Our last two Letters discussed “Donor Development” and “Asking for a Donation”. This letter discusses strategies for prioritizing your donor development efforts.
A commonly cited rule of thumb in the business world is 80/20. This suggests investing 80% of your development efforts in the largest 20% of your customers, programs and products because they probably account for 80% of your revenues, and 80% of your future growth.
For example, one of ECofOC’s clients with a multimillion dollar annual budget generated two thirds of their revenues from charging fees for the services they provided. Almost all of their remaining revenue came from a single, large grant from a foundation. The Executive Director was understandably concerned about what would happen if they lost that grant.
The nonprofit was thinking about starting up a new donor development effort to create the additional revenue needed to offset the possible revenue loss from this grant, and asked for our advice and help. Realistically, it would take them many years, or perhaps a decade, to learn how to develop a nonexistent program into a multimillion dollar revenue producer.
Their biggest single source of revenue was the grant. It enabled them to start giving away their services to children whose families could not afford to pay a fee, which was a very worthwhile thing to do. However, it also resulted in a decline in their fee for service business, perhaps because they started paying less attention to that program, and more attention to using the grant’s funds to provide free services to low income children.
One 80/20 approach to reducing their sustainability risk would be to make a major effort to work with their largest donor (the foundation) to understand its long term funding strategies. The foundation obviously believes in the work of this nonprofit, and should be willing to talk about their long term interests in increasing, sustaining or phasing out their support for this nonprofit. If they wanted to phase out support, they should be willing to develop a plan with the nonprofit to minimize the negative impact on the children that both of them are trying to help. The 80/20 approach focuses a major effort on the biggest donor to upgrade that relationship into an alliance in order to minimize the uncertainty of what might to happen to this major donor’s support in future years.
Another 80/20 idea is to look at this nonprofit’s huge fee for service program. If they put a major effort into growing it by 15% per year, rather than letting it decline, the extra revenue generated in year three would equal their current revenue from the grant. The nonprofit’s secondary priority is to offer services for free to children in low-income families. However, rather than depending on one large grant to fund this capability, they could initiate a program of diversification that might include increasing their fees or asking for donations from families that could afford to pay, asking low income families to pay a token fee, using volunteers to deliver some of their services, learning how to apply for a variety of smaller grants, fund raising among well off families and alumni that have used their services, etc. etc.
One of the best nonprofit workshops that I have ever attended was one on donor development, presented by Katie Machoskie, CFRE, at the Orange County Volunteer Center. Katie’s advice, as I recall it, was to allocate your donor development efforts as follows:
First, make sure that every Board member knows who your top 10-25 donors are. Put 25% of your development efforts into making sure that these donors are delighted about their relationship with your nonprofit (rather than just being satisfied or not dissatisfied), and are considering a donation increase.
Second, spend another 25% of your nonprofit’s donor development effort on the 10-25 donors that have the greatest potential to be a top 10-25 donor. This, and the above effort, typically accounts for 70-90% of a nonprofit’s donations, and donation increases.
Spend another 25% of your effort on the 10-25 largest donors that did not renew their pledge. It is a lot easier to get past supporters to restore their pledge than it is to find new donors to replace these losses. Equally important is to find out from each of these donors what your nonprofit did, or did not do to lose that donor’s support, and make sure your nonprofit does not repeat that mistake with any donors in the future.
Spend the remaining 25% of your effort seeking out new donors. Note that this model suggests that you spend 75% of your donor development effort on a small number (30-75) and percentage (perhaps 10% in a typical nonprofit) of your existing donors, for a 90/10 fundraising rule of thumb, compared to the 80/20 rule of thumb for developing a for-profit business.
Our next letter discusses how a volunteer development program might fit with a nonprofit’s capacity building strategies.