The Role of Major Gifts in Your Fundraising Strategy

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1 The Role of Major Gifts in Your Fundraising Strategy This document includes the following readings: How Major Gifts Fits Into a Non-Profit Strategy The Economic Reality of Major Gifts How to Think About the Cost of Major Gift Fundraising Why Spending More Money on Major Gifts Is Worth It The Economics of Major Gift Fundraising The Three Economic Elements of a Major Gift Caseload How Major Gifts Fits into a Non-Profit Strategy No matter how small your organization is, you should have a major gift program. This is a fact I will explain in a moment. Jeff and I are amazed by the number of organizations which do not have major gifts as one of their major revenue development strategies we see this gap even in some major national organizations. I don t understand this. Major gifts is key not only to developing revenue, but also to giving your high-capacity, high-inclination donors an opportunity to give. There are five important reasons you should have a major gift program: 1. It is a strategic and important function of fundraising. Take a look at this donor pyramid: Notice that at the bottom of the pyramid you have donor acquisition, where you are distributing messages to a universe of prospective donors with an intention of persuading them to become first-time givers. The ROI at this level is terrible, but every non-profit must have this function operational in order to put donors into the pipeline. Next, note how some of those firsttime donors, through proper cultivation and solicitation, move up The Role of Major Gifts in Your Fundraising Strategy Page 1

2 to become continuing donors, then large (major) donors, then capital donors and finally planned givers. In a simplistic way, this chart shows how a healthy non-profit secures donors, then moves them up into higher involvement and giving. Here s my point. If you are doing all the activity at the bottom of the pyramid, you must have a major gift program near the top of the pyramid to fully actualize and operationalize the goodwill you have cultivated in all of those donors. If you don t, you are missing a huge financial opportunity. Major gifts is a critical and important part of every non-profit s fundraising strategy. 2. It gives your donors an important way to express their passions and interests. This is the second important reason to have a major gifts program. Your donors who can and will give more should be able to see a clear path to do so. But in many situations Jeff and I see, major donors are not given an opportunity to do more in their area of interest and passion because the organization they support has not provided the opportunity to do so. Sounds crazy, doesn t it? But it s true. This is a sad reality in so many organizations. Look at it from the donor s point of view. He loves what you do, and he gives you a cumulative gift of $3,000 in one year. You thank him profusely and tell him that his giving has made a difference. Everything is great. But this donor could do more. And he wants to do more. But you do not give him that opportunity. So his larger gift actually goes to some other organization. This happens more than you know. Pretty sad. 3. It develops a superior return on investment (ROI). It is a fact that major gift programs deliver more net revenue to the organization than almost any other money-generating program in a non-profit. Most acquisition programs lose money at the point of acquisition. You are lucky if you can get 50 cents back for every dollar you spend. Direct mail is usually in the 1:3 to 1:4 range. For every dollar you spend, you get $3 to $4 back. Major gifts, when fully functional, can deliver 1:5, at a minimum, and as much as 1:20! On average, we see from 1:6 to 1:12 ROI in major gifts. That s one dollar out in expense for every $12 back in revenue. Pretty good, huh? Why would you not do that? This one area alone can be fueling all the revenue for the important programs of your non-profit. 4. It offsets the poor ROI of donor acquisition programs and protects your ratios. You might not have to think about this, but your finance person or your CEO does. Your organization needs to live within certain overhead ratios, either self-imposed or to meet external criteria. And major gifts will offset the poor-performing donor acquisition ROI. This is an important financial reason to have major gifts fully operational in your nonprofit. The Role of Major Gifts in Your Fundraising Strategy Page 2

