Easy growth is dead

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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

Testing the post-content ask

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Someone has come to your site.  They have downloaded your eight-point plan or a white paper.  They’ve taken an advocacy alert.  They’ve looked at your infographic.  Now what?

When we think about donors, it’s often with our fundraising glasses on, thinking how do I get this person to donate?

One of the underrated aspects of donorcentricity is starting off with the idea of “how do I solve this person’s problem?”.

That is to say, for people who come to your site with the intent of making a donation, most of them are going to make a donation.  For the majority that come with some other intent, however, what is their mindset and how can you help them achieve it?

Let’s take the person who wants to do something about your issue.  That something is, to them, to email their legislator about a particular piece of legislation you are working on.

A traditional fundraising approach would be to have a button on the advocacy page that encourages them, instead of taking an action alert, to donate to your advocacy campaigns.  This interruption marketing is trying to take them away from what they want to do to what you want them to do.

What I would advocate testing is finding your biggest content engagements and put a logical ask (not necessarily a donation ask) after the person has completed what they came there to do.

This could be:

  • On the confirmation page.  If someone downloaded a white paper, it could be “this white paper was made possible by the generous support of people like you” or, perhaps more engagingly, “now that you know about the plight of the Brown Bar-ba-loots, can you email your legislator to add them to the list of protected species?”
  • In a lightbox.  We talked about these earlier this week.  In addition to coming up after a page opens, you can also do them as they are about to close.  This type of ask can serve up your best reason or pitch to complete the action they came to the page to do.
  • As a follow-up email.  The test here can be what the appropriate action to ask for is.  If you have someone who has taken an action alert, what do they want to do next?  And what is of most value to you?

On a related note, I’ve worked with advocacy campaigns where a donation ask after an advocacy alert performed better than a similar up front ask by email without the action alert.  People wanted to take action, then donate.

The great thing about this is that you can be very specific in your ask.  That is, if someone took your Brown Bar-ba-loots action alert, your donation ask (if you choose to do that) can be a Bar-ba-loot specific campaign, crossing confirmation page, lightbox, and email follow-up.  You don’t have to ask this person about polar bears or penguins, because you already know what they care about.

So test out how you can solve your potential donor’s problem first, then ask for something of value.

Thank you for reading.  If you’d like more content like this, please sign up for my free weekly newsletter here.

Testing the post-content ask

What color are online donations?

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I was once a color theory skeptic.  People forget that, before blue meant male and pink meant female, blue meant female and red meant male.  Because of this and the sometimes Chinese zodiac level of imbuing colors with different emotions, impacts, and even personalities, I branded the whole thing voodoo.

Then I looked at the data.  And while there is definitely still some chromatic shamanism* out there, there’s also some real life impact to the colors that you use on your site.

I’m not going to talk about the blue means passive, yellow means cowardly, etc. type stuff that you can get from research.  If you would like that, I recommend the Information is Beautiful color chart that you can see here. 

But in the words of a tweet from @NaomiNiles:

Next time I see an article telling people to increase their conversion rate by using one color instead of another, I’m going to cry.

So there will be no magic color at the end of this (or in the middle).  I’m speaking specifically about the colors you use to delineate the important, converting parts of your site and how that can pop.  Let the people who make up thick brand guidelines have the rest of the site; your job will be to stand out.

Because we are hardwired to seek out that which is different.  Even now, people will look longer the lion or snake in a picture than an antelope or mouse.  Our brains still seek out, notice, and fear perceived dangers even when our greatest professional threat has gone from “gored” to “recipient of cutting remark.”

Colors can make a big difference in this regard.  Dr. Nicolas Guéguen sent female hitchhikers out to get rides wearing different color T-shirts.  With male drivers, there was a significant color impact for red — so much so that the title of his article included Gentleman Drivers Prefer Red. This is likely because of the romantic associations of red as a color.

However, there was a potential impact among female drivers as well.  Females stopped 9.6% of the time for hitchhikers in yellow shirts and 9% for red shirts.  On the other side of the spectrum (rim shot), green shirts were picked up 5.3% of the time, with black at 6%.

The theory, because it is less likely statistically for female drivers to be impacted by romantic cues, is that red and yellow pop out visually when the background is largely gray roads.  

