A Realistic Look at Annual Funds

Part One: A Brief History Annual Giving
Participation, always a sensitive issue with trustees, is in decline at many institutions — not for lack of trying but for difficulties in simply making contact. The CDC in Atlanta recently suggested that 20+ percent of households no longer have landlines — and the erosion in landlines is picking up speed.

Direct mail is super-saturated. Younger generations are not using e-mail except at work, etc., etc. Annual fundraising is getting more and more difficult.

And, who hasn’t seen at least one story this week encouraging better use of social media in annual giving? Questions about social media are everywhere. Trustees are asking, “Why can’t we raise the millions that Obama did using social media?” The short, albeit flippant, answer, of course, is, “We can — as soon as we figure out how to secure nightly coverage on cable news for the next 52 consecutive weeks.”

Though that trustee’s question may not be elegantly articulated, it is profoundly important and deserves a more serious answer. What is happening to the annual fund? As mass solicitation goes, so goes modern annual giving.

And, it is looking more and more precarious — and more quickly and more sharply so as time goes by.

There is an ancient history to this recent distress masked, ironically, by the fact that we’ve continued to raise more and more money through mass solicitation. If that sounds paradoxical, listen closely to two ways of recounting this history of annual giving.

A short history lesson
Until about 40 years ago, the “annual fund” was dominated by volunteer organizations that literally canvassed the community for annual support. Some did well — i.e., they met the budget needs and secured broad, though local, participation. There were “consulting” firms that helped organizations replicate these efforts through dinners and gatherings in other communities.

These canvassing efforts began to decline about 35 years ago, and they’ve rarely been really successful since, though many variations on “special events” continue to offer volunteer fundraising opportunities. One of the causes of the decline in volunteer canvassing was the introduction of an easier, better way to do annual giving — direct mail.

Direct mail made its debut in the late 1940s and ramped up slowly as the “better way.” In the 1960s, the ZIP code provided new tools for targeting. But, the real explosion was caused by the computer in the 1970s with the advent and growth of the digital database.

Computers enabled direct mail to really take off. Canvassing became much easier and much broader. There were few geographical limits that could not easily be bridged. And volunteer efforts began quickly to shrink because the “return on investment” was simply not competitive.

Direct mail expanded the reach of the annual fund beyond the local community. And it raised the stakes, and the take. “Participation” became an art and a very big concern. Annual fund goals — and numbers of donors — skyrocketed with direct mail. A new “science” of direct marketing for philanthropy was born — how to write a letter, better BREs, live stamps, graphics, personalization, segmentation, teasers on the envelope, etc. It all got more and more elaborate and sophisticated.

Direct mail worked very well, and it grew quickly for a couple decades. In the 1980s direct mail quadrupled, then doubled again in the 1990s. The drivers for this growth were technology — we moved from the mimeograph to the offset press, then to the web press, then to high-speed computer printers and more recently to color printers, etc.

Dynamic electronic databases replaced the static addressograph, making many new approaches possible. It took us from “Dear friend” to “Dear Sally and Joe.” Automated stuffing, live stamping and NCOA were factors. Analytics and modeling took us even further, and we began to gather more and more seemingly “trivial” information to drive better targeting. Some nonprofits were able to support their entire operations from annual giving. The sky seemed like the limit as we bought, rented and exchanged lists, and got better with the analytics, segmenting and targeting.

Then, about a decade ago, direct mail started into a decline that has become a nosedive as we — and all our colleagues in the for-profit and political arenas — drove it to, and then beyond, the reader’s saturation point. Witness the new vocabulary like “junk mail.” Direct mail is still an important part of the mass solicitation business, but its role has changed dramatically.

But, through the later chapters of the direct-mail story, telemarketing was rising to meet and anticipate the challenge of that decline. Telemarketing moved in to compensate for “snail” mail. It too, at first, increased the dollars and the donors almost geometrically. The rate of growth was astonishing as alumni volunteers staffing the two-nighter at the local phone company’s facility was replaced by students, then by paid students working several weeks, then all semester, etc. The process was so lucrative and so effective it simply kept growing. Soon telemarketing companies introduced new professional calling centers, and database-driven automated dialing equipment squeezed out the inefficiencies of touch-tone (which had replaced the rotary dial of the earliest days of telemarketing) and drove the contacts to thousands per hour.

We added the same statistical modeling and analytics that had redefined direct mail to further streamline telemarketing. Then, the digital database and other equipment brought robo-calling and a host of other technological refinements that seemed to hold the promise of stretching our “touch” nearly to infinity.

