Making the Case for Net Revenue

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ROI and Net Revenue are a Contradiction in Terms…

Could your own organization be blinding you to opportunities to become a more productive fundraiser? This article will challenge you to focus less on Return on Investment (ROI) and think more about generating net revenue to fund the great work of your nonprofit organization.

Is this you? You manage an individual giving program. As the year progresses, you’re forced to aim at two moving targets: your expense budget and your revenue goal. Unless something extraordinary happens, the news is always almost the same — up a few percent on one, down a little on the other, or maybe vice versa.

Adding to your stress is the fact that you must develop expense and revenue plans as much as 16 months before the end of the year they address. This forces many managers to shuffle numbers around a little every year because planning for significant change is just too risky.

So as the months pass, you continually compare your income to your costs and pray that you’ll have enough left in the expense budget to complete projects by the magical date of June 30, or whenever your fiscal year ends. Sometimes a campaign or two really takes off, and you feel vindicated. If that happens, most often you’ve just been lucky because you can’t repeat whatever drove up the numbers.

B Y T O M H U R L E Y | D M W D I R E C T F U N D R A I S I N G

ROI and Net Revenue are a Contradiction in TermsMaking the Case for Net Revenue“…I can’t tell you how

many times a client has

come to me toward the

end of a fiscal year with

a plea to ‘Do something!’

to help end the fiscal

year on target. ”

Then, on the first day of the new fiscal year, you wind everything back to zero and start all over again — usually with higher revenue goals and a smaller expense budget. If you complain, some wag knowingly says, “You should know it’s all about the ROI.”

As a direct response fundraiser, you have much more information than most of your peers in your organization: retention rates, lifetime value calculations, moves-management reports, cash-flow projections, and so much more. You have metrics that can explain every trend in your program.

All this data can provide you with insight on new opportunities, but it is often ignored by the senior staff because your organization just drills in on one metric — ROI, or Return on Investment.

Your culture can be a culprit Nonprofit organizations have long used ROI as a measure of effectiveness. Boards love to review budgets that keep fundraising costs low. Self-appointed watchdog groups give points to organizations that claim to spend next to nothing to raise a dollar. And rival department heads always argue that investing in fundraising cuts into programs, the real reason the organization exists.

I’ve helped manage donor programs for nonprofits for four decades. I can’t tell you how many times a client has come to me toward the end of a fiscal year with a plea to “Do something!” to help end the fiscal year on target. When I suggest one or two sure-fire revenue producing ideas, often the answer is, “I don’t have the money, and it may lower my ROI.” Mind you, these projects most certainly generate net revenue. That means making more than you spend, perhaps much more. And it can help in that final push to meet revenue goals.

The main point: you do not have to radically change your corporate culture. Just change some internal attitudes toward ROI and net revenue and grow your program!

The real difference between ROI and Net Revenue Understand that efficiency and productivity are not synonyms!

• ROI measures efficiency, that’s it. Efficiency is baked into the psyche of many nonprofit managers because many possess a hidden feeling that spending money on fundraising somehow diminishes the work of the organization. So they lean up the fundraising program by making it more efficient and unintentionally less productive.

• Net revenue measures productivity. In other words, how much did the project raise after expenses? I’d argue, that is a much more important question. Net revenue pays for programs. An arbitrary efficiency metric, like ROI, doesn’t pay for anything.

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“…You do not have to radically change your

corporate culture. Just change some

internal attitudes toward ROI and net revenue and

grow your program!“

First, let’s get rid of apples and oranges Fundraisers express ROI in many different ways using different formulas. Sometimes as a ratio like 5:1, or in dollars like $raised/$cost or even in cost- per-dollar raised. But the term ROI, or Return on Investment, comes from the financial world, so let’s stick with the formal definition you see on this page. It’s net revenue, divided by cost, times 100.

Here’s a real life example. A holiday direct mail campaign to donors costs $10,000 and is budgeted to raise $50,000, netting $40,000. That’s a 400% return on investment, which may or may not be good in your world, but it serves as an example.

If I were to mail to each donor twice, instead of just once, I might double the cost to $20,000. And because most follow-up mailings raise half again as much as the first wave, I will plan on an additional $25,000 in revenue. So now I’ve spent $20,000 to raise $75,000. That’s a 275% return. Not as good as 400%. But I’ve taken $55,000 to the bank, not $40,000. That’s net revenue-based thinking. It’s just one example of how focusing on net revenue instead of ROI works to the advantage of an organization.

Many fundraising managers might pass on the opportunity to do that direct mail follow up because it lowers ROI and costs $10,000 more than the budget. So, they miss out on raising an additional $15,000 in net revenue, and that’s a shame.

Another example:

Be on the lookout for new ideas Opportunities that generate more net revenue pop up all the time. They produce dollars that can go directly to fund an organization’s mission. However, they never see the light of day because managers think there is not enough money in the budget to do them. Trust me, there is.

Have I convinced you to start thinking net revenue instead of ROI? I hope so. But, you’re saying, “I still don’t have the budget to raise more.” Yes, you do. The money is there. As much as you need. Call it an ROF, a Revolving Opportunity Fund. Create an ROF, play by a simple set of rules, and you will always have the resources to launch those special projects to delight your Executive Director and CFO.

