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The Unexamined Donor

For better planning and greater returns, segment the annual fund by giving behavior

By Charlie Cardillo


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The unexamined donor is not worth soliciting. Those are bold words, I know, but borrowing from Socrates is the best way I can convey how strongly I feel about creating annual giving strategies based on donor behavior. I contend that campuses should delve beyond such traditional performance measures as donor participation rate and overall revenue to evaluate their long-term success, and they should use the more complex information they find to develop more productive strategic planning. I hope my arguments will fare better than the great Greek philosopher's, though—his Athenian audience condemned him to death.

Revenue isn't everything

By itself, total current-year revenue, while important, is not a reliable gauge of an annual fund's future performance. A number of things beyond the annual fund's control — like a strong economy or a large, one-time gift — may contribute to changes in the program's bottom line. Total-revenue numbers can also mask important donor-behavior trends that could affect the fund's long-term health. For example, a campus that upgrades a high percentage of last year's donors or secures a higher average gift from some donors might see a short-term revenue gain. But if that same campus is not acquiring new donors, it could face long-term trouble.

If total revenue is not the right measure, then what is? My company has analyzed the gift-transaction databases of more than 60 colleges, universities, and independent schools, standardizing the data to allow for apples-to-apples benchmarking of annual giving performance across institutions. From this analysis, we have concluded that donor behavior — more precisely, donor participation and donor value — are the true measures of both the short- and long-term success of an annual giving program. To modify the words of Protagoras, a contemporary of Socrates: The donor is the measure of all things.

Putting the cart before the horse

Unfortunately, donor behavior is rarely a factor that annual giving directors consider when creating their solicitation strategies. Instead, to use a saying the ancient Greeks might understand, they put the cart before the horse. They tinker with the solicitation content and technique first, hoping changes in those elements will lead to improvements in donor behavior.

This is how it usually works: The development director looks at trends in previous years' revenue from the phonathon, direct mail, and reunion-giving programs. He uses that to project an overall budget goal — say, a 4 percent increase in total annual fund revenue. The annual giving director divides that 4 percent across the various solicitation techniques according to how much better she thinks each can perform, budgeting for 5 percent more from reunions, 3 percent more from direct mail, and 4 percent more from the phonathon, for example. The staff then tweaks the copy, design, ask amount, script, caller incentives, and other minutiae to try to generate that increased revenue.

What's wrong with this picture? It ignores the donors. How have they performed over the past few years? Do they continue giving regularly? Do they upgrade their gifts? Phone calls and letters are just tools for solving the primary business problem: How to get more donors to make more and larger gifts. Ultimately, the type of solicitation doesn't matter so long as the annual fund meets its revenue goal.

Aggregate donor behavior, rather than solicitation technique, should drive strategic planning and goal-setting. Two measures of donor behavior are particularly important: participation (how well the campus is maintaining and increasing the donor base) and value (how well the campus is sustaining and increasing donors' giving over time).

Participation

Just as total revenue is an incomplete measure of annual fund health, the alumni participation percentage can be an incomplete measure of participation. Why? Because while some donors lapse each year, the pool of potential donors, or solicitable alumni, keeps growing. To keep a steady participation rate, a campus actually has to increase its number of donors each year.

A better measure of participation has three components. In order of importance, they are donor retention, lapsed-donor reactivation, and new-donor acquisition. To evaluate overall participation, campuses should analyze their performance on these three measures separately.

1. Donor retention. The first element of participation is how well campuses renew the previous year's donors, the group also known as "active" donors or lybunts — those who gave Last Year But Unfortunately Not (Yet) This Year.

Donor retention is the point upon which the success of an annual giving strategy balances. An institution that retains only 65 percent of its donors, for example, must use its lapsed-donor reactivation and new-donor acquisition programs to replace the 35 percent it lost before it can work on increasing the donor population further.

In fact, 65 percent is actually close to the median retention rate we at Target Analysis have found in all of our analytical work for education institutions. Figure 1 shows the retention-rate trend over time from a sample of 35 institutions. The blue line is the average overall retention rate that these campuses achieved from Fiscal Year 1990 through FY98. It has hovered around the 70 percent mark fairly consistently.

