Recently, I was asked to do some simple modeling on the effect of retention rates on revenue.
The results were surprising. You can read the post and resulting conversation here.
The post author’s goal was to show what that investing in donor retention is better than investing in donor acquisition (getting new donors) OR donor extraction (getting more major gifts from your existing pool of prospects).
The model is simplistic but the consequences for our engagement strategy are profound.
Tale of Two Nonprofits
We compared two nonprofits, one with high retention (90% retention rate) and low acquisition (1,000 new donors per year) and another with low retention (60%) and high acquisition (2,000 new donors per year). The high retention nonprofit grows and grows…
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…while the low retention nonprofit stays the same, barely recovering the number of donors they lose every year.
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(For those interesting in playing with the numbers, the spreadsheet is freely availably here: https://docs.google.com/spreadsheets/d/1zPFTjH5rZ1uc7BNeQyus7NP4j9nQZ8j5BHMgwysRm2o/)
To calculate revenue, I presumed that all donors start out as annual donors ($25/year) except for a small pool of donors who have been with the org for a while (5% of those who have given for three years or more) who then become major donors and make a $10,000 gift.
Post-analysis, it was enlightening to think through the underlying assumptions. If this is so clearly a better strategy, why doesn’t everybody do it?
- If you’re investing in retention, you’ll also need to invest in major gift capacity.
If you decide that a high-retention strategy is for you, after seven years you’ll have a major donor pool that is five times bigger.
This means that you’ll also need to invest in gift officer, stewardship, and admin training/personnel to be able to proportionally maintain your ability to get major gifts from that engaged pool (the 5% rate in the model).
It is a decision that requires at least a three-year commitment. How many orgs are operating on year-to-year plans?
- Not Everyone Wants or Can Handle Growth
On the service delivery side, it takes vision to become the organization that is worthy of receiving this extra funding. Your service model might work at your current scale but will have trouble reaching more people. Maybe there is internal resistance to becoming so reliant on fundraising revenue.
Perhaps, despite all your current needs, additional revenue would create more problems than it would solve. Major gifts typically have some type of restriction in their use. Unless you have a crystal clear vision and are willing to walk away from certain gifts, an influx of restricted gifts could be problematic.
The people factor can also be important here. In this new world where you 4x your fundraising revenue, would you grow your people and make it a priority for them to stay?
- With Great Engagement Comes Great Responsibility
More engaged constituents are people that expect a superior level of human communication with the organization. Many of us find this challenging enough as individuals, even more, when dealing with organizations. Some organizational leadership may actually prefer having less engaged, arms-length constituents. The disconnect happens when they also want those disconnected constituents to be audaciously generous.
- The 5% “Extraction Rate” is a Big Assumption
In the model, I assumed that the “extraction rate” remains constant at 5%. In other words, your capacity to generate gifts from the pool of donors with high engagement and high capacity. It probably fluctuates more than this. As gift officers turn over, staff needs to be retrained, and donor relationships rebuilt. You would think it makes sense to offer longevity bonuses at least for the time it takes for major gift relationships to mature.
- Engagement == Annual Donor
Having annual donors is nice but, in this model, it isn’t only about the money. More generally, it is about having people engaged with the organization long and deeply enough so that the few with the capability to make a transformational gift are inspired and invited to do so. In the past, it may have been hard to measure other forms of engagement so making an annual gift was a good proxy. This is no longer the case and every org with a CRM can build an engagement score of some type.
The true goal is to maintain and increase deep engagement year over year.
This engagement can express itself by making gifts or being an active member of your community.
- Is a high donor retention strategy always the best strategy?
You can play with the numbers yourself (see above for spreadsheet link). You will soon discover that, depending on the number of new donors you acquire every year and the difference in retention rate between your high and low strategies, the high retention strategy does not always win.
For example: high retention (35%; 1,000 new donors per year) vs. low retention (30%; 2,000 new donors per year)
In this example, the high retention strategy raises $593,571 in total over the 7 years of the model. The low retention strategy raises $756,452.
In general, if your acquisition is constant between the two scenarios the high retention strategy always wins.
What does this mean for the person deciding the strategy? A high donor retention strategy will work (transformationally!) if you are willing to embrace a new business model that will increase your donor retention rate by at least two digits.
Incremental improvements (1 or 2 percentage points), especially if they mean losing on acquisition, will probably not yield strong enough results to stick.