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Wednesday, March 29, 2017

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Is Direct Mail Fundraising Worth the Trouble?
Mal Warwick

July, 2006

It happens about every two or three weeks. Someone a client, a reporter, a reader asks me, "What's really going on in direct mail these days? What are the trends?"

I've grown wary of these questions, having long since discovered that, all too often, these people want to know whether personalized notepads are replacing name-stickers, whether courtesy reply envelopes are out-pulling Business Reply Envelopes, or whether long letters still work. Such questions deserve answers, of course but they have precious little to do with the significant trends in direct mail fundraising. So it is that in lectures, workshops, articles, and columns that purport to discuss "trends," the really meaningful, long-term developments are typically either lost in the shuffle or totally ignored.

When I talk about trends, I'm referring to the strategic considerations that make or break our work. For starters, it's futile to look at the prospects for direct mail fundraising over the long haul without first examining the state of the nonprofit sector and our expectations for its future. These expectations are the assumptions we bring to the table. Here are mine:

The nonprofit sector will continue to face needs greater than its capacity, exacerbated by the widening gap between rich and poor, and will thus demand continuously increasing amounts of money.

The demographic patterns that characterize U.S. society will continue to evolve, yielding a population that is larger, older, ethnically more diverse, and increasingly well educated.

The peoples of the world will become interdependent to a degree only hinted at now, driven by global corporate expansion and the accelerating impact of worldwide environmental problems (especially global warming; growing shortages of water, oil, and arable land; overpopulation; and the spread of newly emergent communicable diseases).

With my apologies, then just in case you're really wondering about those personalized notepads or courtesy reply envelopes I'll devote this Special Report to a brief review of the three Big Picture trends that respond to this reality . . . trends that are shaping the present and setting the course for the future direction of direct mail fundraising.

(1) It's beginning to dawn on fundraisers that direct mail isn't always worthwhile exclusively for its own sake.

Here's the ugly truth many direct mail fundraising specialists have been dodging for years. In the face of constantly rising costs and growing competition not to mention the increasing sophistication of donors net returns from direct mail simply ain't what they used to be. Trustees, self-appointed charity watchdogs, and other observers, rarely well-disposed toward direct mail in the first place, are questioning the cost-effectiveness of our work as never before. In defending ourselves, we specialists are increasingly moved to cite the long-term revenue that results from the major gifts and bequests later contributed by direct mail-acquired donors rather than just from the direct mail fundraising program itself.

For example, consider the hypothetical picture in Table 1, which depicts the net revenue derived at five-year intervals from a reasonably large direct mail fundraising program.

Table 1

1983 1988 1993 1998 2003
Acq cost $250 $350 $450 $550 $650
# donors 250 250 250 250 250
House cost $200 $220 $240 $260 $280
House rev $2,000 $2,000 $2,000 $2,000 $2,000
Net DM revenue $1,550 $1,430 $1,310 $1,190 $1,070

Notes: all figures cited are in thousands (000) and in inflation-adjusted dollars. "Acq cost" = total annual cost of acquiring new donors. "# donors" = total number of 24-month-active donors at year-end. "House cost" = total annual cost of house mailings. "House rev" = total annual gross revenue from house mailings. "Net DM revenue" = net direct mail revenue = row 4 - row 1 - row 3.

To keep this example simple, I've maintained the size of the active donor file constant at 250,000 throughout the quarter-century period, and I've assumed static revenue from house mailings. Thus, steeply rising donor acquisition costs and rising house mailing costs result in a reduction of about one-third over the 25-year period. Perhaps even more significantly at least from the perspective of board members with sharp pencils the net revenue in 2003 is now significantly less than two times the cost of acquiring enough new donors to keep the size of the active donor file constant.

Does this picture look attractive to you? Would it strike the members of your board of directors as attractive? Keep in mind that, in addition to all the money (and risk) invested in acquiring more and more new donors each year, there's a lot of time and trouble expended, too.

Despite all that, however, you (and your board) might still think the whole effort is well worthwhile. After all, this is a fundraising program that still yields annual net revenue of more than one million dollars (even if the trend suggests that that barrier will be broken on the downside in 2004 or very soon thereafter).

In my opinion, however, it's difficult to defend this scenario if it fairly represents the whole picture. But chances are slim that that's the case.

Oh, I understand that some nonprofits throughout the vast reaches of the North American hinterland depend exclusively on the returns from direct mail, receiving no revenue whatsoever from bequests or major gifts. Fortunately, however, that is less and less likely as time goes on. Even if a nonprofit organization does virtually nothing to encourage its donors to leave legacy gifts, odds are extremely high that many will do so, anyway. And even a modest program to solicit major gifts from the best prospects on an active file of 250,000 names is likely to produce something meaningful. So, let's repaint that picture in Table 2, taking these additional activities into account.