The same thing holds true for your donate (or subscribe) button.  How does it stand out from the rest of your site?

Hubspot looked at red versus green buttons:

red_green_button

They found the red button outperformed the green button by 21%.

But that was likely because other things on that page were green.  The red button was meant to stand out from the rest of the site.  

Let’s see how St. Jude does it:

stjude

You can see the two actions they want people to take — treatment and donation — are specifically delineated to get people to notice them amid the other colors.

WiderFunnel calls this type of button the BOB — the Big Orange Button.  The trick is that if your background color is orange, an orange button is the last thing you want.

On the flip side, here’s Autism Speaks’ home page.  In disclosure, I have two kids on the autism spectrum and have been both a recipient of its services and a donor to them.  I advocate for you to do donate as well.  But the donate button doesn’t jump out at you on their site:

autismspeaks.gif

This is clean and beautiful and fits their brand guidelines.  But I’d bet they could increase their donations if the donate button was orange (or red or yellow).

So I strongly encourage to use color (and size) to make your button stand out from the rest of your site — whatever that color is.  You can go down a rabbit hole trying to trick out your color to the exact shade you want, but having something that differentiates is most important.

Actually, what’s most important is having a compelling ask that touches the heart of the potential donor, but color can help it get noticed.
* Google says this is the first page on the web to use the phrase “chromatic shamanism.”  Now we just wait for the searchers to come, like moths to an extremely dim flame…

What color are online donations?

Let there be lightbox

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Come, children.  Let’s gather ‘round the fire and I’ll tell you a tale of the Old Web.

Once upon a time, when you went to a site, you would be confronted with “pop-ups”.  These were new browser windows that would open when you would go to, interact with, or try to exit a site.  Sometimes, when you closed them, they would automatically open a new pop-up and so on.  

I’m told that the more ethically dubious the site, the more likely they were to have an endless loop of these.

We fought them with all of our might and hatred, until they became a casualty of the Second Browser Wars, as web browsers realized that they could make us happy by purging these from us once and for all.  Now only a few scattered pop-up survivors live among us, surviving on the barest scraps of attention.

Unfortunately, some of the stigma of pop-ups rubs off on lightboxes (or sha220px-fionaappleshadowboxerdowboxes, which I prefer (while less common) because I think of the Fiona Apple song)

You made me
A shadowboxer, baby
I wanna be ready
For what you do

People think that a light box* (slash shadow box) is just a glorified pop-up.  But when done properly, it has several advantages: it is easily closed, doesn’t cause a loop of pop-ups, and provides a quick guide to the first thing someone might want to do or know on a page.

But most of all, you should be trying light boxes because they work.  One report found that the average conversion rate for email acquisition light boxes is 1.66%.

So how do you make a lightbox work for you?  A few tips:

  • With a few exceptions, I would not suggest a donation ask lightbox.  Like we talked about yesterday, getting the first microconversion is easier and potentially more profitable that a straight ask on the home page.
  • Those few exceptions are:
    • End-of-year fundraising, when people are far more likely to be coming to your site with the express purpose of donating.  A light box will make it significantly easier for them.  (If there are similar campaigns for you, like Giving Tuesday or a special anniversary.  For your non-profit, not your spouse, although you should get them something nice.)
    • Any ask with urgency associated.  For example, if you have a matching gift campaign and can count down to the end of the match in your lightbox, I strongly recommend it.
    • When you are using the lightbox not on your homepage, but after some other action.  For example, shadowboxing the confirmation page of an advocacy action with a campaign-specific ask is a great idea.
  • Make them easy to get out of.  If this offer isn’t for the person, you want them to still enjoy browsing your site, rather than hating your guts.
  • Make them easy to get out of in mobile.  It is a little known fact that hell has expanded to a tenth level to accommodate new technology-associated crimes.  These include:
    • Making a lightbox that is unclosable on a mobile device because you can’t get to the X
    • Taking mobile phone calls in a public restroom
    • Replying all to company wise emails
    • Putting a conference call on hold so that 70 other people have to listen to your hold music before they hang up on you and call back in
    • Making a lightbox that is unclosable on a mobile device.  Oh, I mentioned this one twice?  That’s because it’s a special hell within the special hell.  Like child molesters in prison or Kourtney Kardashian**.
  • Make it smart.  Don’t show a repeat visitor the same shadow box over and over; use cookies to either vary your offer or leave it off altogether.  Research shows that you get the same number of sign-ups showing your light box every month rather than every time.  Also, customize your ask to the content a person is seeing.  If they go to your statistics page, give them an offer for your statistics white paper.  This will increase your conversions and their satisfaction.
  • Give a reason. You don’t want a lot of text on your light box, but you do want to have at least one statement that says why a person would want to take the action you want them to take.
  • Wait about five seconds.  That gives the person enough time to look at (and more than enough time to judge) your site, but not enough time to lose them to another offer.
  • Make sure you are layering in other techniques.  In particular, social proof XXX (“join the other 123,456 people who enjoy our email newsletter”), color theory (having a button color that stands out), and having a no option that doesn’t fit with a person’s self-image (“yes, I’d like to join the fight” versus “no, I don’t care about the environment”) can all be very effective.