3 5. It is a natural path toward planned giving. The more a donor is involved with you financially, the more she will be inclined to make the ultimate gift leaving your organization in her will. This act does not happen automatically. Trust and involvement need to be built. Major gifts, done correctly, builds that trust and creates the involvement that will lead a donor to want to remember your organization in her will. If your organization is struggling with whether to start or expand a major gifts program, please have your leadership team consider these points. And remember that there are important DONOR reasons to do it not just organizational reasons. The Economic Reality of Major Gifts We need more money. That s why we re starting a major gift program. This is how many leaders think the economy of a major gifts program works. They decide to do it and BAM the money starts to flow in immediately. And because they think that way it sets up an unrealistic and damaging relationship with the MGOs they hire. If you haven t experienced this yourself, think about this to get a grasp on what usually happens: 1. A decision is made to start or enhance a major gift program. 2. MGOs are hired. 3. Finance requires the development leader to produce a new forecast for the expense and revenue budget. The development leader is required to justify the added expense. This justification process usually has the finance person or the top leader pressuring the development leader to make sure a good quantity of net revenue results from the program its first year. This is where the problem starts. An aggressive revenue forecast is produced and now the MGOs must deliver on it. We are off to a bad start. This is exactly what happens far too often. And it sets up the program for almost immediate failure. And if anyone in the organization tries to counter the progression of this fatal process they are seen as obstructionists and pessimists. After all, we have the donors who really want to support the organization. And now we are going to ask them to get involved to a greater degree. As if it were that easy - as if the donors are just sitting at home eager to give more because we ask them. This is where leaders and CFOs, and many development directors need a dose of economic reality as relates major gifts. And that reality, in our opinion, has 6 points: The Role of Major Gifts in Your Fundraising Strategy Page 3

4 1. The donors in a major gift program have to come for somewhere IN the organization. This is one of the greatest misunderstandings in major gifts. And hardly anyone talks about it. Some leaders and managers truly believe that the REAL donors to contribute significantly to the major gifts program will come from outside the organization. Just go out there and find them! they say. And the MGO is given a list of very wealthy people the MGO should go after. Stupid. Really dumb. The fact is that the very best donors for the major gift program are already in your donor base. And, yes, if they are given a chance to do something they REALLY want to do, they will generously give. 2. When the donors are moved into the major gift program the other revenue managers will object. Most of the donors that the MGO qualifies will come from the direct marketing program. This means that the revenue that was once credited to direct mail or direct marketing will be credited to major gifts. This could be a $ ,000 swing per MGO in the first year! Yes, this does need to happen because a MGO needs to have a qualified list of donors for her caseload. And this is the right way to do it. The workaround on the credit thing is to give soft credit to direct marketing for those donors as long as they are receiving direct marketing communication which they should until the MGO is absolutely certain he has a substitute strategy for that donor. One caution here: we recommend leaving all major donors IN all direct marketing communication efforts leaving the decision to take them off way into the future. Take them off too early and you will lose revenue. Believe me. 3. Major gifts takes time. This is another often misunderstood point. People that are not familiar with how major gifts works actually think that there are a ton of donors who just cannot wait to give more. This is not true. The truth is that there are a ton of donors in your active donor file who could give more but it will take time to develop the relationship to the point where they will give more. In our experience, a major gift program does not materially generate more revenue until its second year and then it grows from there with healthier results in years 3-5. ROI s usually go from 1:1 to 1:2 the first year, counting attributable revenue to the MGOs efforts, then to 1:3 1:5 the second year, then 1:6 1:8 the third year and higher from there. We have seen more mature programs deliver 1:10 and as high as 1:20 that s $20 in the door for every dollar spent (all costs in). A word of caution here: every organization is different so do not take these figures and PUSH them on your situation. Our best advice here is to simply assume a breakeven the first year, some decent return the second and things starting to look good in years You must have something to offer a donor. This is a critical piece needed to succeed in major gifts. And it is the most often overlooked part. Just get out there and raise the money is the usual directive of an authority figure to the MGO. Well, sorry, it doesn t happen that way. The MGO needs something to present to each donor on her caseload something that matches that donor s interests and passions. If your organization does not provide that you cannot, as a MGO, be successful. You must package your program and budget (link) in order to give your MGOs the tools they need to be successful in fundraising. The Role of Major Gifts in Your Fundraising Strategy Page 4