The green line is the average retention rate of multiyear donors-those who have given in the prior fiscal year and at least one other year. Looking at FY98, these institutions retained an average of 72 percent of multiyear donors who gave in FY97. Since this group constitutes the majority of most institutions' donor populations, the multiyear donor trend strongly influences the shape of the overall trend.

What's striking, however, is the slope of the red line, the average retention rate of new donors. In FY98, these institutions were retaining only 38 percent of donors who first gave in FY97 — a drop from the 44 percent retention rate of FY92. This trend suggests that the continuing challenge of retaining new donors has become more difficult in recent years.

Why is new-donor retention in decline? For some institutions, perhaps they have already done such a good job of soliciting their alumni population that they're left acquiring and retaining marginal donors: those who only respond to a premium package like mailing labels, a bookmark, or a window sticker. There are a number of more likely possibilities for the decline, however. Many campuses may be having trouble keeping track of new graduates; facing more competition for philanthropic gifts; using the same appeal for new donors as they use for multiyear donors; using reunions to acquire donors, but not maintaining contact in post — reunion years; or trying to upgrade the giving of new donors too aggressively. Improving donor retention is often the easiest and least expensive way to increase participation. Even a small gain in retention can significantly improve donor and revenue totals.

2. Lapsed-donor reactivation. The second most important element of participation is how well a campus solicits gifts from donors with a history of past giving who did not give in the last fiscal year. People in this group are also known as sybunts, because they give in Some Years But Unfortunately Not (Yet) This Year.

The lapsed-donor pool contains some very valuable people. Their previous giving demonstrates at least some level of affinity, and their average gift tends to be larger than a new donor's gift, so a campus's return on its investment in these donors will be greater than an equal investment in new-donor acquisition. To maximize this return, however, a campus must segment this population according to such factors as how recently the donor lapsed and the level of loyalty prior to the lapse. (I'll address loyalty later.)

Our analysis of lapsed-donor behavior has confirmed what most people think intuitively: The longer it has been since a donor has given, the less likely a campus will be able to reactivate him. For the 35 institutions in our sample, the average reactivation rate for one-year lapsed donors is 38 percent; for two-year lapsed donors, it's 20 percent.

To put this logic into a direct-marketing strategy, it's clear that campuses should not be contacting, say, six-year lapsed donors — a group that typically responds at a 5 percent rate — as frequently as it contacts one-year lapsed donors.

It's important to appreciate the relationship between donor retention and lapsed-donor reactivation. A rising lapsed-donor reactivation rate is not a positive trend if donor retention is going down. Often it means that the annual giving program's retention efforts have not been aggressive enough, so the campus is finding some low-hanging fruit in the lapsed-donor pool. With a bit more effort, the institution probably could have retained these donors in the first place. Instead, the campus must take the more difficult and costly route of reactivating them.

Conversely, as a campus improves its donor retention, it may see its lapsed-donor reactivation rate drop because only very difficult-to-reach donors remain in that pool.

3. New-donor acquisition. The third and final element of participation is how well campuses do at soliciting gifts from alumni who have no prior giving history with the institution (or, at some institutions, are very long-lapsed donors). Although this piece of an annual giving program offers the least short-term return, this group is still important.

Campuses should look at their entire donor base as a portfolio made up of both blue-chip donors, who give consistently over the long haul, and growth donors, primarily young alumni who have great potential. As some long-term performers inevitably drop off the rolls, the portfolio managers (the annual fund staff) will need to replace them with new donors. A campus that accepts the costs of new-donor acquisition as a long-term investment will have the flexibility it needs to maintain a balanced portfolio at all times.

Donor value

While participation — the measure of a campus' success at retention, reactivation, and acquisition — is an important way of evaluating the long-term health of an annual giving program, it's only half of the picture. The other half is donor value. Often people express this concept as the campus' share of the donor, or the percentage of a donor's philanthropic dollar that the institution garners compared to the other causes he or she may also support.

Retention is critical for creating donor value. A campus that doesn't keep donors from year to year can't carry on a steady dialogue about the role of ongoing support, and that dialogue is what leads to the two elements of value: loyalty (consistent gift-giving) and upgrade (increased gift size). Loyalty and upgrade are correlated, but it's often difficult to say which is the cause and which is the effect.

