As promised in an earlier blog on Warren Buffett, this entry is the first in a series designed to question how development professionals (and others such as CEOs and Boards) should evaluate development effectiveness.
Warren Buffett knows a thing or two about valuing (and investing in) successful enterprises. Given his incomparable ability to evaluate good investments from bad, understanding the principles of his approach may inform efforts to evaluate development effectiveness. Specifically, what might it look like if development effectiveness was evaluated using Buffett-esque principles? What metrics might Buffett cite as evidence of development effectiveness? What metrics currently viewed as exceedingly important might he ignore? In short, how would Buffett go about evaluating our success?
I will provide my answers to these questions over the course of next few blog entries. My first answer is below. In providing these answers, my hope is that we will think anew about our work, our results, and how we add value to our organizations.
What measures might Warren Buffett use to evaluate development effectiveness?
Answer 1: Donor Retention Percentage – When asked the question, “how long do you plan to hold the stock of a company you purchase?” Warren Buffett is known to respond, “forever.” To say he takes the long view is an understatement. His goal is to buy at attractive prices companies that have strong brands, are run by competent managers, and have long-term positive cash flow prospects – and then hold them. Applying this long-term view to development work, I am suggesting that donor retention percentage is a key metric we should track and report in order to measure our true effectiveness. Three reasons why this measurement should be highly important:
First, year-over-year donor retention numbers are evidence that we are building long-term relationships. We aren’t securing donors one year and only to lose them the next. Any program can “gimmick” their way into increasing donor numbers for a year. Ever hear of the $1 phonathon campaign? A horrible gimmick of an idea that speaks more to the need to make short-term results look good at the expense of the long-term health of the organization. Strong year-over-year donor retention numbers are an indication that we are building long-term, fruitful relationships with donors based on quality development principles.
Second, since acquiring new donors is far more expensive than retaining last year’s donors (some organizations report it costing 10 times more to attract new donors as opposed to retain past donors), reporting strong donor retention numbers means that we are making efficient use of our resources. The larger the percentage of repeat donors, the better our development “investment.” This is important for the organization’s bottom line.
Finally, there are a number of studies which point to the link between donors who make consistent annual gifts and those making planned gifts. In general, it is safe to say that some of your best planned gift prospects will be those donors who make regular annual gifts, regardless of amount. Therefore, focusing on increasing donor retention numbers will have long-term and beneficial impacts on your organization. Not only are you getting a repeat donor this year, you are increasing the likelihood that you will get a planned gift down the line.
So, how strong should your donor retention numbers look? Although the numbers are different based on non-profit type, I suggest anything in the 70-80% range is an above average number. Above 80% donor retention and you are showing clear evidence that your efforts are adding considerable value to your organization, both now and well into the future. Warren Buffett would be proud.