5 5. Only a few will give transformationally. This is another surprise for many leaders. They actually think that most of the major donors a MGOs caseload will give outrageous amounts. No they won t. Many will give more generously more. But only a few will give transformationally. From an economic point of view the strategy in major gifts is to have an incubator of donors on caseload where a MGO, over time, can uncover those who will seriously rise to the top in their giving. This incubator is being refreshed one to two times a year as (a) the MGO discovers those donors who will not want to give as she originally thought and removes them from her caseload, and (b) replace those departing donors with new ones from the current donor file. There is a regular shifting and sorting that goes on in a healthy caseload. Do not interpret this shifting and sorting as a careless hunt for money. The MGO is sincerely and carefully trying to help every donor on her caseload fulfill their interests and passions. She is simply spending more time on those who can give transformationally. 6. Value retention will go up. This is the final area that is either ignored by or rejected by leaders and CFOs. In fact, we have a situation right now where we have been able to show the leader actual value from the caseload donors has been retained over prior years. Prior to involving the donors on a MGOs caseload in the major gift program, those donors were attritioning in value at a rate of 46%. This means that if all those donors gave $1 million last year, they would give $540,000 this year, a loss of $460,000! And now those same donors are value attritioning at a rate of 8% so a loss of only $80,000. That is a real savings of $380,000! ($460,000 - $80,000). Leaders MUST count this actual improvement in donor giving as a credit to the MGOs efforts. The fact is that when a donor is managed in a personal way value retention goes up. And this is good news. If you are a MGO that is living under a management system where reasonableness and clear thinking abounds, be thankful. If, on the other hand, you are living under a system where unrealistic expectations have been set, Jeff and I suggest you print this blog out and hand it to your leader and/or CFO to start a dialogue on this topic. Most often, these good leaders do not fundamentally understand how the economics of major gifts works. And that is why it is important to provide this information. How to Think About the Cost of Major Gift Fundraising The Four Major Gift Players Is the organization you are working for actually doing any good? If not, why are you there? It s time to get out. Start looking. I say this because, for major gifts to succeed, not only in revenue generation, but also in maintaining the right cost, you have to have a meritorious cause or product. If you don t, The Role of Major Gifts in Your Fundraising Strategy Page 5

6 there will be a lot of money spent to dress it up. That is why the first of the four major gift players is Player #1: A Credible and Needed Product/Service. Having a solid product/service must be in place and operating effectively if you are going to succeed in raising major gift money. When I scan through the list of charities at Tax Exempt World ( I just can t believe how many non-profits have been created, probably by well-meaning people, that just cannot and will not pass the smell test of a good cause. Does yours? And is it packaged in a way that donors can understand it? (In a later post we ll get into packaging program for major donors an area that is desperately needed in most every non-profit we ve seen). OK, let s say you have a good cause a solid product/service. You now have something to offer a major donor, our second major gifts player Player #2: The Right Donor. In major gifts, the right donor is one who meets three criteria. They have provable inclination to give, they have provable capacity to give and they want to relate to you in a personal way. Inclination means that they are currently giving at your major gift level - emphasis on current and at your major gift level. Capacity means they have the ability to give a gift that would qualify as a major or large gift somewhere between 5 and 7 figures. The last criteria is that the donor wants to relate to you in a personal way. Jeff and I have mentioned this many times in this blog. Just because a donor meets your major donor metric does NOT mean they want to relate personally. Our experience is that on 1 in 3 major donors, who meet the metric, actually want to relate. Don t be loading up your caseload with folks that just are not interested in hooking up with you. Now we have a good cause and the right donor. These two players need to rest peacefully into a welcoming and competent development function in the organization, our third player: Player #3: An Effective Development Function in the Organization. I have to be honest with you on this one. I see very few effective development departments. And if this is broken, either because the director of development doesn t know what he or she is doing or it is organized wrong or it is not funded or managed properly if it is broken, costs will be out of control, money will not be raised as it should and you will be one miserable employee! Face it, if this is your reality, you likely can t change it and you, most assuredly will not succeed in major gifts. This leaves one final player Player #4: A Qualified and Effective Major Gift Officer. The fact that you are reading this tells me that you are a learning person you want to know how you can be more effective in your The Role of Major Gifts in Your Fundraising Strategy Page 6

