Easy growth is dead

ef-hutton-commercial2There are some people that, like the old EF Hutton commercials, when they talk, you listen. Mary Meeker is one of those people as one of the lead analysts on online and high-tech issues.  

To give you some perspective, she was lead manager of the Netscape Communications IPO in 1995; usually when someone says they have over 20 years of online business experience, you assume they are padding their resume.

On June 1, Meeker put out her Internet Trends report, highlighting the evolution of the sector.  You can see the full report here.  Among the over 200 slides are some key takeaways for us nonprofit folks, so I wanted to highlight a few of them this week.

I’m on the record as opposing any article that proclaims The Death of X — that’s even what I called a NonProfit Pro article on the topic.  

So here I am violating my own rule.

In the report, on slides 37 and 38, Meeker articulates the five epic economic growth drivers of the past two decades and how they are all waning:

losing mojo
What do these drivers look like for the nonprofit sector?

  • Nonprofit giving remains at two percent of GDP.  Has been for 60+ years and looks unlikely to break out anytime soon.
  • As Meeker says, overall GDP growth is slowing across the board because of these demographic factors.
  • The number of nonprofits is increasing.
  • The number of donors is waning, with 103 donors lost for every 100 donors gained.  This is offset by average gifts going up, but getting more and more from fewer and fewer is the buggy whip model for success.
  • Anecdotally, nonprofits are increasing their quantity of communications in an attempt to cut through the noise.
  • With giving increasing by less than the amount communication quantity is increasing, costs are up and response rates per communication are down.
  • Meaning that response rates per donor are down.

We need, as an industry, to find a way out of this.  Other than the nonprofits that are working to decrease death, we can’t solve for the N and increase overall population.  Nor is there anything I think we can do at the nonprofit level to prevent other nonprofits from forming.  And we’re unlikely to budge GDP.

So, easy growth is dead.

Thus, there are but a few choices:

  1. Increase the percentage of people who give.
  2. Increase the amount that people who give give.
  3. Decrease the costs of getting people give.
  4. Die off.

All of these will come into play at some point.  We keep overfishing the same donor waters; we will have to find new donors.  In order to break 2% of GDP, we need to change our value proposition to those who donate to us.  And we need to be smarter about how we solicit and receive gifts.  Those who don’t do at least one of these three things will do the fourth.

Tomorrow, we’ll talk about a Meeker-inspired way to help potentially increase both your retention rates and your donors’ experiences (that is, working on #1 and #2).

If you’d like to get these types of tips on a weekly basis, please sign up for my weekly email here.  You’ll get digests of this information, plus additional subscriber-only content like 30 days to firmer thighs.

OK, I’m lying about that last part.

Easy growth is dead

Addressing the resource challenges of donorcentricity

Getting to an organization that is able to know about its donors and customize communications accordingly is not easy.  We often lack one centralized database that acts as the Truth.  We don’t think we have time to make donor calls to thank people where revenue isn’t attached.  Our budgets are so small that we transcend lean and mean and are now emaciated and ticked off.

But we must start somewhere.  Why?  Remember the old joke about the bear and the sneakers?

For a refresher, two guys are at their campsite when an angry bear comes charging in.  One of the guys immediately bends over to tie his sneakers.  The other one says “You idiot!  You’ll never outrun that thing!”

The guy with the sneakers replies “I don’t need to outrun the bear.  I just need to outrun you.”

So, if you have no better rationale and didn’t read my Monday post about the value of donorcentricity to our business model, remember:

  1. Donors to our organizations donate to other organizations.
  2. Other organizations are doing these types of stewardship activities.
  3. BEAR!


So how do you start this journey of a thousand steps?  Here are some tips to first steps to better talk to donors.

Get your database in order. This may mean some time working out of csv files to get your lists in order.  However, this is much better than not trying at all.  It will also help you in the long run, as the fancy pants SQL/database steps to data health are likely just automated versions of what you are doing in your spreadsheet.

Institutionalize calling.  It doesn’t need to be just development employees or just employees.  But any part of your culture that you can get to call donors to thank them – do it.  Even if it’s one call per month.  The practice of hearing donor stories helps whoever here them take what was once a figure on a spreadsheet and turn it into an understanding of why people outside your organization think you exist.

