People often think it’s bad for their charity of choice to spend money fundraising. Up there with percentage spent on administration, people want the portion of the budget spent fundraising to be low (1).
This has always been a mystery to me. If a charity can use your money to go out and raise even more money, that’s great! They’ve just multiplied the impact of your donation.
An even greater mystery has been why charities don’t spend even more on fundraising. The returns from fundraising seem to be huge. For each £1 spent on fundraising, studies have shown that charities typically raise £4-10 (2). That’s an incredible 300-900% return. Why wouldn’t they do as much of this as possible?
One theory is that the social norm against heavy fundraising prevents them from doing as much as they would like. This may be part of the reason. It looks like the sector, and in particular the most effective charities, might under-fundraise. But it also seems that charities are taking most of the easy fundraising opportunities already out there, and so are behaving more effectively than it first looks.
Although the average returns to fundraising are high, it looks like the returns from additional fundraising are much lower. We can show this with a very rough calculation:
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In 2006, charities in the UK raised an estimated £27bn from fundraising (3). They spent about £5.7bn on fundraising (4)
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In 2010, charities raised £31bn (5). They spent £7.8bn on fundraising (6). (inflation-adjusted)
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So, over this time, an extra £2.1bn was spent on fundraising, raising an extra £4bn. If you assume the extra fundraising led to this increase, then it made a profit of £1.9bn - a return of 90% (7) (8).
So, although on average fundraising gives you up to a 900% return, extra fundraising over and above what’s already being doing may give you much, much less. So according to this very rough analysis (7), the charity sector is already taking almost all of its best opportunities to encourage the public to give. This is what as we’d expect if charities are trying to effectively promote their cause. If easy opportunities were left lying around, then someone would take them, use the money to fundraise even more, and soon these opportunities would be gone. It also agrees with our experience of most people having a ‘charity budget’. Once they’ve made a bunch of donations, they stop giving when asked again.
Fundraising is risky (you’re never sure how much you’re going to raise), so individual charities won’t want to fundraise until they make zero returns. Making a loss fundraising would be a disaster for most charities. It’s also clear that if charities start to fundraise too heavily, then it could end in destructive competition. So there’s good reason to be cautious about extra fundraising.
On the other hand, if the 90% figure is at all accurate, it’s still a pretty fat margin of error. So, the charity sector is perhaps still not fundraising enough. We cause this to happen by evaluating charities on what percentage of their budget they spend fundraising, and encouraging them to keep it low. This seems like it could easily cost the charity sector several billion pounds per year. If the average charity is doing good work, then a lot of value is being lost. (9)(10)
So, although there might be some room for charities to fundraise more, they’re already taking the best opportunities. This has some interesting implications. One is explored in my next post. Another is that if we really want to encourage the public to give more, we need new approaches. We hope that 80,000 Hours and Giving What We Can are one kind of new approach. By encouraging people to give a big chunk of their income, we’re raising the overall level of giving. What other ideas do you have?
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References and notes
(1) For instance, see this Guardian article which shows you how to check your favourite charity’s fundraising ratio: http://www.guardian.co.uk/society/2005/oct/21/voluntarysector.charitablegiving
Indeed, the assumption that donors dislike low funding ratios (i.e. a high proportion of the budget spent on fundraising) has been incorporated in economic models of charity fundraising, for instance:
Rose-Ackerman, S. (1982). “Charitable giving and “excessive” fundraising”. Quarterly Journal of Economics 97, 195–212.
(2) CAF found that the ratio of voluntary income to expenditures on fundraising over all charities in the UK was about 10x in 2010. This is based on accounting data, so doesn’t suffer from limited sampling problems. However, since charities seem to aim to keep the portion of expenses that are counted as fundraising low, it’s likely to overestimate the true returns on fundraising. Charities Aid Foundation, (11 July 2011), * “The cost of fundraising” The Institute of Fundraising’s 2010 survey shows that the ratio of voluntary income to expenditures is about 4x.
