A couple of weeks ago, we talked about Cost and Profit centers.  One practical solution offered was to separate the acquisition / reactivation budget into it's own cost center from the house file development budget which should become it's own profit center.  Instead of looking at both of these together as a profit center. Today we are going to talk about the house file consisting of any donor that has made a donation over the last two years.

There’s a lot of pressure on the house file.  This department generates the cash needed to fund all of the program work and the investment needed to operate the Acquisition/ Reactivation ‘Cost Center.’  The house file  must be generating a positive cash flow or you will be out of business.

Last week we defined a few key terms that are critical to building an investment minded organization.  Today we are going to be illustrating how to use these terms to make business decisions. Let's start with the simplified version of Return on Investment or ROI. 

ROI (Return on Investment) = Revenue/Cost 

What is a Reasonable ROI for the house file [active donors]?

ROI values across the industry differ greatly depending on size, age, location, and mission.  Because of this variability it’s important that you establish a unique target for your own organization.

Having reviewed the performance of hundreds of organizations at DonorTrends we thought it would be useful to publish the range of values we have seen for the sector. On the low end, organizations spend $1 to generate $2; and on the high end, organizations spend $1 to generate $6 or more.

For a Majority of the Sector the ROI Range is between $2 : $1 to $6 : $1.  (Revenue:Cost)

Where does your organization’s ROI fall on this scale?  Start by evaluating your ROI from last year.  This will serve as your benchmark.  If you generate less than $2 for every $1 spent, then this will indicate that there is likely room to improve.  If you’re spending $1 and making $5, then you’re on the right track. Then keep track of this metric moving forward and try to make improvements as you go. 

It is important to remember that just because we are calling your house file a profit center doesn't mean that every expense line item will generate a profit. It is okay to 'lose' money in some instances on the house file. In fact it is likely happening right now to you and you may not even know it. This is due to the segmentation strategies most non-profits employ which is masking these losses.   We will tackle that topic in another post, for now let's explore why it is okay to 'lose' money on your active file.

Be negative.  How to overcome investment apprehension. 

Let’s focus on our new donors.  Getting a second gift is the singular most important activity for a fundraiser.  2 out of 10 new donors give a second gift. That stinks.  The silver lining … after a donor gives a second gift, the retention rate can shoot up to 80%.  Get the second gift, keep the donor.   

So how do you determine how much money is okay to lose to get that second gift? That is where two additional terms from last week come into play: Cost to Acquire and 5 Year LTV. (more about these definitions here.)  Plug these metrics into the equation below to determine how much you are willing to spend in year 2 of a donor's engagement with your organization.

5 Year LTV - Cost to Acquire = Investment Benchmark. 

This Investment Benchmark can guide your decisions on expenses for years 2 - 5. Since likely you will be generating a positive revenue stream in years 3 - 5, you can allocate a certain amount of loss that is acceptable in year 2. The specifics of this calculation will be unique to each organization, but the basic principle is the same. Balance your costs for acquiring and cultivating your donors with the expected return.

What are your numbers? What investment are you willing to make for a second gift is? Are there any other segments you invest in? Please comment and let us know how you use these metrics and why. If you need help getting your metrics you can get them today for free, and we have also developed this free contact strategy report that will calculate your optimal ROI numbers for you. If you need additional help contact us and we will help.  

Next week we will wrap up this series with What to Expect When You're Investing. We will take a closer look at the cost to acquire and reactivate, and provide some industry benchmarks.