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Mail QTY Expense #Gifts %Rep Gross Rev. Avg. Gift 14,097 $6,424 664 4.71% $43,918 $66.14

ROI = [(Gross Revenue - Cost)/Cost] x 100%[ ($43,918 - 6,424 / 6,424) ] x 100% = 584% ROI

Net Revenue = Gross Revenue - Cost$43,918 - 6,424 = $37,494 Net Revenue

“…The ROF only needs

initial funding. If you

manage the program

properly, the balance

should always be positive

and ideally at full strength

to start another project. ”

Creating and Managing a Revolving Opportunity Fund We now agree that increasing net revenue is a goal, so it’s time to create a tool that will help you act quickly and with authority when a fundraising opportunity arrives.

Did your Mom or Dad ever demonstrate the value of a rainy day fund? They stashed away some cash to take care of a dead battery or a furnace repair. And their house rules were probably pretty simple. Put aside a modest amount, take care of important, unexpected expenses, and then put the money back as soon as possible.

A Revolving Opportunity Fund works the same way. It will provide you with the cash you need to launch special projects that you just cannot anticipate when you build your fiscal year budget. But when an opportunity arrives, you tap the fund, but return the principal immediately as soon as revenue starts flowing in from the project. Do not let the balance go to zero, and do not allow all the revenue simply to be absorbed into the organization. Pay your ROF back first! You’ll need the fund to pay for your next project.

Work with your CEO or CFO to set up a set of rules that will give you the auth- ority to launch a project without a major internal review. The rules should give you the chance to move quickly when an opportunity arrives, but will protect the organization with established controls.

Remember, the ROF only needs initial funding. If you manage the program properly, the balance should always be positive and ideally at full strength to start another project. Also, no project is 100% guaranteed to work, so be honest with yourself that there is always some risk involved.

Choosing the right projects to fund You should only use your Revolving Opportunity Fund to pay for projects that generate net revenue quickly. Ideally, the project should span a couple of months from start to finish. Your ROF can fund projects such as the following.• Telemarketing to a recent lapsed donor group• Adding appeals to marginal but productive segments of your donor file• Adding a second wave or even a third direct mail wave to segments that are

always productive• Launching a “Board Challenge” matching gift appeal • Adding a newsletter designed to inform, involve, and appeal for funds from

already-active donors

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• Get management to agree to a fixed amount

• Use it to fund guaranteed net revenue-generating activities

• Pay the fund back first from project revenue… then put net revenue in the bank

• Only use the ROF for relatively quick payback projects, not long-term investments

• Do not use it to fund continuing obligations such as staff or hard assets

• Turn the fund as often as possible

• Repeat 2 to 4 times per year

A Practical Example… L A P S E D T E L E M A R K E T I N G• Call 5,000 recently lapsed

members at $5 per contact• Tap your ROF for $25,000• Recapture 500 members

at $65 each• Revenue = $32,500• Then pay back the ROF

its $25,000 and bank the remaining $7,500 in net income

• Repeat, repeat, repeat!

Revolving Opportunity

Fund

NEXT:

At DMW Direct we don’t believe in a “one-size-fits-all” approach to direct response fundraising. Instead, we will tailor a membership program to fit your individual needs and deliver superior strategic and creative solutions that will get results. Plus, you’ll get the personal attention you deserve.

is rarely a good fit

www.dmwfundraising.com • 508-202-4007

Tom Hurley has managed fundraising programs for arts, educational, environmental, and public media organizations for more than 40 years. He is Senior Advisor at DMW Direct, a Massachusetts-based direct response agency that assists nonprofit organizations in realizing the full potential of their fundraising and membership programs. The agency specializes in developing inspiring direct mail, online, and integrated campaigns. Services include strategic planning, creative development, prospect list services, comprehensive production, and campaign management, as well as results analysis. For more information, please visit www.dmwdirectfundraising.com, call 774-773-1200, or email Tom Hurley at thurley@dmwdirect.com.

Make a wish list of projects that would be right for your organization. Take some time to think this through because you want to plan projects that have a high likelihood for success. At a recent conference, I posed this question to those in my session. To my surprise, many were stumped to come up with an idea. But after a time, the group came up with the list on the previous page. Organize an internal think tank to come up with ideas that will work for your group.

Long-range development activities are important, but do not fund them through your ROF. Activities like direct mail donor acquisition, research projects, and capital improvements should be part of every program, but their payback time is simply too long.

ROF-funded projects are perfect for short-term revenue-generating projects because they do not compete with long-term projects for resources.

How large should my ROF be? Earmark a dollar amount that’s large enough to fund a significant project for the size of your organization. Look at the normal expenses of revenue-building projects in your regular budget and choose a similar amount. You only need to consider cash flow because you are not booking it as a regular expense. You are creating a special fund that will continually pay itself back.

Get started! Creating a Revolving Opportunity Fund doesn’t require adding staff or capital expense and can be nearly risk free. It only requires a change in thinking that any investment that earns more than it costs is likely worth the effort. So set up a Revolving Opportunity Fund at your shop, and, the next time a great idea pops up, grab it and raise more net revenue!

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“You are creating a special fund that

will continually pay itself back. ”

“One size fits all”