I believe that performance measurement is the most important tool in every nonprofit’s fundraising toolbox. In order to improve the outcomes of your fundraising efforts, you need to measure performance, analyze results, and improve performance over time. But this begs the question ... What should your organization measure?
Well, it depends on your fundraising goals and strategies. Measurement should always be determined by your unique fundraising plan and the validation you need to improve your fundraising performance. This may include measuring the performance of your marketing channels like your website, social media engagement, and direct mail performance, as well as other efforts like special events, peer-to-peer fundraising, and major gift fundraising performance.
However, underlying all of these channels, efforts, and activities are two metrics that lay a foundation for fundraising performance measurement: return on investment and cost per dollar raised.
These two metrics are powerful because they allow us to start answering some very intriguing questions, like:
- We raised “X” dollars from this fundraising strategy, but what does that mean?
- Was that fundraising strategy more or less effective than the same strategy last year?
- How does the performance of that fundraising strategy compare to our other strategies?
More importantly, we can answer strategic questions that drive fundraising improvement and growth. The most critical of these strategic questions are: Are we raising money or losing money? and How do we know if we are raising money or losing money?
Return on investment and cost per dollar raised can be calculated from two variables: revenue by strategy and expenses by strategy.
Return on investment is the amount of revenue you generate for a given strategy divided by the expenses required to generate that revenue. Return on investment calculates the total yield for every dollar expended to produce that yield. If the outcome of this calculation is greater than one, the strategy produced a return. If the outcome of this calculation is less than one, the strategy produced a loss.
Cost per dollar raised is the inverse of return on investment. Cost per dollar raised is the total expenses allocated to a certain strategy divided by the total revenue generated by that strategy (revenue could also be replaced with “raised” funds to alter the focus of the metric). As opposed to return on investment, cost per dollar raised calculates the total cost to yield a single dollar of revenue. If the outcome of this calculation is greater than one, the strategy produced a loss; and if the outcome of the calculation is less than one, the strategy produced a return.
In order to calculate these two metrics, we need two things: an aggregate sum of all revenue generated for the strategy we want to measure, as well as an aggregate sum of all expenses for that strategy. The “strategy” is the specific fundraising effort, activity, or tactic. You can be specific or broad in how you bucket revenue and expenses under a strategy, but with both metric calculations you must use a ratio of revenue and expenses that are associated with the same strategy.
If we measure revenue and expenses for each strategy, we can improve return on investment and cost per dollar raised performance by improving each variable in the calculation. There are three scenarios that lead to increased performance in these two metrics:
- While holding expenses constant, we increase revenue.
- While holding revenue constant, we decrease expenses.
- We increase revenue and decrease expenses at the same time.
In addition to the fundamentals of these two metrics, there are three key points that can improve the accuracy and value of your measurements.
1) Filter down to the micro-level.
While you can generate return on investment and cost per dollar raised for annual fundraising performance on the macro-level, both metrics become more valuable as you evaluate performance on the micro-level.
Tracking and calculating performance for these metrics on the micro-level requires a segmented fundraising plan with specific and discrete strategies. Filtering your strategies down to the sources, channels, and methods of fundraising you employ makes it easier to find the weak points in your strategy and make changes to improve your fundraising performance. When you run these metrics in a macro view, it's challenging to determine where improvements can be made. Specific micro-level segments allow you to pinpoint exactly which strategies and tactics are effective, and which ones aren't.
2) Collaborate across the organization.
For most organizations (dependent on your organizational setup), your development staff and your finance and accounting staff must work together to produce these metrics. Generally the development staff will have data on the sources of revenue and can attribute revenue to specific fundraising strategies, while the finance and accounting staff will have data on the expenses and can attribute those expenses to specific fundraising strategies.
As a result, it's important that these two functions collaborate to produce these metrics. It's also important that both functions track revenue and expenses using the same specificity and granularity. Without clearly defined tracking and coding of revenue and expenses across both functions, you cannot generate accurate or relevant ratios for these two metrics.
3) Track time and apply as an expense.
Including time in your return on investment and cost per dollar raised metrics is a "game changer." If you've been tracking return on investment and cost per dollar raised for your fundraising strategies, but haven’t been adding time as a part of the expenses variable, try running your metrics again including time.
It's very easy to think about time as a free resource, but we all know time is a scarce resource and is therefore valuable to your organization. Time is a direct expense. If it takes one hundred hours of prep for your development director to plan and coordinate a special event, there is a cost for that time. The direct cost of time will depend on who expended the time, how it was expended, and how your organization values that time.