And it helps them to feel your gratitude as well.

Ditto for thank you notes.  The more these can be a cultural touchpoint, the better.

Try an unconventional thank you strategy.  We have 50 ways to thank your donors here, most of them unconventional and many of them very poorly rhymed.

Finally, once you have data from a good number of people who have randomly received thank you calls or notes or the like, run the numbers.  You should be able to see from an increase in retention rate (I hope) the impact that calling can have on your donors and your retention rate.  Sometimes that number will be enough to continue your random calling.  Sometimes it will be large enough to justify significant resource allocations changes.

After all, the quickest solution to a small budget is to get a big one.  This can help you prove it out.

If you’d like more nonprofit direct marketing content like this, please subscribe to my free weekly newsletter. You’ll get all of my blog posts, plus special subscribers-only content.

Addressing the resource challenges of donorcentricity

Scenario planning your direct marketing budget

Yesterday, I discussed the idea of budgeting to a bad-case scenario budget that is approximately one standard deviation out in terms of results.  (Note I do not say a worst-case scenario.  As the Backyardigans have clearly articulated, things could always be worse.)

This is what you get listening to the father of small children.

This scenario planning allows for another benefit – to know where you are toward your budget and be able to adjust it.

So let’s say you are on a calendar-year basis, you have a one-standard-deviation-down budget as recommended, and as of April, you are hitting the middle-case scenario, exactly where you thought you would most likely be and ahead of your budget.  What do you do?

Well, yes, you could throw a party, I suppose.  But I meant “what do you do with your program for the rest of the year?”

Too often, the automatic response will be that you continue to execute the plan you budgeted for.  This is not unreasonable – the plan seems to be working, after all.

But this also leaves opportunity on the table.  If you have a potential surplus and the rest of your organization is performing to budget, this is an opportunity to make additional investments to increase your program.  Note the “your organization is performing to budget” point.  This is a key factor – sometimes you will be asked to supplement the budget in other areas that are not performing to goal; do this willingly, as it will be these areas that supplement you the 16% of the time you are having challenges.

This is why as a part of your budgeting, and then dynamically throughout the year, you should be looking at “if this, then that” investments.  In your budgeting process, this can be as simple as “if we are $100,000 ahead by April, I’m going to spend an additional $50,000 in acquisition.”  Note that this would increase your costs and decrease your ROI compared with budget, which is another reason these are false indicators for your program.

When you get into your direct marketing year, however, you will want to be more specific with your goals based on performance so far.  Let’s say that one of the reasons you are better than budget is that your deep lapsed 37-48 month segments have been performing better than you had projected and the surprising success of the soft ask on an email mainly targeted at advocacy efforts.  You may still want to make that $50,000 investment, but you don’t want to put that into straight mail new donor acquisition just because that’s where you thought you would go at the beginning of the year.

Instead, you may look at:

  • Testing deeper lapsed audiences with the messaging that worked best for your 37-48 month constituents.
  • E-appending deeper lapsed audiences that you might normally to double down on an audience that seems more responsive than you’d planned.
  • Testing a mail version of your advocacy email series.
  • Looking to shore up weaknesses in the program. If you found that you were not hitting your targets for online acquisition, but had a strategy that was working, upping the investment there could be beneficial.

These are the same sorts of the things you will be looking at in scenario planning if you find yourself under budget in April.  While the fluidity of investment opportunity can be heady and thrilling when you are above budget, your goal when you are under is to minimize soul-crushingness and longer-term opportunity damage.

So you’d be looking at this in converse.  If lapsed reacquisition was doing well, but new donor acquisition was significantly off target, you may be able to shift a portion of your new donor acquisition budget to lapse reactivation and maintain your donor file while preserving your net.  Other tactics to minimize damage as you trim investment is to reduce or shift testing.  While it is painful not to get the knowledge from new communications that you normally would be able to get, it can be less painful than having a smaller or worse donor file at the beginning of next year.

Here, online testing can be your friend.  If you have a telemarketing script or mail piece that you were looking to see if would work for your file, try a version of it online first.

