- You have to start by knowing all your costs, not just direct costs.
Requests for costs often brings sighs, scratching of heads and ‘I’ll get
back to you’, but persist, for you must have this information, including
salaries, overheads, everything. - Then build a costs model and apply all costs to donor gross
revenue for each and every donor - the results will be shocking, startling
and revealing. - Your costs model should be set up in three layers.
- C1 – direct costs, where most of the money goes.
- C2 – salaries, any social insurance, or training costs.
- C3 – your share of overheads such as heat, light, insurance,
corporate charges and the like.
Then, deduct these three from gross revenues to obtain net profit (P),
which will result in three profit levels.- P1 – the profit on direct costs.
- P2 – including salaries.
- P3 – with all overheads included.
You need all three profit levels if you are to truly understand how profit
(and loss) works at the donor level. - Revelation: you will find that some donors are costing you a
packet. These should be dealt with kindly and in an ethical manner but
shouldn’t lead you to pour money down the drain. If practical, do deals
with campaigns, legacies and others in your organisation to make the best
use of these ‘low-profit / no profit’ donors. - With the saved costs, open up a high profit donor section (but call
it something more imaginative) and focus on the donors who really, really
count; steward them (whatever that means to you), pay more attention to
them and invest in them. - The profitability curve: When you arrange donors by high to low
profit you will find that the resulting bar chart is a sloping shape, high on
the left and low on the right. It will show that most of your profit comes
from the top 20-30% of your donors. This curve is quite predictable, as
my research papers show (see below about how to get them). So for
example, if you change job, you can say with some confidence what the
profit curve should look like in your new organisation. - Timescale: you can test out the concept of profit calculations using
only one year’s worth of data, but it is better done over three to five years
(if you have the data). Database systems for fundraising do not usually
have the data structures needed to work out donor profitability; you can
try Excel, though tools such as SPSS Base do a better job of aggregation
and statistical/mathematical analysis. - Make donor-level profitability a central core of your fundraising
strategy; try beginning your planning documents with these words and
take it as far as you can: “All donors are important to us, but we realise
that some donors are far more important, financially, than the general
throng. From now on, therefore, all our activities in individual fundraising
will be driven primarily by considerations of profitability, including, for the
first time, calculations for individual donors based on their giving level.
This will be part of a new strategic realisation: that it isn’t the volume of
donors that counts, it is the net margin that matters.”