So, pop-ups didn’t really die that day, kids.  They evolved to be less intrusive, more useful, and something that both users and nonprofits can value.  Now, alla you young’uns get some sleep, and dream of increased conversion rates.

* No, not a typo.  There does not appear to be a consensus on whether people say light box or lightbox or shadowbox or shadow box.  Thus, I’ve included all of the words in this piece so that they can be found by search engines.  I suggest you do the same in your content marketing.

** I don’t actually understand this joke myself, but I’m told it’s funny.

Let there be lightbox

Boiling a frog online

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They say that the way to boil a frog is not to put them in boiling water.  It’s to put them in cold water and slowly turn up the heat.  Because the change is gradual, the frog will not notice until it is boiled.

Who “they” are and why they want to boil a frog is still unknown.  But the somewhat unfortunate metaphor has a point — it’s often easier to get someone to make a big change in small steps.

Thus, instead of thinking in conversions (for example, getting a visitor to your site to donate), it’s often easier to think in terms of microconversions — the little steps that lead to your (and hopefully your prospect’s) goal.  As the great conversion expert Avinash Kaushik says, “Focus on measuring your macro (overall) conversions, but for optimal awesomeness identify and measure your micro conversions as well.”

There are a few ways you can make this work for you:

Track microconversions and how they lead to your ultimate goal.  Some of these microconversions can include:

  • Connecting with you on social
  • Commenting on a blog post
  • Taking an advocacy action
  • Signing a petition
  • Downloading a white paper
  • Looking at a donation page
  • Subscribing to your e-newsletter
  • Contacting your organization
  • Creating an account
  • Looking for directions to your office

From here you are looking at a classic consultant’s 2×2 matrix:

  • High usage of the microconversion; high conversion to your end goal.  These are the things that make you happy.  For example, if action alert usage is the highest activity on your site and advocates are among your most likely people to donate, you are doing your job well.
  • Low usage of the microconversion; low conversion to your end goal.  You can ignore these things for now; they’ll require a lot of work to get into shape.  You have lower hanging fruit.
  • High usage of the microconversion; low conversion to your end goal.  This is one form of an opportunity — you want to work to optimize the path from the microconversion to your end goal.  Let’s say many people are downloading your white paper, but few of them are donating.  You might find that your communications are largely around different topics from the white paper and your asks aren’t related — these are all fixable things.
  • Low usage of the microconversion; high conversion to your end goal.  If almost no one is commenting on your blog, but almost everyone who comments donates, you should be working to get as many people as possible comment on your blog.

Also, if you are getting fancy, you can compute the value of each microconversion by looking at the donation history of people who take the action.  I’d advise you to get fancy, but the matrix is a good start.

Test a multi-stage donation form.  Tradition says that you click a big button that says “Donate” and you are taken to a long form that you fill out in its entirety.  Tradition will get you all of the gifts that you traditionally get.  The boiling a frog analogy works here; people want to finish things they start, so turning a long form into a series of microsteps easier can increase your overall conversion rate.

Heritage Foundation tried this technique and found it increased registrations by 99% with a two-step versus one-step form.