I think the reason for the discrepancy is that the CAF study includes all charities, whereas the IoF report is focused on larger charities. I’d welcome more info on this though.
(3) Total charity income taken from: CAF’s Charity Trends Report, Key Charts http://www.charitytrends.org/KeyCharts.aspx
Proportion of voluntary income (income from voluntary sources) of 55% taken from the Institute of Fundraising’s 2006 survey of about 40 charities. http://www.institute-of-fundraising.org.uk/research/fundratios/
(4) Inferred from the IoP’s survey finding of a 4.4x fundraising multiple in 2006.
(5) Total charity income taken from CAF as above. Proportion of voluntary income of 59% taken from the IoF’s 2010 survey, source as before. Inflation adjustment of 0.89x, estimated from this inflation data: http://www.rateinflation.com/inflation-rate/uk-historical-inflation-rate
(6) Using IoF’s finding of a fundraising multiple of 4x in 2010.
(7) This analysis is clearly pretty rough. Ideally, it can be completed in several countries, over multiple time-frames. The data, however, is difficult to come by, so doing a more sophisticated analysis would be a significant undertaking. One confounding factor is that fundraising will be more profitable during times of economic growth. To partially counteract this, I’ve used a 4 year period, approximating corresponding to two growth periods in the economic cycle (comparing 2006 to 2009 would depress the figures, because the recession in 2009 made fundraising particularly tough).
One supporting factor is that there has been a steady downwards trend in fundraising ratios over the last ten years from 5.5 to 4, so it doesn’t look like finding diminishing marginal returns over this period was due to random noise, or an artifact of the period 2006-2010. It seems like 10-20 years ago charities were not doing enough fundraising, but they have become more rational over this period. Over the last decade, they were successful in raising the overall proportion of income given to charity from 0.9% of GDP to 1.1%. But it seems like it won’t be possible to raise this much further without new approaches or a social shift.
(8) You’d also want to adjust growth in charitable giving for GDP growth, since we’d expect charitable giving to rise naturally with wealth. GDP growth in the UK over this period, however, was about zero. So, we don’t need to make an extra calculation.
(9) We’re also not sure how steep the decline in the returns from fundraising is at the margin. If it’s very steep, then the capacity for extra fundraising before you drop from 90% returns to zero could be very low.
(10) The social norm against fundraising is stronger than it looks from this data. I’ve calculated the returns from marginal fundraising to the charity sector as a whole. But consider the point of view of each individual charity. When charities fundraise, some of the money raised is money that would have been given to other charities. So the individual fundraising efforts will look like they’re creating more money for the charity sector than they actually are. Since (in our experience) most charities don’t explicitly take into account the fact that some of their donations are at the expense of other charities, they’ll have an incentive to fundraise to the point that the overall charity sector is making a loss. This is the positive side of the norm against excessive fundraising. It prevents charities from getting into a competition for resources that makes them worse off overall.
Comments
Awesome! I wonder if new charities end up starting with incredible fundraising returns or if they have start with the “extra fundraising” figure of about 200%
Funding is to a large degree a zero-sum game. People don’t want to feel like they are contribute to something like a “charity olympics”.
Let’s say you have a relative affected by cystic fibrosus and want to donate to help her. Reasonably, you understand that there are other research topics worthy of funding. If your charity spends money trying to play “disease olympics”, it will crowd out funding that probably would have been spent on other diseases. If your charity is efficient enough, this might be worth it, but in general it will not be.
Genuinely surprised this is a mystery to you. (Or maybe you considered and then dismissed it for some reason?)
Look at the micro-level, as a donor. How do you respond to extremely frequent solicitations from the same charity? There are strongly diminishing returns from soliciting the same people at higher and higher rates.
Also, note that fundraising is subject to Baumol’s cost disease. Economic growth increases donations, but it also increases the wages that need to be paid to attract fundraising staff.
