file health

Judging your online file

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We’ve gone over email, Web, and constituent metrics so far — now we need to look at how your online file stacks up.

imageThe easy, and lazy, metric is file size.  There is a certain type of person — and I’m not going to name any names or get political here — that always thinks that bigger is better.  And that yuge…  I mean huge… is better than bigger.

I would be lying if I had not seen this used as a case for investment at some points.  There is no small amount of power in standing up in front of a board (which is, sadly, more older white men than we should probably have as a society at this point) and saying “your X is too small.”  That X stands for “email file size” is not entirely relevant at that point.

These people, whoever they may be, because I have too much class to single out any one particular person, are wrong.  File size is a vanity metric.  It makes you feel good (or bad) but doesn’t impact performance.

Deliverable file size is a skosh better.  Here, you subtract out people who have unsubscribed, hard bounces, people who haven’t opened an email in a significant amount of time, and other malcontents.  At least this can’t be gamed (in the long term) by going on fiverr.com and paying five bucks for thousands of email subscribers, Facebook likes, Twitter followers, etc.

But ideally, you want to take your file size and overlay your value per constituents.  If your advocacy constituents are worth $1 and your information-requesters are worth ten cents, a file that is 90,000 advocacy folks and 10,000 requesters will be worth a lot more than vice versa.  So, deliverable file size by actionable segment is probably the thing to shoot for.

But more than that, you need to look at those segments by how you get there and where you are going.  This means looking at the positive side (growth) and negative side (churn).

I’ve professed my love of the M+R metrics report here, but there’s one thing I don’t 100% agree with.  They say:

Our job is not to block the exits; our job is to throw the doors open and welcome people in.

They put this in the proper context in the next line: “You should be paying more attention to growth than churn.”  But this doesn’t mean you should be paying no attention to churn.  You want to make sure that people aren’t leaving in droves, especially if they implicate one of your acquisition strategies.  For example, if 90 percent of the people who sign a petition aren’t on your file in six months, you are either doing a bad job of retaining them or you likely didn’t want them anyway.

But, as M+R says, don’t lose a lot of sleep over churn.  The two recommendations I have are:

1) Customize your exit plans.  Many of the people who unsubscribe from you don’t want to unsubscribe as much as they want a different email relationship with you.  That may be something you are able to provide with segmented emails, fewer emails, etc.

2) Do electronic change-of-address maintenance of your file so you can recapture all of the people you want to get back.

I also like to look at online list by origin.  Sometimes, increasing online subscribers from one means of acquisition (e.g., e-append) can mask weaknesses in others (e.g., organic conversion).  There is no ideal here, but it’s good to see some diversity in origin.

Finally, make sure you are measuring the share of online revenue you get from email. You want to stay in a Goldilocks zone here.  Too little from email and your emails aren’t effective in driving people to take the most important action on your site.  Too much from email and you aren’t attracting new people to the organization.

Judging your online file

6 common traps in direct marketing budgeting

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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

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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

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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.

    black_box-aeroplane

    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