A few ways to do this include:

  • Ask for a donation amount up front.  If you mouse over a donate button, an ask array or a free response question can capture an amount immediately and pass it through to the next step.  It’s a simple step and once someone has taken that action, they are more likely to fulfill their donation.  (And if they don’t, you have a solid ask amount for their next visit or remarketing.)
  • Separate the credit card information from basic address information, with the address first.  Credit card information is the most personal information, so you want to get someone to volunteer their more basic information first.
  • Remember to use the period after donation confirmation to make a monthly giving ask as described here.

 

Introduce your surveys with easy questions first.  There is a reason that professional pollsters save questions like race and household income to the end — they come at a time when the subject is already psychological committed to completing the survey.  As we’ve discussed, commitment is a very powerful thing.  (Also, because if the person stops at that point, you still have the main data you want.)

If you are doing an online survey, start with a simple question up front, then build on future screens.  An online progress gauge is also helpful.  When a person knows there’s only 20% left in the survey, they are more likely to complete it (just like they are more likely to donate when there’s only 20% left in a campaign).

The big commonality with all of these techniques is to start small and build to a larger commitment.  It won’t help convert those who come to your web site looking to make a donation (OK, may it might), but it will help you build commitments among constituents who are less certain about taking a big step forward in their relationship with you.

Boiling a frog online

Simplifying your donation form

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This week, we’re going to look at different online techniques you can try to help increase your conversion and donation rates.  I’d love to be able to share your ideas as well, so please email me at nick@directtodonor.com with your comments and case studies.  Or leave them in the comments section below, where we actually have intelligent conversations, unlike some sites (*cough*cough*YouTubecomments*cough*cough*).

 

henry_david_thoreau1

We’ll start with simplifying our donation page.  As patron saint/oversoul of simplification Henry David Thoreau almost said:

“Our [donation form] is frittered away by detail… Simplicity, simplicity, simplicity*! I say, let your [form requests] be as two or three, and not a hundred or a thousand; instead of a million count half a dozen, and keep your accounts on your thumb nail.”

Let’s start from first principles.  What is the point of your donation page?

It’s not a trick question.  The point is to get donations.  Anything else on that page should be subordinated to helping the person coming to the page make the donation for which they came to the page.

Once you have this as the aim, you’ll find that many of the things you put on that page don’t help in this regard:

Top navigation.  You should still have your logo that links back to your home page.  After all, you could do as well in user interface design with the maxim “never make the user use the back button” as you could in Christianity knowing only the Golden Rule.  In each, there’s a lot more to learn, but that one bit will get you through for now.

But do you need the link to each area of your mission, your about us page, and so on?  You do not, because the goal of the page is to get donations.  Take a look at St. Jude’s home page.

stjude.gif

 

It serves those who want to learn about, engage with, and donate to the organization.  However, once you go to donate, they know what you are there for and everything else melts away:

stjudedonation

Only those things necessary to make a donation remain.

Extraneous fields.  The donation form is not the place to ask for your entire database to be filled in.  Thus, prefix, middle name, and suffix can all be deleted.  Nor is it the place to ask for things you are interested in, but do not need.  Thus, phone number, fax number, connection to the cause, etc., should all go away.  (This is not to say you shouldn’t ask for them; that’s why God invented the confirmation page and/or post-donation survey.)

Any more convincing than is necessary.  I’m being intentionally vague here.  The challenge is that people come to your donation form from very different places.  If they came to your site, clicked on your light box (which we’ll talk about later in the week), and got to your donation form, they probably need some convincing to donate.

On the other hand, if a person subscribed to your e-newsletter, got your welcome series (you do have a welcome series don’t you?  If not, learn the basics here), and clicked to donate on the final email, they have already followed the journey you set out for them.  They are convinced and converted, so get them on their way successfully.

There was a great test I recommend a read of here.  In a nutshell, a nonprofit was testing their donation form, which normally had a video at the top of it, versus a back-end book premium.

The key to this test (I believe) was that it connected with email — people would already have been sold once they got to the page.  Thus, the non-video version had three times the conversion rate of the video version.  The goal of the page was to get them to donate, not to get them to watch the video.