I can hear you saying “these are difference audiences” and you would be right.  However, you can minimum the difference by looking at the responsiveness of just the people on your email file that were originally acquired through the mail or phone, then joined your online family.  These donors will look more like your mail- or telemarketing-only donors than the entirety of your file.  In a declining budget situation, you can then cut your testing costs by only rolling out with offline tests that have worked online.  Here you have the additional advantage of being able to set up an audience of people who responded to the appeal online as well to help you create that valuable multichannel donor.

If you are really doing well or poorly, you can also look at what can be referred to as cheating.  This is to say if you are doing immensely well and you have a piece scheduled to go out on January 3rd, you may want to change the mail date to December 29th so that the costs are incurred in the previous fiscal year (insert your own different fiscal year logic here).  This can help you use one good year to significantly increase the likelihood of having two straight good years.

I know, I know.  It doesn’t change the underlying realities.  An organization should value being up $300,000 one year and down $200,000 the next versus budget more than it values on budget both years.  But these artificial distinctions are important to your finance department, your ED, and your board, so it’s important to keep an eye on them, even if it is a skeptical eye.

To summarize a week’s work of virtual ink, for some, budgeting is a once-per-year process.  For you, however, it should be a constant process of refinement and adjustment.  Eisenhower said it perhaps best:

In preparing for battle I have always found that plans are useless, but planning is indispensable.

So don’t let your plan get in the way of what you actually do.

Scenario planning your direct marketing budget

Hitting your direct marketing budget 84% of the time

Much virtual ink has been spilt discussing why the housing market, then the US economy, crumbled like a Barbie chair under a sumo wrestler in 2008.  (My favorite account is Michael Lewis’s The Big Short; the book is excellent and now I’m looking forward to the movie)

In the end, through all the discussions of things like collateralized debt obligations, mortgage-based securities, and tranches, you could describe the problem as:

People assumed that stuff that would naturally all go wrong at once
wouldn’t go wrong all at once.

In this case, it was home mortgages.  Mortgages were looked at as individual special unique snowflakes, when in reality, the things that would make for one person to default on their mortgage (bad economy, failures of certain types of sectors or jobs, taking on too much debt, unregulated and unjustified lending) would make for a bunch of people defaulting on their loans.

By now, you are probably wondering what my point is.  My point is:

It’s reasonable to assume that which goes wrong goes wrong simultaneously in your direct marketing budget.

Yes, there are things that can affect individual communications that are not replicable.  But there are a number of scenarios that can be systemic, whether it is the failure of the economy, a messaging issue, or that viral video of your executive director riding a stolen police horse naked down a major highway.

(That is, the executive director is naked, not the horse, although that last part could really go either way or both.)

Traditionally, direct marketing budgeting and budgeting in general is not like this.  You set the budget for what you believe you can achieve based on previous years’ results and all of the things we’ve discussed this week.  You assume that the good and the bad will balance each other out – that your good tests will pay for your bad ones and that yours learning throughout the year will help expand things a bit beyond your budget.

But when you assume that the success of a communication doesn’t correlate with the next communication or the last one, you make the same mistake as those people who wrecked the economy.

Thus I would recommend setting a high, medium, and low scenario for each communication in your direct marketing plan.  Medium is what you believe is most likely based on your experience.  High and low are one standard deviation away from your plan; you budget for the low scenario.

It need not necessarily be one standard deviation – you can change based on your and your organization’s risk tolerance – but one standard deviation ensures that there’s at least an 84% chance that each communication will be at or better than budget.  If you have total correlation among your various communications (a worst case scenario), that means that you will only be under budget one out of every six years.

Ideally speaking, your budgeted scenario should have at least file replenishment level acquisition and reacquisition – that is, you should plan to end the year with as many or more donors than you started it with.

By budgeting for your “low” scenario budget, you’ve made your finance department happy (or at least less unhappy).  And you have the opportunity to trim out your investment as the year goes on, which I’ll discuss tomorrow.

Hitting your direct marketing budget 84% of the time

6 common traps in direct marketing budgeting

Direct marketing budgeting seems easy:

  1. Take last year’s budget
  2. Take out the losing communications and replace them with the results of the winners.
  3. Project that the communications will do the same thing as last year.
  4. Profit

And I have had budgets set this way by vendors. However, this overlooks a great deal.  In confession, some of these are things I caught before we put the plan in our organizational budget – some I didn’t.

