Every fundraising opportunity has three categories of costs. One is obvious, the second is obscured by the opportunity itself, and the third is investment inherent in the structure of an organization. The first is always considered when deciding whether to pursue an opportunity. It is a direct cost. The other two are indirect. One of the indirect costs forms an either-or question and is often neither seen nor considered. The other is a question of capability. The three categories of opportunity costs are:
- Resources required to pursue an opportunity.
- Benefit that could have been derived if those resources had been applied to a different opportunity.
- Ability to pursue an opportunity.
We plot the first cost on spreadsheets, then create budgets, and even institute measurement tools before we begin our pursuit of an opportunity. The second cost, the cost of opportunity lost, too often receives only a cursory examination early in the decision-making process. Sometimes it’s ignored completely. The third we can do little about at the moment of opportunity, but failure to recognize and understand it can turn an opportunity lethal.
In fundraising we are used to making decisions based on return on investment (ROI). We decide to invest in a fundraising initiative because we believe it will generate income substantially greater than the cost of implementation. In fact we look for opportunities that strongly leverage that expense. We want an outcome, an ROI, that delivers a high multiple of what we have invested.
But what about what will be lost because some other course of action is denied those resources? The answer to that question isn’t easily plotted on graphs and spreadsheets. That’s because what we’re being asked to compare and evaluate are often apples and oranges. Different opportunities don’t equate. They’re not the same. They deliver results that may require different measurement scales and tools. The investments needed are not always directly comparable. Decision making can be swayed by a variety of variables including:
- Size of financial investment needed.
- ROI not always measured in immediate income.
- Differences in kind and size of internal resources needed.
- Possible conflicting perception by segments of both service and funding communities.
- How an initiative will support or detract from aspects of mission.
- Differing outcome measurement metrics for different opportunities.
Those are some general variables, but each organization should compile a list of variables specific to it and its community. Let’s explore some of the types of opportunity costs that may be easily overlooked.
The Cost of Staff Time and Other Assets
Fundraising events are a staple of nonprofit organizations. For smaller organizations, it’s not uncommon for an annual event to be a major aspect of a development department’s efforts. Over time the annual gala becomes a tradition—part of the organization’s fundraising fabric. But it’s labor intensive, draws heavily upon an organization’s resources, and uses large amounts of the goodwill an organization has built up within its community.
If a nonprofit were to weigh the expenditure of all those resources, would it find the ROI acceptable? Would the pursuit of some other opportunity or opportunities have more effectively leveraged the invested resources and returned a substantially higher multiple? These are the questions that need to be answered if an organization wants to explore what it misses out on by pursuing one opportunity over another.
Part of the cost that must be considered when it comes to events is the impact on program staff. As is the case with other marketing heavy strategies such as direct mail or telethons, program and other non-fundraising staff are likely to be called upon to;
- Provide background and support for developing stories to share with donors.
- Arrange for testimonials.
- Be the source of content for marketing efforts.
- Staff telephone banks.
- Prepare and staff fundraising events.
Their participation in the efforts to pursue an opportunity adds another layer of cost. It also raises another question: What mission-critical activities could have been accomplished by staff with the time diverted to pursue a fundraising opportunity?
The Cost of Transitioning from One Initiative to Another
Transitioning fundraising resources form one initiative to another will cost the income that would have continued to flow if resources had stayed focused on the existing effort. But this isn’t the only cost of transition. It takes time for a new fundraising initiative to gain its footing. Income production from the new initiative will be a curve. Whether that curve is steep or relatively flat will depend on the initiative. But steep or flat there is likely to be a period of lessened income. If an organization depends on a steady flow of income, it needs to consider the impact of both:
- The loss of income from shutting down the existing initiative.
- The length of the period of lower income before the new initiative is up to speed.
Both these conditions of lessened income are costs of pursuing the new initiative/opportunity. Ideally you would neither slacken nor end the effort placed on an existing initiative until the new opportunity is producing. However smaller organizations do not always have the fundraising resources to keep multiple balls in the air. Even if the new opportunity holds the promise of greater income over the long haul, you must ask the question: What will be the short-term impact of the changeover? Is the organization ready for a period of lessened income? A cash strapped organization may find short-term cash flow interruptions hard to deal with or even survive.
The Cost of Outcome Measurement
Outcome measurement is an ever-increasing cost for non-profits. The opportunity cost here is what else the staff tracking, analyzing, and reporting data could be doing. Fundraising staff could be developing stronger relationships with significant donors. Program staff could be helping more clients. Marketing staff could be developing and getting out more impactful messaging.
These costs need to be made clear to institutional funders. When multiple institutional funders routinely requiring their own unique metrics, they are putting an opportunity cost on the organization that diminishes the impact of their funding and increases the indirect costs on the nonprofit. Some institutional funders recognize this and will make a separate grant to fund the outcome measurement they require. But the organization needs to work with funders to assure cost efficient outcome measurement.
The Cost of Insufficient Marketing
Organizations increase opportunity costs by not having a donor base sufficient for optimum execution of the opportunity. Building a donor base takes a commitment to marketing. An organization introduces itself and maintains its visibility within a community through marketing.
People do not become prospects unless they know of an organization. Prospects don’t become donors unless they approve of the organization. Donors don’t form a relationship with an organization and become repeat donors unless they know and value the ongoing impact of the organization. An organization’s donor base consists of its repeat donors. The size of a donor base and its commitment is dependent on the quality of relationship with each donor.
It all starts with marketing. Marketing takes time and commitment, but its impact is long term. An organization that does not continually invest sufficient resources in its marketing efforts creates opportunity costs that will dramatically lessen its fundraising income.
The Cost of an Under Resourced Development Department
Insufficient fundraising infrastructure increases opportunity costs. Development staff cannot focus on donor relations if they are tied down with day-to-day administrative operations. Development directors and other senior development staff need to meet with volunteer leadership and major donors. They need to lead the strategic planning of fundraising. They need to evaluate current and past efforts while analyzing future opportunities. An organization wanting to increase the scale of its fundraising must commit sufficient resources to development. Achievement requires investment.
An organization beginning to staff a fundraising department needs to understand the value of marketing, communications, and public relations efforts. It needs to think in terms of fundraising marketing. An organization’s fundraising leadership and its CEO are the principal external voices of its fundraising effort. While the CEO is likely to be the most impactful, CEOs can’t be everywhere.
Successful fundraising requires that an organization have additional people able to reach out to its donor base and community. A CEO and a development director are seldom enough. They need the support of fundraising marketing infrastructure, additional staff that can go out into the community, and involved volunteer leadership. Traditional tools such as brochures have value, and more recent components such as websites, email, and social media can be effective support mechanisms for maintaining and improving an organization’s visibility and good reputation. They should not be ignored. But in the end fundraising is about people, and an organization needs human faces to be both visible and involved in the community.
A failure to invest in the resources that make this level of engagement possible is an opportunity cost that dramatically impacts the ROI of any fundraising opportunity.
Recognizing the Nature of Opportunity Costs
Direct opportunity costs are obvious. We may not like what they tell us, but they come with the opportunity and ask only that we assess them honestly.
The second category of costs is about the either-or of this opportunity or that. It asks us to compare and evaluate, and since the comparison is not an evaluation of same against same, it requires analysis on multiple levels.
The third category of opportunity costs is the most insidious of costs. It is already there when we come to an opportunity. It is baked into our fundraising efforts. The bad news is that it requires us to simply walk away from attractive fundraising opportunities because we lack the vitality to make them viable. The good news is that we can start to change that today. All it takes is leadership and commitment.