Table 2

1983 1988 1993 1998 2003
Acq cost $250 $350 $450 $550 $650
# donors 250 250 250 250 250
House cost $200 $220 $240 $260 $280
House rev $2,000 $2,000 $2,000 $2,000 $2,000
Net DM revenue $1,550 $1,430 $1,310 $1,190 $1,070
Net legacies $500 $500 $500 $500 $500
Net major gifts $250 $250 $250 $250 $250
Net FR revenue $2,300 $2,180 $2,060 $1,940 $1,820

Notes: "Net legacies" = revenue from bequests and other planned gifts, net of any costs associated with soliciting and processing them. "Net major gifts" = revenue from major gifts, net of any costs associated with soliciting and processing them. "Net FR revenue" = net fundraising revenue = row 5 + row 6 + row 7.

This expanded example shows a brighter picture, doesn't it? Yet this particular example assumes very little if any active efforts to promote legacies or major gifts. It's not unusual for a charity with a quarter-million donors to receive each year half a million dollars or more in bequest income "over the transom," spontaneously given by dedicated donors.

By contrast, then, Table 3 shows what the picture might look like if this hypothetical nonprofit were to have initiated active legacy and major gift fundraising efforts 25 years ago.

Table 3
1983 1988 1993 1998 2003
Acq cost $250 $350 $450 $550 $650
# donors 250 250 250 250 250
House cost $200 $220 $240 $260 $280
House rev $2,000 $2,000 $2,000 $2,000 $2,000
Net DM revenue $1,550 $1,430 $1,310 $1,190 $1,070
Net legacies $500 $1,000 $1,500 $2,000 $2,500
Net major gifts $250 $400 $550 $750 $1,000
Net FR revenue $2,300 $2,830 $3,360 $3,940 $4,570

Quite a different scenario, no? With intelligent and sustained efforts to secure major gifts and legacies, that quarter-million-name donorfile has come to look much more productive. Despite a dramatic downward trend in the cost-effectiveness of the direct mail program itself, the overall fundraising program has become far more lucrative, doubling net revenue in 25 years. In fact, the picture presented in this last scenario is a conservative rendering of the reality I've observed at many nonprofit organizations.

It's true, of course, that direct mail fundraising still doesn't work at all for some nonprofits for example, one that addresses an obscure or difficult issue, possesses an unproven (or uneven) track record, or shows a lack of focus in its mission. However, most nonprofit organizations have found that, rising costs and competition notwithstanding, direct mail remains the most cost-effective means to acquire, educate, and cultivate new donors. But today's harsher reality demands that the whole picture be viewed when analyzing the cost-effectiveness of any direct mail fundraising program. Revenue generated from direct mail-acquired donors through other means can dwarf that from direct mail itself.

(2) Fundraisers even, at last, many direct mail specialists are coming to understand that building mutually rewarding relationships with donors is indispensable to the long-term health of a fundraising program.

It's not hard to understand why it's taking so long for direct mail fundraisers to accept this most fundamental insight of the fundraising world. That's because, historically, nonprofit direct mail specialists have identified much more closely with commercial marketers than with fundraisers.

For example, people in the field gravitate much more readily to the Direct Marketing Association than to the Association of Fundraising Professionals. There are good reasons for this not the least of which was that, for decades, the fundraising establishment looked down their noses at direct mail practitioners, and fundraising conferences typically offered few educational sessions on direct mail fundraising.

Traditionally, fundraisers concerned themselves largely with people of means. By contrast, marketers spoke to people in the mass. With minor modifications, the techniques they developed could be applied to meet the needs of annual funds and other programs that addressed small donors rather than large and, lo and behold, those marketing techniques worked! For more than three decades (the 50s, 60s, and 70s), direct mail fundraising proved to be a cash cow for a great many nonprofit organizations. As a result, the field came to be dominated by a marketing mind-set that focused our attention on numbers rather than people, treating donors as digits rather than the living, breathing, passionate individuals they are.

Oh, granted, marketers in recent years have been chattering about Customer Relationship Management, and, in truth, many have long been fixed on the central importance of the Long-Term Value of the customers. No matter how you cut it, though, direct marketing is a transaction-based process. The purpose of marketing is to sell stuff. And when fundraising is dominated by the same transactional mindset, relationships suffer and so do long-term results. That approach has brought the field of direct mail fundraising to an impasse.

Table 4 illustrates an important long-term trend in direct mail fundraising. (The numbers in this table represent rough, ballpark estimates of prevailing costs and returns. If anything, I believe they understate the trend.)

Table 4: Costs & Returns in Donor Acquisition Mail

Decade Cost pkg Return pkg FR Cost* Acq Cost **
1950s $0.05 $0.10 $0.50 $(5)
1960s 0.10 0.15 0.67 (2)
1970s 0.15 0.15 0.00 0
1980s 0.30 0.20 1.50 5
1990s 0.45 0.25 1.80 10
2000s 0.45 0.20 2.20 15

* "FR Cost" = Cost to raise a dollar
** "Acq Cost" = average cost to acquire one new donor

Now, please don't pick up the phone to hound me with complaints about inflation and competition. I recognize that these factors have surely helped shape this trend. But I am absolutely convinced that our own practices have played a major role, too:

We have mailed and mailed and mailed some more, ignoring donors' complaints about mailing too much.