1. Loyalty. Retention is a measure of how many donors continue giving from last year to this year, and loyalty is the next step: a measure of how many consecutive years a donor has given. In general, loyalty is a good predictor of gift size: The more consecutive years a donor has given, the higher the average gift from that donor.

It's logical to assume that the more loyal donors are, the higher their retention rate. In fact, in our 35-campus sample, FY98 donors who had given in each of the previous five years had an average retention rate of 87 percent. That's impressive performance, but what about the 13 percent who are lapsing each year?

Campuses are losing some otherwise very loyal people because they are not effectively prioritizing these donors in their solicitation efforts. These are the least- expensive donors to retain because their average gift tends to be significantly higher (see Figure 2). At the very least, if I was nearing the end of the fiscal year and I had one more dollar to spend, I would use it to call these very loyal donors to find out why they have not renewed their support.

One even more important finding is that loyalty is a characteristic of annual donors who move into major giving. We examined the past giving behavior of donors who made their first $10,000 or larger gift to the University of Michigan in the 1990s. Between the date of these donors' first gifts and the date of their $10,000+ gifts:

  • more than 30 percent had given to Michigan every fiscal year,
  • more than 57 percent had given in at least 80 percent of the fiscal years, and
  • nearly 50 percent had given for 13 or more consecutive fiscal years.

In addition, we discovered that 60 percent of these donors had made first gifts of less than $250 and 29 percent had made first gifts of less than $50. Analyses of data from other campuses have returned similar results.

Can major gift officers get $10,000 gifts from people who have no giving history with the institution? Sure. Will every loyal donor eventually give $10,000? Of course not. My point is that it's cost effective over the long term to cultivate donor loyalty. When the annual fund is building relationships with donors at every giving level, major gift officers will be able to raise more at a lower cost.

2. Upgrade. The second element of value is getting donors to increase the size or frequency of their gifts. This may be the most difficult element to address because, when setting its participation goals, an annual giving program must balance questions of how much to ask for, when, and how often.

For example, an inverse relationship sometimes exists between retention rate and average gift size. A program that's too aggressively focused on driving up the average gift size can potentially alienate donors, resulting in poor retention. A campus must assess the long-term value of the donors it's losing vs the additional short-term revenue it's gaining to determine whether gift size or retention is more important.

While the term "aggressive upgrading" may bring to mind pushy phonathon callers, this strategy can also be a problem in direct mail. A pledge card to a $25 donor that includes a $25,000 option might make that donor feel that her small gift is meaningless. Segmenting by giving level will ensure that donors' pledge cards contain the proper ask increments, thus increasing the probability of an upgrade.

Putting it all together

So if the best measures of annual fund performance are participation (retention, reactivation, and acquisition) and value (loyalty and upgrade), how can annual giving directors use those variables for strategic planning? Will this mean abandoning more traditional segmentation by class year, young alumni, graduate alumni, and so on? Figure 3 should make everything clear.

The first step is to identify the institution's key donor segments. Those could be affinity-based groups (50th-reunion class) or behavior-based groups (sybunts). Second, assess each segment's donor behavior — How well is the campus retaining these donors? Are they upgrading their gifts? — and use that assessment to determine expected future behavior. Third, set performance goals based on these expected behaviors. For example, a campus that typically retains about 65 percent of its lybunts — a group that contributed 80 percent of last year's revenue — and also increases donor retention to 68 percent, might get a 5 percent increase in revenue from that group. Not until the fourth step should the annual giving staff determine what combination of solicitation content, technique, and frequency will help it meet its goals. The fifth and final step is tracking the success of each solicitation effort to assess whether its return is sufficient to meet the goals set in step three, and make adjustments accordingly.

Socrates would be proud

By analyzing donor behavior, an institution can turn the question, "How can I raise 4 percent more through the annual fund?" into the more directed question of, "What can I do to raise 4 percent more from a donor population in which 65 percent of donors renew their gifts but only 30 percent upgrade them?" Rarely is changing the wording of the appeal the best answer — small changes get small results. Instead, most campuses will find that targeting and soliciting donor segments based on giving history will produce more dramatic results.

About the Author Charlie Cardillo

Charlie Cardillo is vice president of marketing and sales for Target Analysis Group, a Cambridge, Massachusetts-based firm that develops analytical benchmarking and database marketing solutions for nonprofits. For more information, contact him at ccardillo@targetanalysis.com.

 

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