This isn’t to say that the video can’t be an important part of the conversion process; just that it probably doesn’t belong on the donation form.

Similarly, reducing copy at the top of this email acquisition campaign increased response by 26%.

So I would definitely test taking much of the verbiage out of your donation page and see what happens to your conversion rate.

Remember, a simple donation form is (usually) a converting donation form.

* Yes, he said “Simplicity, simplicity, simplicity” instead of “simplify, simplify, simplify.”  I was surprised too.

Simplifying your donation form

Why doesn’t Charity Navigator care about impacts?

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A couple of months ago, we talked about inputs, activities, outputs, and outcomes, saying that the closer you can get to measuring whether you actually help people the better you are.  

Charity Navigator measures the amount spent on activities.  So according to them, you would be better off spending $20 to help 10 people than $10 to help 20 people.  As we talked about yesterday, this biases against the use of volunteers; because they are not paid, any services delivered by them don’t count.

To be fair, there’s usually a correlation between amount spent and outcomes (that’s why it’s so unfortunate that Charity Navigator biases against larger organizations, as we discussed on Monday).  However, when that goes off the rails, Charity Navigator is the last to know.

Take Cancer Fund of America.  Here’s Charity Navigator’s three-star rating of them as of 2013, which is buoyed by four stars in accountability and transparency and very strong growth in program expenses.  At the time, it was rated higher than the two stars given to a clear slouch in the fight against cancer: the American Cancer Society.

You may recognize Cancer Fund of America from their profile in America’s Worst Charities, a project of the Tampa Bay Times and Center for Investigative Reporting or from the 2013 CIR report.  Or the lawsuit from the FTC and all 50 states and DC against them as a sham.  Or them shutting their doors earlier this year.

Or you might recognize them from Charity Navigator’s blog, where they talk about Cancer Fund of America being a sham.  When giving donors advise on how to avoid a scam, they say

“Take the time to research the charity’s finances, governance practices and results. You’ll find much of this analysis, for free, at Charity Navigator.”

As a watchdog, it’s one thing to let the sheep get eaten.  It’s another to recommend the wolf to the sheep.  And when you both recommend the wolf to the sheep and use that recommendation as an example of sage sheep-protecting advice, congratulations — you’ve reached Charity Navigator level.

To be fair, a lot of people missed this for a lot of years.  But Charity Navigator continued to rate Cancer Fund of America highly well after it was seen to be a scam because it looked only at program expenses and it didn’t care at all what those program expenses were or if they were having an impact.

And, with the release of CN 2.1, it still doesn’t.

You might say that everyone makes mistakes.  That certainly is true.  But most responsible people admit their mistakes, apologize for them, and change to avoid them in the future.  Charity Navigator held themselves out as a paragon on the very charity they missed and made no changes.

But, you probably are saying, it’s really hard to measure impacts.  Like really, really hard.  Especially for an outside organization.  And I would agree with that.  Charity Navigator is trying to police the entire nonprofit world with six analysts — it’s not easy at all.

But that misses two important points.  First, it is one thing to give advice that is unhelpful; it’s another to give advice that is actively destructive.  Charity Navigator:

  • Suppresses organization size (and impact) by ignoring the costs of scale
  • Ignores the ways a nonprofit can have an impact beyond its initial online constituency by eschewing joint cost allocation
  • Rewards hoarding money
  • Advises against giving to nonprofits who need it most
  • Advises against giving to nonprofits who are more efficient with their program expenses

I can forgive challenges in trying to tackle the challenging nonprofit world.  But your motto can’t be “when in doubt, do harm” in a reverse Hippocratic oath.  At the point that Charity Navigator says “don’t give your money to the losers at the American Cancer Society — go with this scam instead,” then crows about it rather than apologizing to the people it deceived, it is an actively negative force.  Maybe that will change with new leadership, but as I mentioned on Monday, I’ve taken too many runs at Lucy’s football to easily trust in another.

And second, others are doing this far better.  Last month, GuideStar released its platinum ratings, which are the result of a concerted effort to look at the actual impacts of nonprofits.  Causes are able to talk about the impacts in ways that are relevant to them and their donors and compare their impacts to other organizations.

