Doing The Math
December 4, 2006 Don Austin
A charity tested a premium package in acquisition against its control package, a straight appeal, over a two-year period. They were somewhat reluctant to begin using premiums in acquisition because of the adage, “donors must be renewed with the same type of package used to acquire them.” The implication would be that the renewal program would also have to become premium oriented.
However, their response rates in acquisition had been dropping below 1% and it was thought that a premium would increase the response rate significantly. Likewise certain was that the average contribution would decline. A premium package was developed and the charity tested it in a fall acquisition mailing. The premium package acquired more donors, while the straight appeal had a higher average contribution. Importantly, the contribution from the premium appeal was high enough to offset its higher cost, so, the premium package had a lower cost to raise a dollar.
Was the premium package the winner?
Actually, the winner can’t be determined with just this information. Why?
- The straight appeal costs less, so with the same budget more pieces can be mailed compared to the premium package.
- The packages are so different that longer-term performance must be considered.
The donors acquired in the test were followed for the rest of 2004 and all of 2005. First, a greater percent of donors acquired by the straight appeal responded to subsequent appeals. Maybe the straight appeal attracted donors who were more committed. Second, the difference in the average contribution went from about $6 (in the acquisition) to about $4 in 2004 and 2005. The premium donors upgraded more than the donors acquired by the straight appeal.
Now can we say there is a winner?
If we take the metrics from acquisition through renewal appeals to the end of 2005, they can be put into a spreadsheet to create a sound “what if” scenario. Suppose there is an acquisition budget of $1 million and that is applied that to each package. Using the figures from the acquisition test, here is how the donors acquired by the two packages should perform.
The premium package will have generated more income in acquisition. But, in the subsequent solicitations the donors acquired by the straight appeal had higher response rates and made more contributions per year, on average.
Here is what we would expect to happen through the end of Year 2. There were a few more donors giving again in year one but the net income for the year was roughly $31,000 less for premium donors The number of donors in year two who had responded to the straight appeal was significantly greater with net income also spiking upwards. Net income for both years worked out to be $707,556 for the straight appeal and $551,779 for the premium. Projected net revenue for the period, though, the straight appeal generated $855,939 while the premium brought in $856,297.
Evaluating the packages based on acquisition and renewal appeals the following year, you find that their net income is nearly identical. Though the premium is a winner in acquisition, the straight appeal pulled ahead in renewal. The straight appeal might have acquired donors who were more committed to the organization.
These donors had lower attrition and contributed more times per year than those acquired by the premium. At the conclusion of this analysis it seems that both packages are winners in the overall context of this fundraising program. It is quite possible that the response rates for donors acquired by the premium may have been higher if premiums had been used in renewal mailings. In that case the results would be quite different.
This may seem like a lot of effort to evaluate a test. But if the premium package were to be rolled out based on the acquisition results, what would happen? The expectation would be greater net income sustained over the next few years and that expectation would not be met in the long-term.
Don Austin is vice president for client strategy with May Development Services in Greenwich, Conn. His email address is email@example.com