But almost as quickly (think about how the pace of these changes continues to accelerate) caller ID, screening and cell phones with unpublished numbers (and the decline of the landline) began to point toward the approaching decline of the phonathon. The story of telemarketing is all too familiar to all of us and hardly merits a reprise here. Telemarketing also continues to be critically important and continues to be the source of the vast majority of major gifts most institutions receive. But, participation is in decline for most. The ratio of “attempts” to “contacts” continues to decay, the numbers of prospects who are unreachable continues to grow, etc. The future looks long but not especially inviting.

This history, these progressing chapters — volunteers, direct mail, telemarketing — overlap each other and have long declining tails. But, though all continue to be used, their rises and declines are largely sequential and the history is pretty clear, if we pause to think it through. Mass solicitation is under a great deal of stress today.

The paradox: More is ALSO less
We, along with our trustee friend quoted earlier, are searching now for another new approach, the next technological chapter that will again vault annual giving to new heights. We’re turning our attention toward social media. (We almost skipped completely over e-mail, though it had some currency and is still used for ancillary purposes. But its impact was not especially notable — certainly not yet comparable to any of the big three: mail, telemarketing or volunteers.)

Social media seems now to be the next chapter of technological advance. Our hope is that it will, once again, take mass solicitation to a bigger, better, broader, more personal, more effective, cheaper and more lucrative place.

And, after all, doesn’t Obama’s presidential campaign fundraising phenomenon of 2008 strongly suggest the potential for this?

Maybe. The responses to several natural disasters suggests also that there is potential in social media and online giving. But, before we jump to conclusions, consider another theme that winds its way, largely unseen, through a second telling of the history we just reviewed. This theme relates to the paradox we noticed back at the beginning of our discussion. We tend to miss it because we’ve focused on the radial growth in participation and dollar results and on what looks like the success story here.

Over time, the universe of mass solicitation — though it was exploding in real geographic terms, in terms of numbers of donors and prospects, and in terms of dollars — is distilling itself into a smaller and smaller space: the psychological real estate the charity owns in the donor’s mind.

Decades ago, when we used volunteer groups to canvass, life was paced such that we could capture a week or more from our volunteers. They, in turn, were typically able to capture up to an hour from our donors as they made their personal solicitation calls. We “owned” a large chunk of psychological real estate in our constituent’s mind.

As our technology advanced and our efficiency increased, and as we began to get much more from much less, our need for real time and for our donors’ attention span for this stuff shrank — continuously. We went from being able to capture a half hour of our donors’ time through the volunteers’ visits to 10 to 15 minutes through direct mail, to three to five minutes through the phonathon. And we are now struggling to capture a few seconds of time and attention from our constituents via flash video to inspire someone to click “reply” and key in a credit card number. The psychological real estate we capture through the new media is shrinking — rapidly.

Have we asked ourselves: Can we ask? Is this psychological real estate important? How is it important? Does it have a half-life like uranium that reaches into infinity? Or is there a zero-point rapidly approaching where, for mass solicitations from organizations responding, not to natural disaster (which can capture continuous exposure on cable news), but to simple annual support, it will literally disappear? Should we worry that eventually the psychological real estate might become too small for established charities seeking baseline support?

Perhaps social media will become a new panacea. Certainly, we should do what we can to create this. But we probably need to spend some time asking ourselves what this history really means. Look again at the Obama fundraising phenomenon. Does it fit with this analysis? Was social media the tool that the Obama staff used to capture the psychological real estate? Or was it simply the tool the campaign used to harvest the results from the real estate that was captured by the news media — continuous front-page stories, cable news coverage, stump speeches broadcast, exceptional events, talking heads, continuously obsessing, etc.?

Social media was effective because it leveraged the attention already purchased in other ways. How will a charity do this advance work that the national election coverage was able to do for Obama? How will it do it in a way that is convertible and effective for the “harvest” tools? The recent tsunami, Haiti and Katrina phenomena pose similar questions — could the organizations the responded to those events have accomplished what they did without the massive support of the traditional media?

Is the glass half-full or half-empty?
The glass really does seem to be half-empty when we look at this second telling of the history of mass solicitation. But maybe there are some pointers toward a new road. For example, over this same history of several decades the profession has also come to appreciate a different truth through the maturation of another fundraising science, the campaign. This truth? It’s that the annual fund is for many organizations no longer about real money. The major- and planned-giving programs are those that focus on real money.