Hey Andy, it’s not clear to me how much fundraisers worry about taking money from other causes. Most charities don’t seem to think fundraising is a zero sum game, but I’m not sure.
Good point Carl - my note (8) might be wrong
Not sure if there are severly diminishing returns for trying to get people to “upgrade” their donations, I remember reading this is quite effective.
Just had a thought, I wonder if rather than fundraising returns actually starting to fall of dramatically you instead start taking money from other charities, hence the national figure isn’t so high.
Hey Ruairi, yes my figure is for the fundraising of all charities taken together. If you look at individual charities, they’ll be getting returns higher than 90% at the margin, because they’ll also be taking some money from other charities.
How generous were people before fundraising became big I wonder?
Is it not an option that some large % of total donations happen as a result of a very small amount of fund-raising and the major function of the remainder simply re-directs it? (in charitable geography but also in time) if people’s perceived ‘charity budgets’ are spread over a number of years then you would see an increase in donations in a year with more fundraising whether or not there was a net increase.
I sometimes consider whether fundraising as a whole has been a net gain. After two decades of constant exposure I have certainly developed an almost complete emotional inoculation to seeing people starving and a near in-penetrable set of solicitation-defence habits. I’ve even heard a number of people from London say that they actually now hate charity due to its predatory attacking them on the street (there are a lot of chuggers in London)
This said, its likely only due to this ‘inoculation’ that I didn’t feel uncomfortable addressing ethical effectiveness questions in the first place (I also observe a correlation between people who are ‘less inoculated’ and people who really don’t like effectiveness conversation)
Perhaps the super-mass-media fundraising of the last (fourty?) years is exactly what paved the way for our kind of venture to flourish!
I agree with your point that there are substantial opportunities to increase the funding of charities, and that the diminishing marginal returns of current fundraising approaches make novel approaches particularly attractive. Something that has had me excited recently are opportunities for nonprofits to generate funding in ways that perhaps rely more heavily on the demands of consumers for goods and services than altruism (e.g., non-profit bottled water producers, such as NIKA, that donate 100% of their profits to improving the quality of drinking water in developing countries). Another exciting example of this is Tickets For Charity, a for-profit social enterprise in the United States that buys high-demand tickets directly from artists and sports teams at face value, sells the tickets at a price above face value (as determined by demand on the resale market–which is legal in the US), and donates the profit (minus a service charge) to charities selected by both the ticket purchaser and the ticket supplier (unfortunately many of the charities that are chosen are not necessarily high impact ones, but that’s another story).
These are really interesting ideas. Another strategy some charities are been pursuing is social bonds. For instance, some charities only ask their donors to lend money rather than give it to them. The charities can use this money on fundraising or setting up charity shops, enabling them to repay the capital. Since the donors are not making a loss, the level of commitment to the cause is far lower, greatly expanding your potential donor base. Moreover, it acts as an excellent foot in the door. After making this small financial commitment, many donors go on to make donations or to cancel the debt.
Great discussion! Even if charities do mainly steal from one another, it remains the case that good charities may want to do a lot of fundraising to steal from the less good ones, at least unless the competitive dynamic changes. I agree that creating a movement targeted at increasing total giving rather than giving more to a particular cause could be useful.
I think there’s also a question about what kinds of fundraising to do. Mass mailings may indeed turn people away, and the same for street fundraisers, but maybe more strategic, relationship-building fundraisers who cultivate friendships with high-net-worth donors is a different ballgame. This doesn’t necessarily leave a negative impression on the public (indeed, most of the public won’t see it).
I’m scared of attempts to put fundraising into commercial products because people might think “if I spend $1 on buying a gift that’s partly directed toward a charity, I don’t have to donate $1 to that charity anymore,” when in fact this reduces total donations. Whether this actually happens is a question for further study, but I would want to be careful before allowing people to feel good about buying products they don’t need.
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