Research in this paper examines, through analysis and a case study, the profitability of individual donors.
The purpose is to examine these questions:
What can we learn about the range and distribution of donor

• profitability from case studies?

• Who counts the most, profit-wise?

• What are the implications for fundraising management?

The main conclusions are:
1. Profitable and unprofitable donors : About half of donors are profit
making and half loss making in a year. Donors show a very wide
range in their annual net profitability.
2. It is down to a few : A very few donors create the annual net
surplus in a programme. In the case study shown, three quarters of
net profit was generated by just one tenth of the donors.
3. Strategy : A strategic focus on the few profit generators seems
obvious, and a new approach to fundraising management is
strongly indicated.
4. Changing fundraising practice : Discussions with charities, agencies
and consultancies suggest that cultural factors and a reluctance to
change ‘ the way we do things ’ impede the take-up of a profit-based

download full paper

• Combining wealth data with other variables

• Un-drowning:Scoring wealth &warmth Prioritising major gift prospects

From Warmth to Wealth

1. 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.
2. 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.
3. 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.

4. 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.
5. 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.
6. 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.
7. 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.
8. 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.”

Q: if tenure is years of continuous giving, what is the range of tenure values we might expect?

A: the minimum tenure, of course, is 1 year, but donors often show great commitment. Tenure can rise to many years.

I’ve looked at databases that were commissioned 18 years ago and found appreciable numbers of donors with 18-17-16-15 years of continuous giving. What amazing, special people. Founding fathers and mothers. Veterans. Partners. Advocates. Words are not enough.

Q: so tenure measures loyalty then?

A: you could say that, and for a charity with both a long organisational history and a database that has been carefully – make that scrupulously – managed, loyalty-as-tenure is there for anyone to see. But of course it does not indicate at all WHY the donor is loyal. For that we have to probe the heart, mind, values, experience-of-the-cause of the donor and that is another discussion entirely. It means listening to long term loyal donors intelligently and finding out about their motives.

Q: does tenure differentiate how donors behave?

A: Yes. There is not a great deal of experimentation or testing around (that I know of), but one instance I will tell you about gives a powerful illustration of tenure in action. A membership-based organisation was contacting its supporters by mail, and cut a second, small slot-like window in the envelope. In it they lasered ‘Member since <1985>’ or whatever date it was.

Q: that is so simple. What happened?

A: it was the most successful appeal of all time measured in both response rate and revenue. It is nothing more than simple recognition of the member’s commitment. It shows that simple data can be used to great effect. In the example here the use of tenure was in the envelope, to get the thing opened, but it could have been used just as easily in the body of the letter.

But donors can surprise you. This same mailing had a higher than usual complaint rate (‘I don’t want my neighbours/family/partner knowing I’ve been a supporter of yours for many years!’). And some long established non-profits believe that, regardless of what the database says, they have supporters who have supported them for 30-50 years.

Q: does the for-profit world use tenure too?

A: I can’t say I am an expert, but I remember when I belonged to the AA (Automobile Association, roadside rescue). I had a membership card and on it was embossed ‘Member since 1973’. And when I started Rodd Associates in 1989 I used the well known office supplies firm Viking. After a few years of buying from them, a letter arrived out of the blue from the finance director thanking me for my loyal custom. They really won me over on that day.

Q: so what should fundraisers do with tenure when they’ve got it?

A: that is another story for the next blog.

Q: there’s a lot of talk about donor loyalty – 627,000 hits on Google. But I can’t find much on how we should quantify loyalty though.

A: well, one way is to measure a donor’s tenure.

Q: what’s that?

A: tenure is a time measurement, made most easily from data in a donor database. The word comes from a Latin root meaning to hold or possess.

Tenure, at least the way I choose to define it, is the number of years of continuous giving. You can think of it as a measurement of the donor’s lifetime relationship with the charity, but independent of their financial value. It’s the ‘L’ in LTV (lifetime value)

Q: why do you think donor tenure important?

A: because it quantifies the duration of a relationship between the charity and the donor. All fundraisers want lifetime-loyal donors (or say they do).