It’s still a work in progress, launching only last month, but it’s still far better than anything from CN, because it tries to quantify the change nonprofits make in the world.  Additionally, in the GuideStar profile, there’s everything that’s in a Charity Navigator profile from financials, but without the misleading guidance.

I urge all nonprofit leaders to take a look at what is required to get platinum here.  

There’s also Great Nonprofits, which allows constituents to review the impact of a nonprofit.  This might have sounded odd 25 years ago, but by now, all of us have bought something on Amazon or tried a Yelp restaurant based on the review.

These efforts are important because donors do deserve to know what impact they are having and to be protected from scams.  They are crawling through the desert looking for it.  And when they find the oasis is actually a mirage, they are trying to drink the sand that is Charity Navigator.

So let’s give out water, as clear and pure as we can make it.

Why doesn’t Charity Navigator care about impacts?

Why does Charity Navigator hate volunteers?

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OK, that may be a bit of an exaggeration.  But not much of one.  Because Charity Navigator gives backwards incentives to make sure that program activities are done by program staff and not volunteers.  And they are entirely indifferent to the impact that an organization, only the inputs.

Let’s take two social services nonprofits as an example of this.  To make things fair, they both start in the same place:

  • They are each $10 million organizations in both revenue and costs
  • They spend 80% on programs, 11% on administration, and 9% on fundraising — a model CN organization.  (Clearly, they should spend more money on fundraising to grow faster, but we’ll ignore that for now.)
  • They each get a $1 million grant to help fund employees who provide direct program services to the community.
  • They are each growing their revenue by $300,000 per year.

Suddenly, this grant is cut.  (Cue scary music: dun Dun DUUUUUUUNNNN!)

Organization A is able to get another grant to mostly replace the existing one and fundraise for the rest..  They continue on as they were going before, except their fundraising costs go up to 11% of revenues.

Organization B realizes that they have been doing with employees what volunteers can do.  They get a grant for $100,000 in program expenses per year to pay for staff to recruit, cultivate, train, and deploy volunteers. In year one, they are able to provide the same services as before.  In years two and three, they are able to increase their services in the community as volunteers beget new volunteers.

Which nonprofit would you support?  I’m thinking most would (and should) support B over A — biggest impact on lower revenues means it’s more effective.  Not that A is bad; just that B is a doing more with less.

And you might think that Charity Navigator would agree with you.  However, it has has a growth imperative: in order to get a maximum rating in program expenses, you must grow your program expenses year over year.  Not your program impact; your program expenses.

So let’s see how this breaks out after three years.

Charity A goes from $10M to $10.9M in revenues.  They go from $8M to $8.5M in program expenses — an increase of 6.3%.  This gets it 8.3 points of increase in program expenses.  Its fundraising expenses and fundraising efficiency measures, however, each go down by 2.5 points because it has crossed a completely arbitrary Charity Navigator threshold.

Charity B stays at $10M in revenues and at $8M in program expenses.  This gets it 2 points on program expenses by CN’s calculations.  Its fundraising expenses and efficiency stay the same.

So A does 6.3 points better than B on program expense increase and loses 5 points for fundraising expenses and efficiency.  In summary, CN says that charity A is better than charity B not because it did more — it didn’t — but because it spent more.

To give credit where credit is due, CN did remove increasing overall revenue as one of the seven financial criteria in their 2.1 release.  Now if we can only get rid of the other six.

You may think that I jiggered this to make this example look good.  However, it’s actually a worst-case scenario for Charity A because of the increase in fundraising costs.

It also highlights that, according to Charity Navigator,  you would be better off using staff than volunteers to do your programs, because you spend money on staff.

But this is actually a symptom of a larger problem: it highlights how Charity Navigator doesn’t care about impacts.  We’ll talk about that more tomorrow.

Why does Charity Navigator hate volunteers?

Why does Charity Navigator advocate hoarding?

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Another part of Charity Navigator’s financial rating system is to have reserves for a rainy day.  In order to get a top rating from Charity Navigator, an organization must have 12 months of operating expenses in the bank (depending on the sector: lower for food banks and relief organizations; higher for foundations, libraries, parks, foundations, etc.)

