In our newly evolving multichannel nonprofit fundraising environment, the old methods of measuring return on investment have clearly begun to fall apart.  Today’s nonprofit fundraiser can choose from a multitude of channels to invest in – and each channel can have different cost structures and produce different types of donors and returns.

This complexity makes it even more critical to be able to understand – and measure – the return on your fundraising investments (ROI), so that you can make data-driven investment decisions across channels or across a combination of channels.  The following four steps, detailed in Donordigital’s Measuring Your Return on Investment in Multichannel Fundraising Campaigns, will help you measure return on investment across multiple fundraising channels.

STEP 1: ESTABLISH THE GOAL

Fundraising efforts can have benefits far beyond dollars for a nonprofit organization.  In spite of the capabilities for multichannel fundraising efforts to engage individuals to become advocates, activists or volunteers, it is recommended that – for the purpose of calculating return on investment for fundraising efforts – the following standard should be used: The goal of fundraising investment is to produce revenue in the form of donations that have cash value.

Of course, this doesn’t mean you should never invest in efforts that can’t be measured, or that you must produce equivalent revenue in all channels.  But it does mean you should make those investment decisions after you have prioritized and optimized investments you know will have a measurable return.

STEP 2: START WITH THE “I” IN ROI – DEFINE YOUR INVESTMENT

To be completely accurate in measuring fundraising investment, you would need to count and distribute the costs of a thousand different items – the cost to turn the lights on every morning, the salaries of everyone on your staff, the money you paid for the sandwiches at your last brainstorming retreat.

However, calculating expenses to that level of detail is not feasible given the limited time and resources available to most fundraising programs. Therefore, consider the following two standards in determining levels of fundraising investment across channels:

1. Count the direct costs of initial and subsequent efforts.

Direct costs should include all expenses incurred specifically to make the effort possible.  Examples of direct costs include:

• The cost per contact for a phone campaign
• The cost of paper, printing, list rental and postage for mail efforts
• Online advertising and list rental costs

2. Count only those indirect expenses that are outside your usual cost of business.

A robust fundraising program incurs many costs that are not directly attributable to any one effort. But most of these expenses can be considered a cost of doing business, independent of any single fundraising effort. You will not take down your organization’s website, throw away your database or stop thanking individuals for gifts if you decide not to perform a new donor acquisition effort this fall.  Therefore, taking the extra effort to assign these expenses across different fundraising efforts is most likely not worth the effort – and will not help you make strategic decisions about which channel to invest in.

STEP 3: UNDERSTAND THE “R” IN ROI – CALCULATE YOUR RETURNS

Based on step one above, the calculation of returns becomes a whole lot easier. Because your goal is to raise dollars, the return on your investment is simply the dollars you raise.  As with tracking costs above, this can be done most easily at the donor or prospect level through the following steps:

1. Assign an origin effort to every donor or prospect you acquire.

This should be the effort that first identified the individual as a likely donor to your organization.  It could be an online action based on a click through from a banner ad or a piece of return mail from a direct mail acquisition effort.

2. Measure all initial and subsequent revenue from that donor or prospect.

This would include all direct gifts made by the individual, including the initial gift to your organization.

STEP 4: MEASURE THE MULTICHANNEL RETURN ON FUNDRAISING INVESTMENT

Once you have measured your investment and determined your return, measuring ROI is easy.  Simply divide total revenue returned by the total of the initial and subsequent costs.  You can measure this ROI as a percentage – with 100 percent ROI meaning you have gained a dollar for every dollar you spent. Or it can be phrased in terms of dollars – for every $100 you spent, your return in donations is $100.  Here is an example:

• You spend $10,000 on an online campaign that acquires 5,000 new prospects.  Over the next 12 months, you send these prospects 25 emails at $0 expense, two phone campaigns that cost $4.50 per contact for 500 contacts, and three direct mail campaigns at $0.50 each. That means your total expense is $10,000 + $0 + ($4.50 x 500) + (3 x 5,000 x $0.50) = $19,750.
• Over the same 12 months, 250 of the 5,000 prospects convert to donors, giving a total of $21,250.
• The ROI for the online campaign = $21,250/$19,750, or 108%.  In other words, for every dollar you spent, you raised $1.08.

Measuring ROI in this way means rigorously tracking all of your campaigns and donors, and being able to assign costs and revenue to the proper effort.  However, to determine how much money to invest across competing channels, it is impossible to make the right decision without doing this legwork.  And, in today’s environment, it is imperative to measure return on investment in an equal way across all fundraising channels in order to ensure the long-term health of your organization.

This article was originally printed in Philanthropy Journal.

Peter Schoewe is Director of Analytics at Mal Warwick|Donordigital.  Schoewe brings over 15 years of direct mail and multi-channel fundraising expertise to explore how best to optimize integrated fundraising programs.