Retention-Based Budgeting

February 3, 2016       Stephanie Ceruolo and Larry May      

You’re probably accustomed to approaching annual budgeting with two overarching numbers dominating your thinking: how much more your organization is asking you to raise and how much more funding they’ll give you to reach that goal. The process doesn’t leave a lot of opportunity for thinking in the long term — where will this program be in five years?

One critical factor most direct response fundraisers don’t think about much is their annual retention of active donors. That is, how many individuals who made a gift in the current fiscal year will continue giving next year? That number is one of several underlying dynamics that can help you set next year’s budget and promotion plan.

In every direct response program, each fiscal year starts with a group of 0-12 month donors, those individuals who made one or more gifts to you during the previous fiscal year. These donors should form the core of your planning. This active donor pool is made up of donors from each of three major groups:

1. Repeat donors from the previous year, who gave two years in a row;

2. Lapsed donors who reactivated last year; and,

3. New donors who you acquired last year.

Do you know how many donors you will need to replace this year just to stay even?

During the coming year, you’ll send some number of appeals to these active donors, and each appeal will generate a number of responses. In nearly every sizable direct response program, something like 40 percent or even more of those active donors you started out with will not renew. This number can vary, but it’s more likely worse than 40 percent than better. Within a few percentage points, it stays pretty consistent from year to year. What’s the impact of this attrition?

In broad terms, you’ll need to replace that 40 percent of donors by renewing lapses who skipped last year (or even many years) and acquiring new donors. But first you need to know your retention number.

How many donors did you have in the last fiscal year? It’s not the overall number of responses from last year. That would be the number of gifts you received, which is always greater than the number of individual donors. Every program has a number of multiple gift-per-year donors, perhaps 20 percent to 30 percent. The number of gifts per donor per year can run from a low of 1.2 to more than two for some organizations.

You can base your planning on a solid foundation by learning a few vital dynamics that are operating within your program. Here’s a fairly simple top-level view of some numbers you need to know:

• The number of individuals who make a gift each year;

• The average number of gifts per active donor each year;

• The average contribution amount; and,

• Retention of 0-12 donors from one year to the next.

The first three factors define how much you will raise each year. It’s the number of individual donors multiplied by average number of contributions multiplied by average gift amount. That equals total revenue. This can feel like a return to math class, and some very good fundraisers don’t care much for math. If you’re one of them, make sure you have someone who is good at math as your partner.

And then, you’ve got the challenge of item number 4. No matter how many good new ideas you roll out next year, or how good your copy or creative, or even if your cause becomes more popular with the public, a sizable percent of current donors simply won’t give again. You’ll have to develop a plan to replace those donors through lapsed reactivation and new donor acquisition.

There are different cost/income ratios at work in each of these three audiences. Nearly all your profit in the new fiscal year will come from those active donors who renew. They have the highest response rates and will generate gross income for you at the lowest cost. In your efforts to reactivate lapsed donors, you might make a small net profit, but you should think of reactivation as a break-even exercise.

Lapsed reactivation is the most important part of replacing current donor attrition to keep a program growing. Most nonprofits don’t pay enough attention to reactivating lapses. Try to build a promotion plan that calls for half or more of your attrition replacement to come from reactivating lapses. That can mean investing as much in reactivation as you gain from it in gifts.

New donor acquisition — the unavoidable pain point of direct response — almost always means losing money. And acquisition has been getting harder and harder lately. Newly-acquired donors have a lower second year retention than repeat donors. If you’ve been ramping up acquisition for growth, your overall retention will decline as these new donors make up a larger percentage of the 0-12 group.

Some fundraisers at smaller organizations don’t think about donor acquisition. Many never mail someone else’s donor list as a way to acquire new donors. One way or another, you need to bring new donors on board or your program will be shrinking. In a small program, look for home-grown prospects you can convert to donors, such as volunteers, friends, family, alumni, service recipients, event attendees. Virtually anyone who has contact with your organization is a prospective donor.

Moving the needle, even a little, on donor retention has a major impact on revenue, as does increasing the number of gifts per donor each year. You can increase these two factors by boosting response rates. That means using more impactful appeals that generate more gifts and asking more frequently.

This is often an unpopular idea. Direct response campaigns that produce the most gifts can also produce the most complaints because they get noticed. People in your office who might not know much about direct response (or might outright hate it) will hear about donor complaints and tend to overreact. But when you get more gifts, even if some donors are turned off, you are winning. You’re keeping more people in that critical 0-12 month donor group, the group who generate nearly all your net revenue and sustain your organization.

The hardest factor to change in direct response is your average gift. Everyone works on new messages and contact strategies to get donors to write bigger checks. Fundraisers try to acquire new donors who are more generous in general. But the fact is average gifts move up very slowly, year by year. And while you can impact the average gift to some campaigns, overall it tends to stay close to where it was last year. In most programs, half or more of donors who renew give roughly the same average they did the prior year. Approximately one-quarter of donors upgrade and one-quarter downgrade. Ironically, it’s most often higher gift givers who downgrade.

You might think these generalizations don’t apply to you and your program. In truth, the fundamental dynamics within direct response programs vary a little, but not much. Ultimately, direct response is about people and how they behave, not what we might like them to do. Understanding these dynamics is the window to managing what’s going on in your fundraising. Ignoring them, or worse, denying them, is certainly not helpful.

To achieve growth, focus on a few challenges: How can I keep more donors in my 0-12 active group?; How can I increase the number of multiple contributions next year?; How can I renew more lapses and acquire more new donors?; How can I move the average contribution up a little?

These aren’t easy things to achieve. But even small successes in each of these efforts will move you forward this year, and bring you into the next year with a larger base to build on. NPT

Stephanie Ceruolo is vice president and general manager of Infogroup Nonprofit Solutions. Her email is Stephanie.Ceruolo@infogroup.com. Larry May is senior vice president of strategic development for Infogroup Nonprofit Solutions. He received the Max L. Hart Award for Fundraising Achievement from the DMA Nonprofit Federation and the George T. Holloway Award for Distinguished Service from the National Catholic Development Conference. His email is Larry.May@infogroup.com