I fully agree that nonprofits should build reserves.  There are natural ebbs and flows of both revenues and expenses in the nonprofit world; usually one is ebbing while the other is flowing.  Additionally, funders sometimes have demands that are off-mission, counterproductive, or political.  You need a bank of money so that you can say no to quick bucks at the long-term expense of your mission.  And you want to be able to take advantage of unforeseen opportunities as well as preparing for unforeseen difficulties.

Because it has a basis in need, this may be CN’s most helpful financial metric, which is much like the Taller Than Mickey Rooney Award: you can still be very short and win.

Remember, Charity Navigator purports to be a guide to where you should give your money as a donor.  And there are two problems with it as guidance to donors.

First, it rewards the hoarding of money.  There literally is no upper limit on how much you can have in reserves and still max out your reserves rating.  In fact, they brag about this on their site:

“Givers should know that other independent evaluators of charities tend not to measure a charity’s capacity. Indeed, charities that maintain large reserves of assets or working capital are occasionally penalized by other evaluators. In our view, a charity’s financial capacity is just as important as its financial efficiency. By showing growth and stability, charities demonstrate greater fiscal responsibility, not less, for those are the charities that will be more capable of  pursuing short- and long-term results for every dollar they receive from givers.” (here)

The simple question is would you rather fund an organization that ten months of expenses in the bank or ten years?

My inclination, as I would think most carbon-based lifeforms’ inclinations would be, is the ten-month organization.  If you have ten years of reserves in the bank, you are almost certainly not funding worthy projects and not investing in your infrastructure or growth.

BBB asks that you cap your reserves at three years to make sure you aren’t doing this — it seems like a better practice that CN is actively avoiding.  Or, put well from ACEVO, Charity Finance Group and the Institute of Fundraising:

“Charities need to justify their reserves. Holding a high level of cover for risks and unforeseen events appears sensible, but is this right if worthwhile projects are going unfunded? Charity funds are meant to be spent; therefore charities should be able to provide solid, considered justification for keeping funds back as reserves and not spending them.”

Nonprofits do not exist for the purpose of existing.  They exist to solve a societal problem.  If you have too much in reserves, you are privileging your existence over your mission.  And to that I say

shame-bell-lady-from-game-thrones

Second, it advises against giving to those who may need it most.  Let’s say there are three nonprofits, both with substantial (let’s say 15 months worth of) reserves.  Disaster strikes: a grant that makes up more than half of each of their budgets dries up.  Thankfully, they have prepared for this rainy day and, after consulting with their boards, they each take action:

  • Nonprofit 1 has a policy that they will not go below 12 months of reserves, per Charity Navigator’s advice.  They spend some from their reserves, but have to make small cuts in program and large ones in infrastructure to keep their bank balance solid.
  • Nonprofit 2 also believes strongly in a solid reserve, but not at the expense of their programmatic activities.  They dip into their reserves, taking them below the 12-month mark (knowing they will be penalized even more if they cut program activity), and prop up their program activities to a stable level.  However, they make no move to upgrade their fundraising abilities to replace their revenues.
  • Nonprofit 3’s board says that moments like this are the reason you have reserves.  They do what it takes to replace their program expenses and invest in ways to increase their unrestricted giving to replace the missing funds.

Charity Navigator ranks these organizations 1, then 2, then 3.  As a donor, three is the only one I’d want to give to — the only one that cares enough about their programs to sustain them for the short term and work to salvage them for the long term.

At the point where you are advising people to give to nonprofits in the exact wrong order than the one you should be, you probably need to rethink your financial metrics and do more than rearrange the deck chairs.

But that’s not the worst part.  Not only does Charity Navigator advise against giving to those who need it most; it advises against giving to those who have the most impact (or at the very least, is impact agnostic).  We’ll talk about that more tomorrow.

Why does Charity Navigator advocate hoarding?

Why Charity Navigator ignores standard accounting practices

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Or, perhaps this would be better titled “why does Charity Navigator ignore standard accounting practices?”.

