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Factors affecting fundraising costs

Resource Center - Foundation

As the saying goes, sometimes it takes money to make money.

When a donor considers giving to an organization, a top concern is how well the money will be managed: How much does the organization spend raising money, versus using it for the primary fundraising purpose.

Fundraising is a process that has many components, and investments must be made in order to complete the process. Individual components should be evaluated as part of a total development program, and boards of directors of nonprofit organizations should determine a reasonable rate of return on investment for their own organizations based on prior results.

If only three to five percent of the donations from a particular campaign actually go to the cause, donors may want to look elsewhere. On the other hand, it may not be reasonable to expect that 90 percent of the contributions go directly to the cause. Just like for-profit entities, charities have operating expenses.

Here are factors to consider when evaluating an organization's fundraising costs and returns.

  • The age of an organization. A well-established organization will likely have a greater return on investment than a newly established nonprofit.
  • The age of the fundraising department. A mature, professionally run development program will be expected to produce a higher return on investment than a newly formed department.
  • The source of funds. Nonprofits that rely heavily on small gifts from individuals donors will have higher fundraising costs. In contrast, organizations that receive support from the federal government, corporations, foundations, or large gifts from wealthy donors tend to have lower costs.
  • Different methods used in the fundraising process will produce different returns. For example:

1) A donor acquisition mailing will have a much lower return on investment than a donor renewal mailing.

2) A capital campaign will produce a much higher return on investment than an annual fund program.

3) A newly established planned giving program may have zero return on investment for the first few years.

4) The return on investment for a special event will be lower than that of a major gifts program.

  • The size of an organization may affect the return on investment.
  • The profile of the constituency. The economic and geographic profile of the constituency being solicited will have an effect on fundraising costs and return on investment.
  • The location of the organization. An organization located in an affluent region of the country should expect a higher return on investment than one located in a less affluent area.
  • The popularity of the cause. The cause and its level of acceptance by the community will affect the return on investment.
  • The competition for funds. Within the community or constituency that the organization is appealing to for support, the competition by other organizations may lower the return on investment.
  • Sometimes, a fundraising campaign may lose money in the short-term but generate significant returns in the long run. The cost of direct mail acquisition (mail solicitations sent to potential new donors) may range anywhere from $1.00 to $1.25 per dollar raised. However, once new donors have been identified, a second mailing to that group may cost only 20 cents per dollar raised. Thus, while the first mailing may not bring in much money, the second mailing should bring in a substantial number of contributions. These newly identified donors may ultimately donate even larger gifts to the nonprofit (e.g., land, stocks, charitable bequests, etc.).
These are just a few factors that affect the cost of fundraising and make it difficult to evaluate a charity based solely on financial factors. Find out more about wise giving in AFP's Giving Guides.

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