We have insisted on upgraded gifts in every mailing, abusing the principle that "if you don't ask, you don't get" despite the fact that no more than about one-third of direct mail donors ever upgrade their contributions.

We have tossed aside those pleading marginal notes from donors, asking us to stop sending that newsletter that never gets read.

We have cut costs on caging, cashiering, and list maintenance, contenting ourselves with "95% accuracy" in the belief that those donors whose names and addresses are mangled don't really make much of a financial difference in the larger scheme of things.

We have taught donors to expect free goodies in the mail in exchange for their "gifts."

In short, all too many of us, for far too many years, have treated direct mail donors like dirt.

We're learning to do better now. Thanks to Paul Schervish and his colleagues at Boston College authors of the now-famous paper heralding the "$41 trillion intergenerational wealth transfer" we are coming to understand that we pay a very heavy price when we treat direct mail donors poorly. We're learning that the average bequest in the U.S. is about $35,000 surely a major gift by the standards of almost any nonprofit organization and that such bequests typically come from donors whose life-time giving was modest indeed, often no more than $10 or $20 at a time. We understand that people who are mistreated and ignored for years are, shall we say, less likely to do so.

(3) Increasingly, fundraisers are making the effort to coordinate direct mail with telemarketing and online communications as well as with their colleagues' work on major gifts and legacies.

At nonprofit organizations throughout the country, compartmentalization prevails in development work and this tends to be more markedly the case in the very biggest organizations. (Major universities provide some of the most egregious examples I've seen.) Direct mail, membership, direct marketing, annual fund whatever the direct mail effort might be called, it's usually confined to an office, department, or program and insulated by bureaucratic procedures, personal ambitions, departmental rivalries, and misguided incentive systems from every other component of the development program.

Slowly, though, fundraisers are learning that compartmentalization hinders the relationship-building process. For example, if a direct mail-acquired donor is successfully upgraded over time to the major gift threshold say, $1,000 per year and then precipitously handed over to the major gifts office, the result may be to lose the donor rather than explore the potential for even larger gifts. Consider what often happens in practice in such a case:

Direct mail contact including the donor newsletter, informative appeals, and an annual renewal schedule abruptly ceases. Last year, that donor received, on average, one mailing per month, many of them strictly informative. This year, she may receive three or four mailings if the major gifts program is on the ball and has its own systematic communications program. In some cases, she would receive none at all. And keep in mind that this donor is a reader whose first gift and almost every subsequent gift probably came in response to a mailing.

In theory, a donor is "graduated" from the direct mail program (or whatever it's called) to permit a major gifts officer the opportunity to cultivate a personal relationship. The practice is often very different. At most organizations, that $1,000 donor who just barely qualified for major gift cultivation would be lucky to get any attention at all. The overworked major gift officer her account is assigned to could well be fully occupied pursuing possibilities with $5,000 or $10,000 donors.

That pattern is only part of the larger problem of compartmentalization, or "siloing." The principal consequences include the following:

Donors may receive communications from various offices or departments that are both inconsistent and independently (and thus poorly) timed.

Donors who express a preference for communications via one channel "mail only," for instance may nonetheless continue to receive telephone and e-mail contact because that information is either not shared or not heeded.

High-priority, organization-wide campaigns (such as capital campaigns) may be difficult to manage, because autonomous offices or departments tend to develop their own themes in response to their own internal priorities.

Most significantly of all, opportunity costs steadily mount, as the potential for integrated, multi-channel communications is squandered.

I would like to think that this pattern is changing. I'd like to think that all the talk in recent years about "integrated fundraising" is more than just talk. Certainly, I see signs that the change is underway: increasing efforts to market legacy giving to small donors; growing emphasis on "mid-dollar" fundraising (variously, $250-5,000) to move selected low-dollar donors up within reach of major gift solicitations; rising interest in coordinating direct mail, telephone fundraising, and online communications with one another; and the beginnings of understanding by major gift and planned giving officers of the hidden treasures that lie in their organizations' membership or annual fund programs.

These are all positive developments. Perhaps some day they will all culminate in a new found belief that what we fundraisers do is entirely secondary to the needs and desires of donors. Then direct mail fundraising will truly have come of age.

This article was reprinted with permission from Mal Warwick. Consultant, author, and public speaker Mal Warwick has been involved in the not-for-profit sector for more than 40 years. He has written or edited seventeen books of interest to nonprofit managers. He has taught fundraising on six continents to nonprofit executives from more than 100 countries. Copyright (c) 2005 by Mal Warwick. All rights reserved.


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