For those blissfully unfamiliar with nonprofit accounting regulations, allow me to burden you for a moment.  When a nonprofit combines fundraising and program activities, it is required to allocate part to fundraising and part to the program expense.  A nonprofit can do this if it meets three criteria:

  • Purpose: does the program part of the expense benefit the mission and societal good?
  • Audience: is the communication going to an audience that needs that communication for the societal benefit?
  • Content: is the content genuinely of value to the mission?

So it is not something done lightly.  But when Charity Navigator does its rankings, it takes out joint cost allocation.

Geoff Peters, in his excellent post Can’t we replace Charity Navigator, puts it thusly:

“Charities are required to follow GAAP Accounting rules and FASB standards in order to receive a clean audit opinion.  Yet when they follow those rules, Charity Navigator reverses the joint cost allocation which is required under audit standards and restates (misstates) the finances of the charity.  Then the media picks up on that misstatement and publishes it as if it were true.  This results in damage to the charity’s reputation and is based on false information but since the media accurately quoted Charity Navigator’s misstatement, they cann300px-prometheus_adam_louvre_mr1745_edit_atomaot be sued.”

The idea that Charity Navigator thinks that it knows better than the IRS, BBB, FASB, GAAP, and many other acronyms in laughable hubris, the type that Greek myths punish with your liver being continually eaten and regrown.

But sometimes the vocal minority has a point.  So let’s look at whether joint cost allocation makes sense.

Charity Navigator says:

“We believe that donors are not generally aware of this accounting technique and that they would not embrace it if they knew a charity was employing it, nor does Charity Navigator. Therefore, as an advisor and advocate for donors, when we see charities using this technique we factor out the joint costs allocated to program expenses and add them to fundraising.  The exceptions to this policy are determined based on a review of the 990 and the charity’s website (in some cases we review data provided to us from the charity directly).  We analyze these items to see if the organization’s mission includes a significant education/advocacy program or other type of program that would directly be associated with joint costs.  If that is the case, we inspect in further detail the charity’s expenses in regards to those specific programs.”

There are several reasons this logic is spurious:

  • First, is it just me or does this say, in essence, “as an advocate for donors, we think they are stupid.  We think they can’t figure out that if they get a mailing, someone has to pay for it.”?
  • The fact that some people are aware of something is a reason to educate recipients of data, not to judge the providers of it.  For example, I believe not many people know how poor Charity Navigator’s ratings are, so I’m dedicating a week of posts to it.
  • As we stated earlier, in order to count something as a program expense, a nonprofit has to establish that it is an essential part of their mission.  What Charity Navigator is saying by backing it out is that they think that almost all nonprofits are lying about this.
  • In order to ferret out those few CN doesn’t believe are lying, they will analysis the mission and the communications to figure out if it is a legitimate purpose.  Call me crazy, but I think the nonprofit is probably a better judge of this.

This last point is especially true when you consider that CN has six program analysts and rates over 7500 charities.  With a little math, you can figure out that they spend about 90 minutes analyzing any one nonprofit, assuming no bathroom breaks or meetings.  Considering that the nonprofit’s staff, board, and audit committee spends a bit more of time on this than CN, then it’s certified by the federal government (not a strong argument, but one nonetheless), it appears that CN should take the proverbial long walk off a short pier trying to refigure every nonprofit’s mission for them.

It also goes to the question of what a world looks like in which you don’t do this type of allocation.  Let’s say you want to educate people about an important piece of legislation or ways to screen for prostate cancer.  How should you reach these people?

Yes, email is great; that will help you preach to the converted.  How do you reach people who don’t believe in what you do?  Earned media is great.  But if you are failing to recall all of those stories on your local news about how to screen for prostate cancer, it’s probably because they didn’t exist.  Not everyone has a sexy issue.

The truth be told, more people hear about more missions through their mailboxes and phones than through any other means.  

And those are expensive, so they have asks attached to them.  It is natural that all of the fundraising parts of these asks should be considered fundraising.  But we are dependent on people knowing about and acting on our issues in a variety of ways.  And that which is program expense should be program expense.

CN was sincere when they said they didn’t think that mail had a place with nonprofits.  They could not be more wrong.  Choking off joint allocated media doesn’t just strangle fundraising; it also throttles mission.

And thus, their guidance is better off ignored, or better yet repudiated.

Why Charity Navigator ignores standard accounting practices