Changing file.  OK, you may say – we have 1,000 more donors than we did last year.  We’ll assume the communications have the same response rate and average gift as before and just add to our quantity.

Wrong.  You need to look both at the number of people on your file and the lifecycle of that file.  Let’s say that last year, you did a lot of new acquisition (yay!) and your retention rate stunk (boo!).  As a result, your overall number of donors may not have changed much, but your composition is entirely different – you have far more first-time donors who will have lower response and retention rates and far less multi-year and core donors.  See my post about the fallacy of file size and single-size retention rates here for details.

Bottom line, if you assume your new donors will perform as they always have done, you are toast.

Spill in and spill out.  Accountants have a really good reason to artificially cut things off the way they do.  Or so they keep telling me.

The bottom line is with accrual accounting some of your costs will not occur in the year that you are planning to send out a communication.  Likewise, some of the revenues from a campaign will spill out of a year into the next year, especially for longer-lead time media like mail and telemarketing pledges.

It’s sometimes OK to assume that spill in from one year will equal spill out into the next year.  However, changes in file, size of efforts around year end, and when that darn print vendor decides to send you their invoice can all change whether you hit goal or not.

Communication performance.  I had a vendor report that a piece was going to do 4% response rate because that’s what it had averaged over the past three years.  When I dug deeper, the response rate over the previous three years was 5%, then 4%, then 3% (these numbers are fictitious; don’t believe any response rate that doesn’t have a point something).

I would argue this is perhaps a dying communication and that this is more likely to have a 2% response rate than a 4% response rate.  You don’t see that if you are simply averaging previous years’ performances.

Test failures.  If all of your tests are going to work, you are going to have to call them something other than tests.  Most of the time, your tests will not do as well as your control will do, so you can’t account for this by assuming you are get the results of last year’s test winners.

Speaking of…

Roll-out failures.  You had your test last year and it succeed at 95% confidence?  Chances are you if you tested at 25,000 pieces, you tested part of some of your better segments, not across all of the segments.  Perhaps the piece you have tested into is good for your current donor sets, but doesn’t fit with why your lapsed donors originally signed up with your organization.  If that’s half of the audience you were planning to mail to, you will want to dial back your expectations.

Interactions amount communications.  Let’s can you had record online revenues last year, but your mail program fell off and your donor file dwindled.  A good portion of your online donations are likely people who got their mail piece and decide to donate online; thus, you have to see how aspects of your program affect each other.

Hopefully, these help you make your budget; tomorrow, we’ll talk through scenario planning in your budgeting.

6 common traps in direct marketing budgeting

Setting your direct marketing budget anti-goals

Yesterday, I argued that the three things that matter in your budget are net revenue, file/program health, and cross channel/multichannel/omnichannel health (how much are you contributing to other fundraising and non-fundraising efforts.

That ignores some key traditional metrics.  And that’s intentional.  Here’s why:

Costs.  Many nonprofits look to minimize their overall costs (and believe you me, I have seen some nonprofits transcend lean and mean and become emaciated and ticked off).  But this is a fallacy in direct marketing.

Let’s picture direct marketing once again as if it were a magic box that you put costs into and got revenue out of.

If an additional $100 in the magic box brings you an additional $150 in revenue today, you should do that.  That’s covered by net revenue.

If an additional $100 in the magic box brings you an extra $200 next year, you should do that (unless you are in a hyperinflationary market).  That’s covered by program health.

If an additional $100 in the magic box brings you an additional .5% chance of a $100,000+ bequest (crosschannel health), you should do that.  That’s covered by crosschannel health.

The problem with overall cost as something you look to minimize is that it could ignore these three investment opportunities.  Don’t do that.

Gross revenue.  If the impacts on file and crosschannel health were the same, would you rather spend $2 million to make $4 million or $3 million to make $5 million?  Clearly the former, as you can getting more return on your investment.

Yet some nonprofits have a goal of “we will increase our revenues to X” instead of “we will increase our revenues to Y, net of direct marketing costs.”  The former gives an incentive to overspend at the expense of net revenue, program health, and crosschannel health.

