The Law of Fundraising. Bruce R. Hopkins

owns, which names the charity as the sole beneficiary. The advantage to the donor is that the charity recognizes the death benefit value as the amount “credited” as a gift by the donor. The wealth replacement trust concept is linked to a charitable remainder trust; the donor uses the annual income to purchase a life insurance policy, usually for the value of the asset placed in trust, and names his or her heirs as beneficiaries, thus transferring to heirs the same value upon the donor's death.

(d) Reasonable Costs of Fundraising

Few charitable organizations are able to make use of every fundraising technique. Usually, only mature fund development programs in established charities have the necessary numbers of volunteers, donors, and prospective donors as well as an adequate professional and support staff, budgets, and operating systems to coordinate such a massive effort with efficiency.

      Most organizations begin with the need to define the audiences who will support their mission and to seek their first gifts. Thereafter, attention is focused on securing annual operating revenues to stay in business, which requires constant attention to the annual giving solicitation methods. The choice of method(s) depends on several factors, including the scope of the organization's mission and the cost of fundraising. If the cause is national, the broadest solicitation outreach will be needed through direct mail, which is most expensive. If the purpose is local, concentration can expand audience selection to everyone in the area—again, expensive. In time, major gifts, grant requests, capital campaigns, and estate planning may be included to balance overall program productivity and cost-effectiveness.

      By contrast, several types of organizations have the ability to engage in multiple fundraising methods simultaneously and with high profitability. Colleges pursue alumni constantly (annual gift, class gift, reunion gift, capital campaign, estate planning, plus requests for time and talent in leadership roles and as volunteers and workers). Private colleges do not approach the public, but they often expand their solicitations to “anyone who walked across the campus one day.” Other organizations must appeal to the public because their cause, as well as their needs, requires them to reach out. Thus, advocacy groups combine fundraising with a call to action; churches, with the offer of a way to salvation; hospitals, with wellness education and provision of direct care; and so on.

Whatever the organization, its choice of fundraising method carries with it a differing cost-effectiveness performance. “Charities are not the same in how they perform fundraising nor does fundraising perform the same for every charity. Equally, efficient fundraising is not the measure of the importance or value of the cause.”⁵²

Choice of method requires attention to cost-effectiveness measurement. It costs money to raise money, but what are the reasonable cost levels? Studies by the American Association of Fund-Raising Counsel, the National Society of Fund-Raising Executives (now the AFP), and the Association for Healthcare Philanthropy reveal that, on average, it costs 20 cents to raise one dollar after a solicitation program has been in operation for a minimum of three years. Reasonable cost levels for various methods of fundraising are given as follows.

(i) Direct-Mail Acquisition. Making the first sale, whether in for-profit sales or nonprofit fundraising, is expensive. Direct-response advertising is a popular and effective form of direct-mail acquisition used by both private and nonprofit enterprises. Reasonable cost levels for a nonprofit organization should not exceed $1.50 per dollar raised, with a corresponding 1 percent or higher level of participation (rate of return).

(ii) Direct-Mail Renewal. Once a donor is acquired, the effort to renew this gift, either in a few months or next year, will be more cost-effective. Renewal costs should be within 20 cents per dollar raised, with a 50 percent renewal rate among prior donors.

(iii) Special Events and Benefits. While highly popular with volunteers, benefits are expensive to conduct and usually are valuable for reasons other than raising money. A net goal of 50 cents per dollar raised against direct costs is the recommended guideline.

(iv) Corporations and Foundations. Solicitation of corporate and foundation support is a highly selective and competitive method of fundraising. Expenses should not exceed 20 cents per dollar raised.

(v) Planned Giving. Planned gifts, being complex and individually designed, require time to prepare and plenty of patience to mature. An average of 25 cents per dollar raised is the recommended guideline.⁵³

(vi) Capital Campaigns. The most profitable, cost-effective, and productive fundraising method available is capital campaigns. These campaigns focus on big ideas and solicit big gifts, require personal leadership and solicitation by volunteers, have professional staff direction, and usually yield good results. Capital campaign costs should not exceed 5 to 10 cents per dollar raised.

      Regulations that focus on costs compared with gift revenues treat unfairly the realities of fundraising performances by charitable organizations, whether old or new. Simple bottom-line analysis is inadequate, can be misleading, and seriously fails to understand the nature of individual organizations, their unique environment, and their separate capacity for raising charitable contributions.

New startup efforts (even for established charities) to begin a fundraising program are not likely to meet these “reasonable cost” guidelines for at least three years. Charities representing new causes or previously unknown or unpopular needs will be even less successful. The critical factors inherent in success—environment and capacity—also must reflect the realities surrounding the organization. A realistic analysis of local conditions will help set reasonable expectations based on factors such as availability of prospects, access to wealth, competition, local regulations, geography, style, public image, access to volunteers (including leadership), fundraising history, prior fiscal performance, volume and variety of fundraising methods offered, use of professional staff or consultants, existing donors for renewal and upgrading, established fund development office procedures, and more.⁵⁴

§ 2.3 ROLE OF A FUNDRAISING PROFESSIONAL

      Fundraising executives refer to the development process as their guide. This process includes (1) acquiring donors, (2) renewing and upgrading donors, and (3) maximizing donors. Each phase represents an increased capacity to support charitable organizations. The process starts at the bottom of the pyramid of giving (Exhibit 2.1). Identification of prospects from those publics available to each charity is accomplished through the several annual giving methods. Each individual donor's progression up the pyramid requires time for communication of information and development of interests and of a level of personal involvement with the organization (the “friend-raising” phase). Major gift opportunities, while less frequent, are usually centered in capital campaigns and represent a continuing investment in response to a rising commitment and enthusiasm for the programs and services of the organization. The ultimate investment decision is usually made last, is frequently the largest gift, and may even come as part of the distributions from a donor's estate.

      Fundraising professionals are like symphony orchestra conductors. Before fine music can be produced, they need competent musicians, all the right instruments, the correct sheet music for each player, a concert hall, rehearsals, and an audience. Any one of the 15 fundraising methods can more easily be accomplished alone; activating many methods simultaneously takes skill in managing the process of moving everyone forward together, in the same direction, toward the same objective, and at the same time.

      The desired net effect is to stimulate multiple forms of asking for multiple gift decisions from donors and prospects each year, while at the same time selectively soliciting larger gifts from a few who have demonstrated greater potential from previous gift performance. All of this should