7 job. There are a lot of people like you. And there are quite a few that just should not be in the job - they are the primary reason the major gift program is not working. They should leave. Here is how all these four players align to the subject of learning how to think about the cost of major gift fundraising. If any one of these players is non-functioning or marginally functioning, costs will go up which means the return on investment will go down. Put simply, you will have a failing major gift program and there will be nothing you can do about it. These four players, when functioning properly, create a context for success. That is why we look at them very carefully when we engaged to help in a major gifts program. They are critical to your success. So, take a look at them and make them work better, if you can. And I guarantee that you will experience more success in your major gift fundraising efforts. Why Spending More Money on Major Gifts Is Worth It 722 people gave $8.1 million in one year. Those same people gave $3.6 million the following year. And it wasn t one big gift that went away! So $4.5 million, from hundreds of donors, just flew out the window!! One of the reasons 55% of last year s revenue evaporated at this non-profit was a lack of management and proper strategy. (By the way, we find that most major gift files are losing value at a rate of 35-60% per year). But the other big reason was a reluctance to invest in the major gifts team. I remember talking with the manager of this medium sized non-profit, trying to convince him that it might be wise to spend more money. He wouldn t hear of it! Sadly, the manager s manager was so out of touch with the program that the organization continued to lose money year after year. This is one of the most amazing dynamics I find in many non-profits today. There is a source of revenue (major gifts), that gives a return of anywhere from 3:1 in the early years to 10:1 or more as a mature program, that is underfinanced and neglected while management scurries around trying to find more money. It s like a tragic comedy. Sadly, this situation is played out in thousands of great causes every day. Why does this happen? Several reasons: 1. There isn t a culture or understanding of major gift 1:1 fundraising. We all talk about the donor pyramid. But we mostly love the bottom of the pyramid, where we acquire donors and cultivate them using direct marketing strategies and techniques, vs. the top where major gift activity happens. The Role of Major Gifts in Your Fundraising Strategy Page 7

8 2. Most outside counsel (agencies) are direct marketing oriented. And the agencies or consultants that provide major gift services are either capital campaign oriented or focused more on moves management and donor strategy rather than a fully integrated major gift plan that also involves donor file analysis, donor qualification, program packaging, offer development, MGO management and reporting. 3. Major gifts, as a discipline, is rather young. 4. Managers of major gift programs are too embarrassed to get help. We see this over and over again. The manager of the major gift program, whether it is the development director or reporting into the development director, thinks that if they bring major gift counsel in it will expose their weakness and undermine their standing. The opposite is actually true. The professional inside manager knows how to use outside counsel. Some of our best clients are superior major gift professionals who chose to use their talent in donor strategy and approaches to help their MGOs while we co-manage with them and they let us do the analysis and program packaging items. It makes for a great team approach and a better result. So, all of this nets down to people in a system who do not fully understand and value the contribution major gifts can make to the organization. And so it remains resource starved even though it is generating the BEST return on investment of any other fundraising program in the organization. If you find yourself in this situation, here is what I suggest you do, whether you are a one person major gift unit in a small non-profit or part of a larger team: 1. Make a list of the number of donors giving $2,500 cumulatively per year for the last two calendar (donors think calendar vs. fiscal) years including YTD 2011 so three periods. If you are part of a major gift team in a medium to large non-profit, your cume number per year may be higher. 2. Divide that list by 450. Why? Because in our experience only 1 donor in 3, who meets the major donor criteria, will actually want to relate to you in a more personal way. So, since you need a caseload of 150 qualified donors you will need 450 donors meeting a cumulative giving criteria of $2,500 to qualify down to 150. When you divide the list in point #1 above by 450, the resulting number is the number of MGOs your organization needs to serve those donors. And, if each of those qualified donors gave $2,500, you would have, at a minimum, a caseload of $375,000 for each new MGO which is not a bad place to start. I think the The Role of Major Gifts in Your Fundraising Strategy Page 8