Pareto’s Principle that 80 percent of our outcomes result from 20 percent of our effort (80 percent of the funds from 20 percent of the donors) continues to skew northward, and we now realize that more than 80 percent (much more) of the money comes from fewer than 20 percent (many fewer) of the donors. The truth: Though we thought about it as a fundraising program — and many of us still do, especially our trustee friends — we are now beginning to understand in new ways that annual giving is really more about engagement than about fundraising. It’s more about loyalty, teaching and involvement.

Of course, for many organizations that count on the annual fund to balance the budget, this will seem like heresy. But for the majority of larger, sophisticated fundraising shops, this is a much less controversial proposition. The annual fund is a donorbase-management program, not a fundraising program. Part of the difficulty in thinking about this issue is one of perspective. There was a time when what we now know as “major gifts,” numbers with six, seven and eight figures, were not on the horizon. Most giving for most institutions was essentially “small gifts” as we look in our rearview mirrors today. However, though the annual fund still accounts for the vast majority of donors, it rarely accounts for the lion’s share of the gifts, the money.

Our long romance with mass-marketing technology distracted us from this lesson. We actually were making real money from the annual fund, and it looked like a bonanza with seemingly infinite potential. If we really took the lessons from this insight that annual giving is not really so much about the money as about the engagement — if we try to leverage it — we might find an insight that again positions the glass to appear to be half-full.

There is a striking coincidence between a couple trends that show through this history. Volunteer-based fundraising was (ROI) inefficient relative to money and participation breadth. But it was quite effective at capturing a huge share of psychological real estate in the constituent’s time/attention continuum — it was very, very engagement-effective and efficient.

As we professional fundraisers became more bottom-line focused, aspiring to raise larger, faster, easier money from a broader and broader base, we bought, one might say, this bottom-line efficiency and dollar growth and paid for it with the currency of that old psychological real estate. This is not, of course, a black or white situation, but there is no escaping that this gray area has progressively become darker and darker over the years. When we run out of this currency (psychological real estate), can we still have the efficiency and the bottom line?

Here’s a takeaway, also part of the history sketched above: Even in the old days, though we may not have realized it, our efforts were not so much about money but rather about donorbase management. We did not care as much that people gave sacrificially; we cared that they participated. The issue was to build a broad base and donor loyalty — we focused on building a supporting constituency. Episodically — once every 20 years or so – we “harvested” that base, that loyalty, with a major campaign. In the interim, the money we raised was as much a sign that we had a base as it was real money. Next issue, let’s explore the pragmatic implications of this insight. Good donorbase management is still possible, of course, and we can still make it pay.

The Troubled Future of Mass Solicitation
Part Two: An Intriguing Future for Donorbase Management

Last issue we traced a troubling history of a young industry — mass solicitation of philanthropic support. It seems that technology has been a mixed blessing covering a wider and wider territory more and more thinly. We recounted the successive rise and decline of volunteer-based solicitation, direct mail and telemarketing. No one in annual giving, especially those in smaller, more regional institutions, is comfortable with the direction this history seems to be going.

But just as some organizations continue to use volunteers for community campaigns, all will probably continue to use both direct mail and telemarketing into the foreseeable future. Many are experimenting with social media and other Internet- and technology-based mass-solicitation tools. We examined some fundamentals that seem to abbreviate the potential of these tools for most smaller organizations. But, this story is far from finished. Technology is a continual swirl of novelty and insight.

Until the next great mass-solicitation emerges — and everyone is working continually to produce this new marvel — there are some measures that suggest themselves to the prudent annual-fund director. Let’s look at some pragmatic annual-fund management strategies for the way forward:

1. Manage your annual-fund program for loyalty rather than for money. If you succeed at the loyalty, you’ll raise the money. If you manage for money and succeed at it, you’re not assured to also capture the loyalty. Institutional leadership must be educated on this matter.

• The annual fund cannot succeed as a gap-filler. It’s not about the cash, and it can’t just continue to raise more and more money.
• Rather, the annual fund is the pump mechanism on the famous major-gift “pipeline.” It is the intake system and one of the important tools for managing the hydraulics of the pipeline. To focus on the cash increases the risk for driving the management attention away from loyalty. The cash is only the sign — albeit a critical sign — that loyalty is building.

2. Focus first on LYBNTs (Last Year But Not This Year). Start with them on day 1 of your fundraising new year and stay on each of them until that person renews. In the end, we all know that it is much more successful and inexpensive to retain than to acquire. So build a program around the goal of securing maximum growth from minimal acquisition. (Sounds paradoxical, but it’s a very interesting problem to contemplate.)

