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July 08, 2015

ROI and Cost Per Dollar Raised: How to Calculate and Interpret These Critical Performance Indicators

Tuesday’s blog introduced you to some important KPIs (Key Performance Indicators).  Today, we dig deeper into the mother-of-all KPIs: return on investment and cost per dollar raised.

Return on Investment: Revenue divided by Expenses. 

ROI can be calculated for a specific campaign, strategy, or event.  Savvy fundraisers use ROI calculations to lobby for greater fundraising investment.

Some fundraisers calculate the ROI for 12 months out, 2 years out, etc.  This works well for a major gifts or a donor acquisition campaign—programs that don’t produce immediate results or campaigns that grow based on repeated future gifts. 

As you calculate the quantifiable ROI, always keep in mind Social ROI: your donor’s perceived return on their investment in you.  This isn’t as easy to measure, but it’s just as important.  (note: we’ll tackle this metric in a future blog.) 

Cost per Dollar Raised: Expenses divided by Revenue (the inverse of ROI.)

This metric shows you how much you spent to raise a single dollar.  Benchmarks vary by sector, but it’s a good idea to calculate this on an annual basis, always including staff costs. 

Nonprofits calculate everything from the cost to bring on a new donor to the cost of a campaign. For a donor acquisition campaign, you should calculate both cost per donor and net per donor.  Knowing that donor retention is critical to success, it’s a good idea to also calculate retention rate.   

Don’t forget to consider time as one of your costs.  This is especially important when analyzing events such as silent auctions and golf tournaments.  When you include staff and volunteer time, you’ll likely see that events aren’t an effective method of fundraising, and they don’t lead to significant donor awareness.  Instead, use your staff and volunteers to conduct a cultivation and stewardship campaign.  Not only will it be more successful in the long term, but it will give you a more involved donor pool for major gifts or a campaign.

How can you use ROI and cost per dollar raised to improve performance? The obvious answer is to either keep costs constant while raising more money—or decreasing costs while raising the same amount.  Do what works but do it more efficiently, or invest more in the campaigns or strategies that have proven successful.

If you haven’t yet explored AFP’s Fundraising Effectiveness Project, I urge you to do it NOW. http://afpfep.org/. It offers easy-to0-use calculators you can plug in your data and receive instant feedback on some of the performance metrics we’ve been considering this week.

 

Author: Jon Sturdevant, Winkler Group Senior Consultant.  Follow Jon @jonsturdevant and @WinklerGroup.

Posted by on Wednesday, July 08, 2015