9 average gift of such a caseload would be higher, which would result in caseload value higher than $375,000, not to mention what you could do with a couple of donors in that caseload who want to partner at a five or six figure level. 3. Using the rationale outlined in point #2 above, add MGOs if you have enough qualified donors they can relate to or, at least, a caseload pool of 450 per MGO. 4. Hire an assistant who is administratively excellent, research oriented and computer saavy. This person will take a huge load off of you so you can spend more time with donors. We recommend a full time assistant for every two MGOs. If you don t have that kind of support, there is a solid economic case for you to add one. 5. Increase your operating budget to allow for more time and effort spent with (travel and meals) and on (resource) donors. As you read this, you may be thinking there is no way I will be able to add these things to my major gift effort! If you have qualified donors to relate to, and you don t add capacity to relate to them, I guarantee you will leave way more money on the table than it costs to increase your internal capacity to deal with those additional donors. Not investing in this situation is like taking $1,000 and burying it in your backyard when you could have invested it and it could have had a guaranteed return of $3,000 to $10,000!! At the top of this post I told you about the non-profit that walked away from $4 million+ dollars. I can just imagine the bureaucrats in the backyard burying the expense money they had saved, patting themselves on the back for a job well done, while the program people had their budgets slashed and, as a result, the organization served less people. Crazy, isn t it? And stupid! It doesn t need to be this way. We have good people to serve and good donors who want to help. And there are a lot of good managers and leaders in our non-profits who, when they understand how the whole major gift thing works, will rise up and support the program as it should be supported. That s what gets Jeff and me up in the morning! The Economics of Major Gift Fundraising Several weeks ago I got into a rather heated argument with a finance person in a large nonprofit who was taking an aggressive and spirit-robbing position on the value of a Major Gift Officer. What good are they doing anyway? he said. They take credit for money that is already gonna come in! I don t see what value they add. The Role of Major Gifts in Your Fundraising Strategy Page 9

10 And then he pulled out a report that showed the caseload performance year to date of one of his MGOs. He pointed out how this much of the caseload dollars were generated by direct mail and that much was generated by an event and the other amount came in without any obvious help from the MGO etc. etc. My blood was boiling. But I managed to keep my mouth shut until I could gather my thoughts and present them in an objective and reasonable fashion. And that is what I want to share with how to think about and present the economics of fundraising so that you will have: 1. A clear understanding of how your caseload should economically work that is, best practice from professionals just like you from all around the country. 2. A plausible and truthful presentation and, if necessary, a defense of what should be expected in terms of caseload and MGO performance. 3. An answer to aggressive and sometimes ignorant management folks who have no understanding of how major gifts works and rather than spend the time to learn it and understand it just sit on the sidelines and peck the spirit out of you. Jeff and I really do think that MGOs and the work they do is often misunderstood. How can someone spend so much time doing nothing but relating to people and actually make that work economically? They grow impatient with how long it takes not realizing that any good relationship takes a great deal of time to develop. Then there is the credit issue. What should a MGO get credit for? I been in countless conversations where either the finance person or even the CEO would rather a MGO spend hours a day proving how he or she got the gift vs. be out in the field with donors. It is amazing how much energy is spent on this subject. Now, don t get me wrong. I am a firm believer in the principle that a MGO needs to be able to show they truly had a hand in what caused a gift from a donor. In fact, one of the questions Jeff and I regularly ask MGOs is Can you actually relate to each donor on your caseload? Can you show that your efforts in some way or another influenced the donor s decision to give? If the MGO has absolutely no way to talk to the donor, either in person, via mail, or phone, then it is highly unlikely there is a connection between the donor s gift and the MGO. But then, that donor should not be on the caseload. So, my presumption is that all caseload donors are qualified that the MGO has determined that, in fact, he or she CAN relate to and positively influence them in a way the donor and the MGO have agreed to. The Role of Major Gifts in Your Fundraising Strategy Page 10