• Set a retention goal, and track it progressively. It’s not enough to know that you’re building toward 73 percent retention over time — you need to know that you retained 73 percent of those LYBNTS you contacted this week, next week and so on.
• Set retention goals, and work on them throughout the year. This positions the program to manage finite resources for the most important results. Many programs make a decision to limit the number of “attempts,” and they set this number for the entire pool. Essentially this amounts to a decision that LYBNTs are no more valuable than recalcitrant nondonors. Conserve resources for investment in your most important prospects.
• To manage retention you need to understand loyalty. Asking for an increase every year is insensitive and unresponsive to loyalty. Spend some time differentiating the message. This is more than varying the ask amount or the salutation.

New donors don’t have loyalty. They gave spontaneously. (Most annual giving is simply transactional.) You need to help new donors interpret and internalize what they did. For this you need a new-donor program. And this should start with the acknowledgment of that first gift and be reiterated in the next solicitation. Pushing them to increase before they understand what their decision to give really means risks sending the message that their new gift was just not quite good enough. Weigh the risks — when you push you can push them up or out. We know which is better, but do we know which is more likely?

Newly increased gifts deserve a new-level program. Many of the same ideas apply. A new level of giving may require interpretation, and you may need to allow the donor to get used to it.

3. Recognize that there will be some attrition. People die, their circumstances change, they find new causes, etc. Build a plan to focus on compensating for it. Better programs experience retention rates in the high 70 percent range. That means even the best experience attrition of 20+ percent. Instead of looking simply at acquisition, look first and more precisely at reacquisition. SYBNTs (Some Year But Not This) are generally closer than never-givers. And, some SYBNTs are closer than other SYBNTs.

Find those SYBNTs with the best combination of high recency and high frequency. Focus on them like you focus on LYBNTs. Set goals for each segment of this group, design targeted strategies for the group and work to achieve the goals. A statistician can build a grid based on your donor records that segments your SYBNTs strategically. Use recency as one axis and frequency as the second in the grid. The upper left cell will contain those who have the longest giving record and the shortest lapse. The lower right cell will contain those who gave only once many years ago. Work from the upper left first toward the lower right. Identify how many you need to reacquire to compensate for LYBNT attrition, and target accordingly. Think about real numbers for these goals. “More” and “as many as possible” are not helpful unless you have infinite resources to invest in the effort. The key here is to budget finite resources to achieve specific goals — strategies are not strategies if they are vague.

4. Understand the average size of gift not as a question of money. Rather, it is a question of loyalty and engagement. Not everyone can or will increase his or her giving every year. In fact, if someone just made a significant increase last year, you risk sending him a message of ingratitude by asking for another this year. The donor might not hear you are grateful for that increase, but that you consider it to have been too small. In a typical annual fund, about a third of returning donors increase annually — loosely translated that means it takes about three years to grow into a giving level psychologically. Until the donor gets comfortable with this new giving level, you run a risk of pushing her out, rather than up, when you push. Build your segments and target your messages accordingly.

5. Recognize that you must also replenish your donorbase with new constituents. Your loyal constituents are human – i.e., they are mortal and at the mercy of the elements of change. Figure out whom you most need to acquire and whom you have the best chance of acquiring. For higher education this is often the graduates of the last decade group. Build specific strategies for these younger people. Here is where social media mighty be most helpful. But persuading your new grads to join your online community — in addition to Facebook, LinkedIn and others they may already be using — might be more challenging than we realize. This is a video-oriented crowd but not necessarily an e-mail-active crowd.

6. And build your real case. This is not about money. Nor is it about what the donor can do for the institution. It’s about the value that the institution contributes to the community. All giving is, or wants to be, about making the world a better place.

• Talk about outcomes — not simply the outcomes from the gift, but the institutional outcomes. Be specific; be quantitative. If you can, tell a story. If you tell a story, tell a short one.
• Remember how much time and attention your program can capture — it’s very, very small — and work accordingly. Try to “brand” the annual fund. This means that you find a very brief, pithy, memorable mental image. Stick with it; let it evolve very slowly such that the continuity is sustained. (See the Reed College example of the “Lemming Society.”)
• You can produce a splashy new image each year in the acquisition program, but ask yourself how well you think this will serve your loyalty focus. If it serves that focus well, do it. If it undermines that focus, go back to the drawing board.

The amount of time and attention you are able to secure from your constituents is what makes the difference in the kind of donors they will become for your organization. Manage your annual fund for loyalty and attention. The annual-giving program is not as much a fundraising program as it is a donorbase-management program. Think about it and manage it from this perspective.