In general, long relationships provide reliable, predictable revenue, often leading, it is said, to increased involvement and engagement, major gifts and legacies. Long donor relationships are a sure sign of success.

Q: How come then that I’ve never heard of tenure?

A: good question. Fundraising has its blind spots. Take RFM (recency, frequency, monetary value) which is widely used. ‘R’ recency is the time since the last donation and the shorter it is the higher we value the donor. So fundraisers do look at time, but look in the wrong place. We don’t take account of the lifetime association that a donor has with us. RFM takes no account whatsoever of loyalty. That’s why RFM is questionable when used alone and unaided by other measurements.

Q: how did you find out about tenure?

A: in the 1980s in the National Blood Service. I knew that blood donors’ giving patterns could be written in a form of one or zero codes: 1 ‘gave blood when asked’ and 0 ‘was asked but did not give blood’. We called it ‘pseudo binary’ because the patterns of 1s and 0s looked like binary numbers (numbers to the base 2).

But it was while I was working in Canada. Another dataholic and me wanted to measures of donor loyalty. We decided ‘years of continuous giving’ could be calculated relatively easily. We had good SPSS tools, good transaction-level data and know-how.

Q: how is it measured?

A: you identify the donor’s first ever gift (by sequencing by date ) and then extract the year part of the date – easy in SPSS. Then you identify their last ever gift and extract the year. You subtract the earliest from the latest to get ‘tenure’. Note that if the donor has only been on file 1 year you must correct for that because 2008-2008 = 0.

Q: but you said it is years of continuous giving. Explain please.

A: for a donor to show ‘perfectly loyal behaviour’ the yearly giving pattern should be unbroken. You can, if you’ve some technical skills, code donor behaviour as ones and zeros. A plain 1 means ‘gave in the year’ and 0 means ‘did not give in the year’.
So donors with three, five and ten years of uninterrupted giving create loyalty patterns:

It works the same for cash givers, monthly givers and those hybrids that do both.

Q: neat! So you can ‘see’ loyalty as patterns.

A: yes. Believe it or not, a lot of donors behave just like I describe. Above five years loyalty, historic LTVs (lifetime values) are always conspicuously large. And high tenure/high loyalty donors are reliable very likely to re-donate. In the examples above, each donor has a 100% retention rate.

Q: can you take to a more sophisticated level?

A: sure – instead of 1-0 patterns you can, instead, calculate the value in your local currency:

And you can add the number of gifts per year in the same way. You create I summary of the donor’s giving behaviour.

I’ll say more on tenure in the next blog: the range of tenure values and of course, to be ultra fashionable, the donor journey.

We – my charity colleagues and me, and our agency – applied what we learned and spread that learning amongst ourselves. And the knowledge proved accurate and powerful. It did well, raised a great deal of money at good ROI.

Soon, many of us in the fundraising community had about the same amount of knowledge and we applied it, getting better and better with practice.

This was a generation ago. Where did that learning go? I know it stayed inside my head. I replayed it at conferences and with clients, but it was just last year that I realised:

• Many fundraisers have forgotten  that powerful stuff that we all learned and knew once upon a time
• There is no mechanism for preserving the best knowledge and passing it on to the new generation
• The sector suffers from amnesia, forgetfulness or is just plain distracted
• It has forgotten some of the classic, timeless fundraising knowledge that makes things work at their best

Here are 4 examples, anonymised, from 2006-2009, of what happens when you forget important, foundation knowledge:

• Junk e mail: the forgotten science of DM testing, laid down at least 40 years ago, resulting in untargeted, junk e mail campaigns ‘because it doesn’t cost us any more money to e mail everyone so why bother with all that testing malarkey?’. Words fail me.
• Using the donor’s data history comprehensively in communications: a top-drawer agency, founded a generation ago by DM greats, which obsesses over data analysis but forgets totally the potency of using highly personalised long-copy appeals with relevant data items inserted …leading to poor income results. Quelle surprise.
• The unexpected keepers of the flame: the agency whose charity client has such a high turnover of fundraisers  that only the agency greybeards (and none of them over 50) know the history of the charity’s marketing.
• Still being asked the same questions: those of us still active with roots ten, twenty, thirty years ago sometimes reflect to each other that we are being asked the same questions now as when we began. Is nobody out there learning?