This is yet another reason why Charity Navigator’s financial rates are so very, very flawed and actively counterproductive.  They have cost of fundraising in their model so that a 10% drop in ROI could cost you 2.5 points (out of 100 (actually 70 because they spot you 30 points)).

However, if that turns your organization into one that is growing substantially in income and program expenses as a result, instead of shrinking, you get an additionally 20 points (because revenue growth and program expense growth are two 10 points categories.  This is why Charity Navigator rated an active cancer charity scam three stars – because it was growing.  If you doubt me, here’s their rating from the handy dandy Internet archive.

Conversely, a charity that has encountered tough times will get zero points out of ten on both of these growth indicators, giving them two stars on financials or less, hurting that struggling charity in its efforts to work its way out of the hole.  I will at some point dedicate a week to the perverse incentives of Charity Navigator, which sets itself up as a watchdog but instead chews up your shoes and poops on your carpet.

Return on investment is important.  But it should be strived for, not budgeted for.  Later this week, you’ll see why, as we look to get to our optimal program.

So tomorrow, I’ll talk about the nuts and bolts of budgeting and some pitfalls to watch out for.

Setting your direct marketing budget anti-goals

Setting your direct marketing budget goals

So, you want to budget for your direct marketing…

Wait.  Scratch that.

So, you have been told to budget for your direct marketing.  None of us really want to set a budget.  Yes, you want to be able to project what communications and campaigns will do, the better to measure expectations for the future and learn from our successes and failures.

But the ideal direct marketing world would be one where there was not a number to hit, but rather a series of goals.  You would set up your communications and tests, learn from what was done, retool the program for the future given what you’ve learned, and get hot oil massages from attractive members of your preferred gender(s).

Back in the real world, though, it is imperative that our causes know what they can count on from the direct marketing program and, ideally, from the bridges you have created to events, major gifts, planned giving, monthly giving, and corporate outreach.  Someday, I will blog about multichannel attribution, just as soon as I feel like I’ve figured it out myself.  Or, to speed things up, if you think you have a handle on it, email me at nick@directtodonor.com and I would love to give you a guest blogging opportunity.

These budgets let us know what staff we can bring on, projects we can take out, people we can help.  It’s imperative that we set them and that we stick to them.

I would argue there are three relevant things for which to budget:

  1. Net revenue. Think of your direct marketing program like a black box for a moment.


    No, not that type of black box.  Hopefully.  Our black box is magical.  You can put in $100,000 and get $200,000 out.  You can put in $1.8 million and get $3 million out.  And, most importantly, you can put in X and get out Y, because our magic box is algebraic.

    Your organization needs to know what Y minus X is – how much does the magic box add to the money that is put into it.  Or, but another way, this is how much extra are you contributing to the mission through your activities.

  2. Program health. Your number and quality of donors determine how good your black box is going to be in future years.  There is a point at which this conflicts with #1.  A good program will take a maximized net revenue and reinvest some of that to help sustain and grow the program in the future.  Simplistically, this means acquiring donors.  Beyond that, it also includes the tests that fail so you have the benefits of the ones that succeed, cultivation communications that may not bring in immediate revenues but set donors up for better things down the road, and other tactics that sacrifice net for lifetime value (e.g., acquisition of monthly donors).
  1. Crosschannel health. This is more difficult to measure, but it will be to your benefit to start trying.  That is, how much if what you are doing helps out with other efforts.  A good example is with planned giving efforts.  An ideal target audience for planned giving appeals are 70-plus year old “tippers,” who give to your organization often, but not much, and who have substantial assets that may not be known by your organization or even conventional wealth screening indicators (living in modest homes and neighborhood, little to no stock activities, certainly no M&A or Wall Street stuff, and few political donations).  This is also a borderline audience for most direct marketing activities – they require more expensive (mail and phone) solicitation, they are unlikely to convert to monthly giving), and models will show them to have low lifetime value.  But what value do they have in the long-run?  A focus only on net revenue and traditional RFM-based file health metrics will ignore folks like this.

Purists will note that there are several things that are traditionally part of a budget that I don’t include here.  But that’s tomorrow’s post – the things that people think matter, but don’t.

Setting your direct marketing budget goals