Implications for alumni (constituent) relations
There are implications here also for how we think about alumni or constituent relations. Another story line in the ancient history we reviewed at the opening is about the relationship between alumni relations and fundraising. In the old days, the days of volunteer canvassing, alumni relations and annual giving were one. They grew apart in parallel with the rise of mass marketing in annual giving.

Was there a causal connection between these two phenomena — the divorce from fundraising and the rise of technology? Maybe. But the important thing is that they grew apart, far apart. Not long ago it was common to hear an alumni-relations professional eschew fundraising fairly vigorously. One version of the argument held that, “We’re about planting the seeds; development is about harvesting.” Or “We set the table; we don’t dine.” Implied was the argument that fundraising was somehow antithetical to getting people's attention and that, if you insert fundraising into the equation, people won’t listen to your case building.

Certainly, if every event and every magazine article was about asking for money, that argument makes some sense. But is it really that simple? Alumni relations is about engagement. At nearly every institution of higher learning, a simple overview will demonstrate that the vast majority of engaged alumni never attend an event. The principle means of engagement is the annual gift. Maybe a large number also engage through the magazine, website or the online community, but is that engagement as active and meaningful as the check they write? That’s hard to measure.

The problem, it seems, is that when the alumni-relations professional staff walks away from fundraising, it tends to lead the alumni board also in that direction. How many alumni boards tend carefully to the actual work of fundraising? Most feel, like their support staff, that if they push the fundraising agenda, their events, clubs, communications and activities will suffer. Somehow these things don’t fit together comfortably.

When the alumni leadership walks away from fundraising it delivers a very important, though very subtle, message to those it leads — “There is something untoward about the fundraising dimension of your relationship with your alma mater.” “Fundraising is not fun; it’s not rewarding; it’s obligatory and painful.”

If the annual fund is about loyalty and engagement; the alumni-relations program loses a great opportunity for success by looking away. A better strategy would be to endorse the annual fund, to make it a real point of pride. Does this mean that the alumni relations professionals must become “fundraisers,” must do some “asking"? Not at all. A simple effort to script every event and every communication with a message of pride about how well the alumni do in supporting the institution is very powerful.

A simple line like, “Many of you who join us here today are annual-fund participants. Thank you. It’s hard to overstate the impact that you are having for the young people who follow you at alma mater. And, even more important, it’s hard to overstate the importance of populating our world with more people who make the same kind of contributions to our society that you are making. Alumni, let’s give ourselves and our institution a real hand,” could be so very, very powerful. No asking. No discomfort on anyone’s part. Some very meaningful reinforcement about the alumni experience and, oh by the way, a positive interpretation of giving.

To take it up a notch, give all donors special name tags and recognize them with a special round of applause. No one needs to ask at this event. No one needs to chastise those who don’t give. No one needs to disparage the lack of participation. No one needs to declare that, “we all ought to be doing this,” or that, “we owe this to our college,” or that anyone should or could think more about the matter of support.

All that is needed is to declare the value of giving, to affirm the act of giving and to affirm those who do give for giving. The goal is to make a point of pride out of institutional support — a pride that all can share — whether or not they themselves are donors. It’s not that nongiving is a fault; it’s that giving is a strength and a privilege. Unless the alumni board signs on to this approach, it’s hard o avoid tacitly, subtly suggesting the opposite. To suggest the opposite is to lose the connection to the biggest, most effective, most visible, most inspiring act of engagement the institution has to offer.

In the end, annual giving is about loyalty. It’s about engagement. And the work that advancement departments do in annual giving is really about the hydraulics of the pipeline of major giving. It’s always been this way. The pressures and stresses of recent trends in the business of mass marketing help us see this more clearly.

The issue is: How do we do the work of annual giving in ways that drives our attention away from the bottom line to this more important purpose? Most institutions discover that when they begin to view the money not as the end but as the gauge, as the measure, of a higher value — loyalty — they begin to raise more money. This is the happy paradox.

Is there a larger role for social media here? Is there a future for mass solicitation? Can we sustain the annual-giving program? Most assuredly. But let’s think more deeply about these issues than we’ve thought in the past. These new times will require a new creativity, and they can bring us a new success. The golden age of philanthropy is not past — unless we allow it to be so. Fundraising is quite essentially the business of optimism, and optimism (not necessity) is the mother of invention. FS

James P. Daniel is a partner at Bentz Whaley Flessner. Reach him at jdaniel@bwf.com