People often think it’s bad for their charity of choice to spend money fundraising. Up there with percentage spent on administration, people want the portion of the budget spent fundraising to be low (1).

This has always been a mystery to me. If a charity can use your money to go out and raise even more money, that’s great! They’ve just multiplied the impact of your donation.

An even greater mystery has been why charities don’t spend even more on fundraising. The returns from fundraising seem to be huge. For each £1 spent on fundraising, studies have shown that charities typically raise £4-10 (2). That’s an incredible 300-900% return. Why wouldn’t they do as much of this as possible?

One theory is that the social norm against heavy fundraising prevents them from doing as much as they would like. This may be part of the reason. It looks like the sector, and in particular the most effective charities, might under-fundraise. But it also seems that charities are taking most of the easy fundraising opportunities already out there, and so are behaving more effectively than it first looks.

Although the average returns to fundraising are high, it looks like the returns from additional fundraising are much lower. We can show this with a very rough calculation:

In 2006, charities in the UK raised an estimated £27bn from fundraising (3). They spent about £5.7bn on fundraising (4)

In 2010, charities raised £31bn (5). They spent £7.8bn on fundraising (6). (inflation-adjusted)

So, over this time, an extra £2.1bn was spent on fundraising, raising an extra £4bn. If you assume the extra fundraising led to this increase, then it made a profit of £1.9bn – a return of 90% (7) (8).

So, although on average fundraising gives you up to a 900% return, extra fundraising over and above what’s already being doing may give you much, much less. So according to this very rough analysis (7), the charity sector is already taking almost all of its best opportunities to encourage the public to give. This is what as we’d expect if charities are trying to effectively promote their cause. If easy opportunities were left lying around, then someone would take them, use the money to fundraise even more, and soon these opportunities would be gone. It also agrees with our experience of most people having a ‘charity budget’. Once they’ve made a bunch of donations, they stop giving when asked again.

Fundraising is risky (you’re never sure how much you’re going to raise), so individual charities won’t want to fundraise until they make zero returns. Making a loss fundraising would be a disaster for most charities. It’s also clear that if charities start to fundraise too heavily, then it could end in destructive competition. So there’s good reason to be cautious about extra fundraising.

On the other hand, if the 90% figure is at all accurate, it’s still a pretty fat margin of error. So, the charity sector is perhaps still not fundraising enough. We cause this to happen by evaluating charities on what percentage of their budget they spend fundraising, and encouraging them to keep it low. This seems like it could easily cost the charity sector several billion pounds per year. If the average charity is doing good work, then a lot of value is being lost. (9)(10)

So, although there might be some room for charities to fundraise more, they’re already taking the best opportunities. This has some interesting implications. One is explored in my next post. Another is that if we really want to encourage the public to give more, we need new approaches. We hope that 80,000 Hours and Giving What We Can are one kind of new approach. By encouraging people to give a big chunk of their income, we’re raising the overall level of giving. What other ideas do you have?

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References and notes

(1) For instance, see this Guardian article which shows you how to check your favourite charity’s fundraising ratio: http://www.guardian.co.uk/society/2005/oct/21/voluntarysector.charitablegiving

Indeed, the assumption that donors dislike low funding ratios (i.e. a high proportion of the budget spent on fundraising) has been incorporated in economic models of charity fundraising, for instance:

Rose-Ackerman, S. (1982). “Charitable giving and “excessive” fundraising”. Quarterly Journal of Economics

97, 195212.

(2) CAF found that the ratio of voluntary income to expenditures on fundraising over all charities in the UK was about 10x in 2010. This is based on accounting data, so doesn’t suffer from limited sampling problems. However, since charities seem to aim to keep the portion of expenses that are counted as fundraising low, it’s likely to overestimate the true returns on fundraising.

Charities Aid Foundation, (11 July 2011), * “The cost of fundraising”

The Institute of Fundraising’s 2010 survey shows that the ratio of voluntary income to expenditures is about 4x.

I think the reason for the discrepancy is that the CAF study includes all charities, whereas the IoF report is focused on larger charities. I’d welcome more info on this though.

(3) Total charity income taken from:

CAF’s Charity Trends Report, Key Charts

http://www.charitytrends.org/KeyCharts.aspx

Proportion of voluntary income (income from voluntary sources) of 55% taken from the Institute of Fundraising’s 2006 survey of about 40 charities.

http://www.institute-of-fundraising.org.uk/career-guide/fundratios/

(4) Inferred from the IoF’s survey finding of a 4.4x fundraising multiple in 2006.

(5) Total charity income taken from CAF as above. Proportion of voluntary income of 59% taken from the IoF’s 2010 survey, source as before. Inflation adjustment of 0.89x, estimated from this inflation data:

http://www.rateinflation.com/inflation-rate/uk-historical-inflation-rate

(6) Using IoF’s finding of a fundraising multiple of 4x in 2010.

(7) This analysis is clearly pretty rough. Ideally, it can be completed in several countries, over multiple time-frames. The data, however, is difficult to come by, so doing a more sophisticated analysis would be a significant undertaking. One confounding factor is that fundraising will be more profitable during times of economic growth. To partially counteract this, I’ve used a 4 year period, approximating corresponding to two growth periods in the economic cycle (comparing 2006 to 2009 would depress the figures, because the recession in 2009 made fundraising particularly tough).

One supporting factor is that there has been a steady downwards trend in fundraising ratios over the last ten years from 5.5 to 4, so it doesn’t look like finding diminishing marginal returns over this period was due to random noise, or an artifact of the period 2006-2010. It seems like 10-20 years ago charities were not doing enough fundraising, but they have become more rational over this period. Over the last decade, they were successful in raising the overall proportion of income given to charity from 0.9% of GDP to 1.1%. But it seems like it won’t be possible to raise this much further without new approaches or a social shift.

(8) You’d also want to adjust growth in charitable giving for GDP growth, since we’d expect charitable giving to rise naturally with wealth. GDP growth in the UK over this period, however, was about zero. So, we don’t need to make an extra calculation.

(9) We’re also not sure how steep the decline in the returns from fundraising is at the margin. If it’s very steep, then the capacity for extra fundraising before you drop from 90% returns to zero could be very low.

(10) The social norm against fundraising is stronger than it looks from this data. I’ve calculated the returns from marginal fundraising to the charity sector as a whole. But consider the point of view of each individual charity. When charities fundraise, some of the money raised is money that would have been given to other charities. So the individual fundraising efforts will look like they’re creating more money for the charity sector than they actually are. Since (in our experience) most charities don’t explicitly take into account the fact that some of their donations are at the expense of other charities, they’ll have an incentive to fundraise to the point that the overall charity sector is making a loss. This is the positive side of the norm against excessive fundraising. It prevents charities from getting into a competition for resources that makes them worse off overall.