11 But back to the subject at hand. Jeff and I think it is important for MGOs and their managers to clearly understand: 1. That just relating to each donor on the caseload stops value attrition by as much as 60%. This is a ton of money! And we can show this progress to those outside of the process who need and want to understand it. This means that if the MGO did nothing but show appreciation to the donor and her giving and show her how her giving is making a difference the amount of money going away each year would go down almost nothing. This is what we call found money it is money we once had then lost and then found again. 2. That new money is both the new gift that came in from a donor as a result of the MGOs work and also the found money that would have attritioned off and gone away had the MGO not been working with the donor. This is a ticklish subject that is often misunderstood by the doubters outside the process. You must understand this to appreciate the good you are doing in major gifts. 3. That, in addition to the found money in point #2 above, there are very few possibilities for large and unusual gifts in a caseload. Many onlookers think a MGO should be cranking out scores of very large gifts from their caseload. The truth is that a good MGO will be lucky to secure one or two vs. the dozen s many managers and finance people believe they should. So, there is work to be done to explain these things to yourself and others. And that is what I intend to do over the next week. It is one thing to be in the business of fulfilling and servicing the passions and interests of each of your caseload donors. It is another thing to manage the internal publics. You could do the donor thing really well and be miserable because you haven t taken care of the internal business. For the most part, management folks are reasonable and supportive people. They just need to understand how this major gift thing works. And I am going to help you make sure they understand. The Three Economic Elements of a Major Gift Caseload A major gift caseload is not just a bunch of donors who meet a certain giving or capacity criteria. The Role of Major Gifts in Your Fundraising Strategy Page 11

12 It is true that current giving and capacity play into the selection of a caseload pool, from which you should qualify out those donors who actually want to connect. It is also true that your caseload will have donors of different economic quality which is why you should be tiering your caseload so you know where to spend your time. All of this is true. But when you get up at the 10,000-foot level and look down on it, a caseload is made up of three groups of donors what I would call the three economic elements of a caseload: 1. The core donors These are donors who you have qualified and with whom you have a good mutual relationship. They are engaged, involved and contributing at expected levels to your organization. They make up anywhere from 85-88% of your caseload. 2. The transformational givers These are the 1-3 donors in your caseload, that you have identified, who can give transformational gifts. They haven t done it yet but they could. And you are on a course, which may take a year or two, to make that happen. These donors make up 2% of your caseload, maybe less. 3. The new donors Then there are the new donors. This is the cohort of donors, who you qualify one or two times a year, to replace the donors on your caseload who have either changed their minds about a relationship with you, have had some life circumstance that has changed the giving relationship with you or have simply gone away with no explanation. When you originally qualified them you thought the relationship would work out. It didn t. So now you have to replace them. Also in this group of donors are those donors who will be displaced on the caseload because higher value donors have presented themselves in your donor pipeline. Think of it this way. You only have 150 donor slots available in a year. You must fill each slot with those donors of the highest economic value. This reality will force you to replace donors on your caseload for no other reason than they have a lessor economic value than the new donors who have shown up. This group of donors will make up around 10% of your caseload EVERY year. Be sure and manage your caseload to make sure that you are on track to manage these three economic elements of your caseload. If, as you are reading this, you are saying: Hey Richard, I thought you said this major gift thing was not about the money. Why are you approaching a caseload mix on a purely economic basis? Here s the reason. Remember that there are two dynamics in major gift caseload management: 1. The donor dynamic this is about fulfilling the interests and passions of donors. It is solely focused on how you can serve the donor. This is more about service than it is about money. In fact, the money follows the service. The Role of Major Gifts in Your Fundraising Strategy Page 12

13 2. The organization dynamic this is about fulfilling your contract to the organization you work for. You have to deliver economic value. You are being paid to raise money and you must be cost effective in doing that. You cannot allow an economically nonproductive donor to occupy any of your 150 donor slots. Each donor must deliver economic value greater than the cost to manage them. These two dynamics seem to be in opposition. They aren t. Your forward-facing work toward the donor is about the donor and helping them do what they want to do on the planet via your organization. You do that while you are delivering economic value to your organization. Think about all of this and make sure you are properly managing all three groups of donors in your caseload. When you do this right you will be doing the right thing for your donors AND the organization. * * * Veritus Group is a full-service mid and major gift consulting agency serving non-profits all over the world. Through our Major Gift Academy, we strengthen development professionals and non-profit major gift programs with a donor-centered philosophy that is focused on accountability. You can reach us on the Web at and The Role of Major Gifts in Your Fundraising Strategy Page 13