want an asset that you can manipulate, direct, and, ultimately, bend to your will.

You haven’t done the hard work of enticing that donor to give again, because your mission aligns with her desires.

You aren’t trying to attract the right kind of donors.

You aren’t trying to woo those donors over and over and over again, and get them to be faithful in their giving to you year over year over year.

Instead, you’re trying to manipulate them. You’re trying to control them.

And it shows.

How does it show?

It shows up as 45% year-over-year giving!

It shows up in conferences, seminars, webinars, and blog posts about “boosting your retention rate”, as if that was simply another manipulable feature of your organization, like dumping a faster processor into your CPU, or pouring some nitrous oxide in your turbocharger to squeeze every last little bit of speed out of this thing before it blows up.

I think there needs to be some fundamental reframing of the words that organizations use to describe themselves, and their donors.

One of the first is this one – retention.

Let’s all say it one more time, then let’s retire it together. RETENTION is a metric we used to use, but will no longer.

Because nonprofits don’t have a retention problem. They have  a “retention” problem. The problem is not the donors, it’s in the organizations themselves and how they think.

Fixing this problem is going to be deeper than just changing a few terms.

It’s going to require full-scale reorientation of how your organization views itself and the world around.

For a simple start, make a small change.

Instead of retention, why not think of reporting your “donor faithfulness rate”?

It would be the same numbers. You wouldn’t even have to change your data processes, just re-title a few slides in your presentation deck.

100 donors last year, 45 donors this year. 45 / 100 = 45% Donor Faithfulness.

health-greatest-gift-contentment
courtesy QuoteOasis.com

On the surface, it doesn’t look much different.

But that’s the important point.

The surface isn’t what matters. That’s just the tip of the iceberg.

It’s about recognizing who has authority in the relationship between donor and organization. Retention is all about the organization and its achievements, and says that the organization has the power. Faithfulness is all about the donor, and her desires, and recognizes her authority to walk away at any time.

If you measure a retention rate, but then try to turn around and talk about how much you love your donors and give them a “personal touch” through trinkets and baubles and window dressing,  there’s going to be a disconnect.

They will be able to feel it.

They’ll be able to sense that you don’t really care about them. They’ll be able to sense that you’re really more concerned with your own goals and meeting your own objectives.

They may not be able to express it in words, but they will express it in action.

By giving somewhere else next year.

And searching for that relationship that they’re missing.

The relationship they thought they were getting by giving to your mission in the first place.

The relationship that you’re now missing out on, because they’re wandering off somewhere else.

***

note – this is one of a series of blogs about the language we speak and the unintended effects of our wording. The first was Stop Saying “Thank You”. More will follow.