Is It Better For Charities To Be Frugal?
Perception = reality.
Isn’t that at the core of marketing and branding? What people believe about products, services, companies, and nonprofits is based on their experiences and perceptions.
But, what if their perceptions don’t match the truth?
A new study by Grey Matter Research and Opinions 4 Good tells a story that’s bound to confuse nonprofit marketers and fundraisers. Donors’ perceptions about charities’ costs (fundraising, administration, and overhead) are simply incongruent with reality.
Ron Sellers, of Grey Matter, says:
“Many charities don’t have the full perspective on what donors will and will not accept, and what they really know and believe about overhead ratios. Our research suggests that the overhead ratio may be much less important to donors than many organizations believe.”
So, why are nonprofits trying so hard to convey their frugality?
They mistakenly believe that donors, charity watchdog organizations, and the media will criticize their organizations if they spend “too much” on infrastructure costs. This has been the case for eons and it wasn’t until Dan Pallotta released his book, Uncharitable: How Restraints on Nonprofits Undermine Their Potential, did the conversation begin to change.
Let’s examine the study’s summary to see where the disconnects exist.
The charitable sector as a whole has a reputation problem. The average donor believes a reasonable overhead ratio means setting aside no more than 19% for overhead, administration, and fundraising. But the average donor also believes the typical nonprofit spends 28% on overhead.
Nearly six out of ten donors feel charities typically spend too much on overhead (often by a wide margin), while just 15% feel the typical charity overhead ratio is below what they consider to be a reasonable limit.
Donors really have no idea about the overhead ratios of the organizations they support. Researchers asked donors to name their very favorite charity, then checked the Form 990 overhead ratios for each one. Fewer than one out of every five donors gave an estimate that was close (i.e. within 20% of that charity’s actual number), and in fact half were off by at least 50% (e.g. estimating 24% or 8% for a charity with an actual overhead ratio of 16%).
Half of all donors name a favorite charity that spends more on overhead than what those donors feel is a reasonable limit.Not only that, but many donors are supporting charities that exceed their self-defined reasonable limits by a wide margin: 27% favor an organization that spends double or more what they feel is reasonable.
Almost half of all donors believe their favorite charity’s overhead ratio is higher than it actually is, including one out of four donors who believe their favorite organization spends at least twice as much on overhead as it really spends. Yet even with these wrongly inflated overhead ratios in mind, donors continue to favor those organizations.
Many donors actually admitted they have no clue. Almost two-thirds of donors cited their favorite charity’s overhead ratio, but then admitted that they weren’t very sure about it. Even among those who felt quite certain about the number they gave, seven out of ten were off by at least 50%.
Many donors believe their favorite charity spends too much – but they continue to support it. Only three out of ten donors believe their favorite charity’s overhead ratio is lower than the maximum they find reasonable, while four out of ten believe their favorite charity exceeds reasonable overhead spending – yet it remains their favorite charity.
With nearly six out of ten donors saying the typical charity overhead ratio is too high, one out of every five donors believes their favorite charity spends even more than the typical charity. About half don’t see their favorite charity as being any more frugal than average – yet, again, it remains their favorite charity.
Older donors (the lifeblood of many organizations) have the most stringent expectations for low overhead ratios, and often believe their favorite organization spends much less than others on overhead. In reality, older donors tend to favor organizations that actually have higher overhead ratios, demonstrating a substantial gap between what these donors claim to want and what they’re actually supporting. Six out of ten older donors have a favorite organization that exceeds what they consider to be reasonable overhead spending.
Donors are not favoring organizations that are especially frugal. Only 11% of all donors name a favorite charity with a seriously low overhead ratio (single digits), while nearly half name a favorite charity with an overhead ratio of 20% or more. In their actual giving, donors are clearly favoring organizations that don’t have rock-bottom overhead ratios.
Donors indicate that the overhead ratio doesn’t dictate where they give. When asked the primary reason they named a particular organization as their favorite, just 12% said it’s because of the organization’s financial efficiency.
What should charities do with this new data?
First, look at what typical overhead expenses were in 2012 versus today for the study’s charities.
“While the average perception of what is typical spending is 28 cents on the dollar, answers
are all over the board, just like they are for perceptions of what is reasonable.” (The Donor Mindset Study VI)
Let this soak in:
“There’s no evidence that an organization will become more attractive to donors by dropping its overhead ratio.”
Just 12% say they support their favorite charity because the organization uses their money very efficiently. More important to them are proven effectiveness and results (18%), trusting them (16%), feeling a personal connection with the organization (16%), and being able to see their results firsthand (14%).
My marketing and branding recommendations for charities:
- Cite the 28% average overhead expenses (and this study as a reference) and compare it with your own lower ratio. Based on this study’s results, donors will likely be surprised that it’s lower than they anticipated.
- Focus on the charity’s results, not as much on statistics, but in heartfelt stories about changing lives.
- Build and maintain donor trust through transparency, regular communication, and personalization. That means putting donors (customers) first, ensuring that every brand experience is top notch throughout the customer journey.
- Make your donors feel that they’re part of your family in supporting the cause.
- If your donors are local, invite them for a tour or host an open house. Of course, not all charities have physical locations that are conducive to this, so do whatever works to connect with them.
- Get over the overhead dilemma. Be frugal as necessary, but still invest in quality programs and services, good personnel and fair salaries, professional development, and growth. Without these investments, you risk stagnation or worse, a bad brand reputation and/or eventual closure.
“So many donors are completely unaware of what their favorite charity’s overhead ratio is that even a fairly high number makes little difference for them. After all, there are plenty of huge, well-known charities that have overhead ratios higher than 25%, and their numbers suggest their ability to raise funds does not suffer because of it.
Not only are small differences in overhead ratios unlikely to make much difference in an organization’s ability to attract donors, but they are unlikely to play much part in keeping donors.” (The Donor Mindset Study VI)
The full study examines these donor perceptions more in-depth, with considerable detail. You can e-mail email@example.com (not linked) for a free copy of the full report.
Contact me for assistance with your nonprofit marketing strategy, messaging, communications, and/or tactics. Check out my nonprofit marketing experience on LinkedIn.