Years ago a Cambridge academic told me about ‘institutional memory’. It was, she said, the term for the collective knowledge of an enterprise. It was a kind of invisible but nonetheless potent asset that all organisations had.  It couldn’t be quantified and never entered the balance sheet because accountants did not know how to measure it. But it was definitely there. Generally, if a few special, experienced people left, the knowledge went out of the door with them. Start all over again.

Since the late 90s academics and others have talked about knowledge management and how valuable an asset knowledge is. It has become very big business, with an infrastructure of consultancies, academics, internal knowledge management experts and authors. (http://en.wikipedia.org/wiki/Knowledge_management)

Knowledge is captured, written up, made available in paper and via web channels. Firms in the commercial sphere report substantial benefits from creating ‘communities of interest’ who share knowledge in person for the benefit of the business. ROI data is scarce but growing, but tangible results of KM and with supporting data can be found for cost reduction, speed to market of new products and collaborative problem solving.

The challenge to the not for profit  world is to preserve the valuable learning that charities naturally generate so that it is not lost – to their great detriment.

With the recession that is now with us, and for some long time, finding and rekindling that classic, powerful knowledge seems rather important.

The 16th-17th C philosopher and thinker Sir Francis Bacon wrote that ‘Knowledge itself is power’ (http://en.wikipedia.org/wiki/Scientia_potentia_est) His world was not ours, but I think he was right.

Ironically, all “not-for-profits” still have to realize a surplus. That’s what most people call profit. And, in fundraising, one of the most useful ways to monitor profit is at the level of the individual donor.

My interest—passion, as it has become—in donor-level profit began when I responded to a Swiss client who said, “You’ve done some great work for us, John. What do you want to tackle next?”

I said, “I want to look at some of the Big Questions. How about donor-level profitability?”

“Gehen Sie bitte so vor!” said the client (“Go right ahead!”). Carte blanche to dive into their data and examine profitability. And with pay!

What I found astonished me. Remember George Orwell and his famous book Animal Farm? In it, the pigs say, “All animals are equal, but some are more equal than others.” So it is with donors. But just how much so has been an eye-opener.

First, let me tell you what I mean by donorlevel profit. It’s what you get when you subtract the costs to acquire, service, and maintain a donor from the gross revenue that donor produces. Counting the gross revenue is easy—it’s what turns up naturally in the database. Counting the costs—not so easy.

After a wait of nearly two months for the information on costs to arrive from Switzerland, I divided them into three groups: C1 for direct costs (chiefly postage, production, and the like). Then C2, the salaries of the staff involved. Finally C3, the overhead— the share of heat, light, insurance, and so on. C1 costs are by far the largest.

The overall profit margin for the most recent year, I found, was 65%—pretty respectable, I think you’ll agree. But behind this happy number there was a deeper truth: Only half the year’s donors were profitable. The rest were loss-making.

Picture this: The organization was supported by around 66,000 donors that year—but half of them cost money and only half made money!

It gets better: Among the profit-making donors, a few—the top 10%—contributed 90% of the net profit.

What happened next? Well, it seems that Orwell really did know a thing or two about donors even though he wrote about politics.

My immediate recommendations were:
- Corral off the super-profitable donors and get someone—a real, living, breathing person to look after them. Or as you Americans do more fluently than we Europeans, steward them
- Deal politely and compassionately with the many thousands of unprofitable donors, but recognize where the real money is coming from, cut back on your large-scale appeals, and focus on the real money-generators

This was my first donor-level profit study, but not the last. I’m up to seven now, with more in the pipeline, and in general the results are always similar.

A caveat: Monthly givers of more than trivial amounts are usually profitable, varying little. It’s among the non-monthly, non-direct debit donors where the greatest savings (and greatest growth) are to be found.

The moral of this story is this: Remember what every businessperson knows—that there are high-value, high-profit customers who should be courted and on whom you should focus. Then there is a middle ground of donors who are marginal in net value—and a long tail that loses you scads of money.

Be realistic. Be smart. Make donor-level profit a principle of your fundraising. And tell me how you get on.