Why Break-Even is not the best measure to use in your fundraising metrics

I heard recently that the Board of a development charity has insisted on all donor acquisition having to break-even within 2 years.

Here is why that is not a very smart move and why it is going to adversely affect that organisation.

Let’s get this straight first. Break-even is an important metric.

If it takes 4 years to recoup the investment made, then there are going to be cashflow implications for your charity. Could you have made more money by leaving it in the bank than waiting 7 years to break-even?

But there are more factors at play than simply how long it takes to recoup the initial investment. One of these is the Long-Term Value (LTV), or the value of donors over their whole lifetime.

Don’t forget the Net

If you are looking at break-even, it is important to look at the net numbers. Let’s assume that you have taken attrition into account.

The biggest factor is going to be the attrition rate which could set your break-even back by several years.

Last month we did a Health Check on a major UK charity and found that they were losing nearly 80% of all Year 1 donors by the time they got into Year 2 [only 20 new donors gave into their 2^nd year].

Then you need to take into account the cost of servicing those donors during the time since they were recruited. Sometimes that cost will wipe out any income gains made from those donors.

 It’s all about Value

Let’s say that we have 2 programmes running. The first one breaks even at 16 months and delivers us an LTV of £99. The second programme breaks even after 22 months but delivers an LTV of £348 – which one are you going to take? The second one – every time! [i]

You will see that the 2^nd example delivers 4.5 times of value for just another 6 months’ of time to break-even. And the Board of the organisation above would have rejected this because of the break-even criteria. Short-sighted.

The chart below shows the performance of some mail packs and their relative break-even points. The strongest pack in value terms took 49 months to break even.  (LT Net is the long term value minus the cost of servicing the donor and the cost of acquiring them in the first place)

So what does this tell us?

Break-even will not tell you the whole story. Without understanding the value element and the net value, you will not be able to make an informed decision.

Let me give you an example. Some of the largest charities in the UK build volume files of low value monthly givers. In some cases those donors have a low LT Net, but because the programme breaks-even within 24 months (or whatever), the wheel keeps turning.

How about this? What if you took the decision to reduce the volume of donors you acquire to a fraction. Instead of asking for £3 per month, you ask for £20 or £30 per month.

Fewer donors. Higher value. Less attrition. Much greater LTV and LT Net. Perhaps a longer break-even, but at the end of the day you are left with more donors feeding the upper part of the pyramid, more income, more loyalty, more major donors, and more engagement.

There are lots of anecdotes about the £10/month donor who leaves a legacy. Some have concluded that we should focus on low value donors for legacies. That’s misguided. Focus on the upper end first and work your way down. Of course, long-term, consistent donors at the right age are good candidates – higher value is better.

The current fundraising landscape demands a different approach. It requires more value being built into donor files

For more information about how Petra Fundraising could transform your fundraising approach, email stephenb@petrafundraising.co.uk