Time is also an opportunity. Depending on how time is spent, there could be more valuable uses of time that generate higher returns for the organization. Adding time to your measurement of return on investment and cost per dollar raised gives you a true measure of fundraising performance.
Practical Tip: Try tracking time for specific fundraising strategies. Start out with an isolated experiment of one or two strategies. Use a time tracking software like Harvest, RescueTime, TSheets, or Toggl; or keep track of your time in an Excel spreadsheet. Then calculate return on investment and cost per dollar raised two ways. Calculate one set of these two metrics with time included as an expense (valued at a particular rate) and one set without time included. The difference should be evident.
How do we put these metrics into practice? How do we apply them to real-life scenarios, and actually use them to improve fundraising performance?
1) Invest in what works; put fundraising dollars toward effective strategies.
Fundraising budgets have limits. There isn’t an endless pool of funds to invest. As a result, we need to be selective, strategic, and smart in where we invest our fundraising dollars.
Where should we spend our fundraising dollars to generate the highest return? If you use specific, granular details on the micro level of your fundraising strategy to calculate return on investment and cost per dollar raised, you can identify the best fundraising opportunities. Identifying effective opportunities can focus your organization on shedding waste (which are those activities that don’t produce a return) and investing in value (which are those activities that do produce a return).
In addition, both of these measures allow us to create “baseline” metrics. Baseline metrics are comparable across incomparable strategies. For example, you can compare the returns from your direct mail campaign to the returns from your special event using these metrics. You can also compare the returns from your social media efforts to your major gift personal solicitations. If we base our comparisons on revenue or expenses by themselves, we cannot compare unlike fundraising strategies. However, as a ratio we can compare these strategies to uncover those that are most effective.
Note: While a particular strategy may be highly effective based on these measures, it may not scale. For example, you may find that your event is less effective than a direct mail campaign, but the event’s scale cannot be matched by your direct mail efforts. Scale is an important factor to consider when investing in effective strategies. The correlation between scale and effectiveness, as it pertains to developing a cohesive fundraising strategy, is an important consideration when deciding how to invest limited fundraising dollars to produce maximum return.
2) Test and experiment; test smart, learn, and adapt.
It's important to remember that if you're measuring these metrics for the first time (especially if you include time in your expense calculations, which I highly recommend), the results may be enlightening or shocking. Something you thought was high performing may be generating poor performance. This is why it's important to test strategies, evaluate the effectiveness of each strategy, and learn.
However, testing and experimenting have limits. Again, our budgets aren’t infinite. We need to be smart in our testing approach. Jim Collins states it best in his book Great by Choice, “fire bullets then cannonballs.”
Because time and money are scarce and valuable, Collins uses this premise as a method to validate strategies and learn. “A bullet is a low-cost, low-risk, and low-distraction test or experiment. Based on empirical validation that the bullets are hitting their mark, then concentrate resources on a calibrated cannonball. Calibrated cannonballs enable large returns from concentrated investments.”
Don’t waste resources by firing uncalibrated cannonballs when you don’t know if you will actually hit your target. Test and experiment by firing bullets until you feel confident you’ve fine-tuned your methods. Then fire a cannonball when you're confident you’ve dialed in performance with the right specifications to make the biggest impact. You can use return on investment and cost per dollar raised to validate your strategies and then scale those strategies into larger fundraising efforts once they're proven.
3) Turn the dial up; improve the return of each fundraising strategy.
Lastly, with these metrics you can improve performance. If you understand the drivers that affect these two metrics, you can “crank up” the return on each fundraising activity by improving similar fundraising strategies over time.
For example, if you run the same event every year and calculate the yield of that event based on the return on investment and cost per dollar raised, you can strategically improve performance for that event in the upcoming year. Employ the three scenarios described earlier:
- Increase event revenues while holding expenses constant.
- Decrease event expenses while holding revenues constant.
- Increase event revenues and decrease event expenses at the same time.
If you can improve any one of these scenarios, you can yield higher returns for the upcoming event than the past event. The fundamentals of these two metrics allow you to squeeze more value from your fundraising efforts to generate more return with less cost, while contributing to your organization’s year-over-year growth.
These aren’t the only metrics you should be tracking, but they can get you started. The goal of any development professional is to invest in positive fundraising projects. Fundraising success is directly correlated to managing a portfolio of projects that yield positive returns as standalone efforts and as a total, combined portfolio of fundraising projects. By measuring a spectrum of macro- and micro-level returns using these two measures, you have a litmus test for whether your fundraising strategy is contributing positively to the growth of your organization.