I started doing direct mail fundraising work in 1989 – that’s 30 years ago. While most of what makes direct mail (and all direct response channels for that matter) work hasn’t changed – like high personalization, great storytelling, compelling response devices, and powerful offers – there is one area that has changed quite a bit.
In short, we need to change the way we measure the money…
THE GOOD OLD DAYS
Yep, I’m talking about return on investment – or ROI. A decade or so ago, measuring the economics of your direct mail program was a pretty straightforward proposition:
Step 1: You’d start by dividing your new donor acquisition cost by your conversion rate to determine the cost of a repeat (2nd time) donor. This dollar figure represents your new donor investment.
Step 2: In order to determine the payoff – or return – on that investment, you multiply the typical donor’s average gift times life expectancy times gift frequency.
Step 3: Then, you compare the total revenue (Step 2) to the initial investment (Step 1) to determine your ROI.
Save the Whales Canada brings on first-time donors at an average cost of $20. They then manage to convert 40% of those donors to a second gift. The cost of a repeat donor, in this case, is ($20 divided by 40%) $50.
The average new donor proceeds to make 1.3 gifts of $40 per year for 3.5 years. The gross return on that initial $50 investment is (1.3 x $40 x 3.5) $182. Expressed in percentage terms, the gross ROI for SWC is 364%.
Expressed a simpler way. For every dollar that SWC invests in new donors acquisition, they will receive $3.64 in new revenue over the next three and a half years.
Pretty simple, isn’t it?
WELCOME TO THE NEW MATH
Today, I want you to stretch your brain to include two new elements in your direct mail ROI calculations:’
Now, the straightforward mail calculations outlined above still apply as they did before.
But, now we need to add a wrinkle. We know that many of your donors who receive your direct mail appeal will give – but they might not send the gift in the return envelope you provided. They could well walk over to their computer – or pick up their phone – and make a gift online. The mail still generated the gift – but it came in through a different channel. While we don’t have hard data to quantify amounts, we think it’s reasonable to think that 10% or 20% (or more) additional revenue could come in online in addition to those cheques that come in the mail.
Now comes the second new – and very important! – element: legacy giving. There are about 5 million living Canadians who have made bequests to charities, and a whopping 75% of them are also direct mail donors. You need to start thinking about bequest revenue and linking it to your initial direct mail donor investment.
Keep in mind that, while direct mail gifts are immediate, legacy gifts can take a decade or two to materialize. Also, remember that the average legacy gift is about a thousand times bigger than a typical annual gift sent through the mail.
Now, there are many variables involved in calculating how much legacy revenue you can expect to receive from a new direct mail donor, but we think it’s a good starting point to estimate an increase of 40% on the revenue side.
ADDING IT UP
We can now compare our old ROI calculation that only looked at mail revenues with a new calculation that takes into account gifts in the mail, online giving and bequests. Using the estimates I’ve sketched out here, there are two ways to add up your return on investment:
The old ROI (just direct mail) is 364%.
The new ROI (which incorporates direct mail, digital and legacy giving) is 586%, which is 61% greater!
WHAT DOES ALL THIS MEAN?
If you’re like most professional fundraisers, you need to make a case for budget allocations every year to invest in your program. In our experience, it’s getting harder and harder to persuade your bosses to invest in direct mail when calculations are done the old way.
But! – when you include digital and bequests in your ROI equation, direct mail suddenly makes a lot more sense – and has earned a place in your program of the future.