By Wilson C. Levis and Anne L. New
This article was first published in Philanthropy Monthly, June, 1982
Wilson C. Levis is director of The Average Gift Size Study Project, sponsored by INDEPENDENT SECTOR. Mr. Levis was senior consultant in charge of the National Information Bureau's project to establish a National Center for Charitable Statistics. The Center is now an ongoing national service sponsored by the Council on Foundations, INDEPENDENT SECTOR, National Information Bureau, and the United Way of America. Mr. Levis is also director of education and agency relations for the National Information Bureau. Miss New is president of Timmerman & New Incorporated, consultants to not-for-profit organizations. She was a consultant to the National Center project and is serving in a similar capacity In The Average Gift Size Study.
The cover article of PM's [Philanthropy Monthly's] July/August 1981 issue offered donors, watchdog agencies, and government regulators two new factors to consider in their evaluation of fund-raising costs of charitable organizations in the United States.
The factors, the average gift size and the average cost per gift, were suggested as supplements to, not a substitute for, the widely used fund-raising cost percentage (fund-raising costs expressed as a percentage of funds raised).
The article described how the application of the new factors would be explored in a project, The Average Gift Size Study, sponsored by INDEPENDENT SECTOR, and funded in part by grants from the American Telephone and Telegraph Company and the Equitable Life Assurance Society of the U.S. The article invited comments from readers and participation by charities willing to supply gift-size data.
Data on 125 health, welfare, and educational institutions receiving more than $25,000 annually in public support from 100 gifts or more have now been received and analyzed. The total amount raised was almost $581 million from almost 5.3 million gifts at a total fundraising cost of $53.4 million. In addition, executives of such institutions, accountants, government regulators, and grantmakers have been interviewed for their comments regarding the scope and limitations of the gift size and cost per gift in evaluating charitable fund-raising.
This present article offers the results of the data analysis and interviews, and discusses them in relation to the five theories the study undertook to test. It then suggests ways in which both donors and government regulators may easily obtain and use gift-size and cost-per-gift data to improve their understanding and evaluation of charitable organizations, fund-raising costs and effectiveness.
In particular, the article points out how a donor may more accurately determine approximately how much of his or her gift will be used for fund-raising. Such information may help the average donor decide what size gift may be appropriate for a specific organization. It may also highlight - for both the average donor and the grantmaker - the economy and effectiveness of making or pledging one larger gift rather than responding to a series of separate appeals from the same organization. Finally, the data on average gift size and cost per gift may bring into sharp focus some very fundamental questions about the role of small givers in philanthropy today.
| Only the cost per gift can tell a donor how much of his or her gift will probably be used for fund-raising and how much for the "good cause." |
The concepts embodied in the five theories set forth in the original paper have been discussed with interviewees and tested in the data analysis. The theories and tentative conclusions follow.
Theory l. The average cost per gift (last year's fund-raising expense divided by the number of gifts received) provides current donors with a reasonably reliable estimate of how much of each gift was used for fund-raising; it also provides prospective donors with a reasonably reliable estimate of how much of each gift will be used for fund-raising.
The key word here is "reliable."
Past experience may never be totally reliable when used to delineate what the future will be. But it can be an indication of what the future is likely to be. Results of the study so far show it is usually, but not always, reasonable to assume that the previous year's cost per gift will be approximately the same as the cost in the current year.
The exceptions are typified by the generalized case of Agency A. In year X, Agency A incurred substantial fund-raising costs for a campaign that was not launched until year Y. To divide the fund-raising costs incurred in year X by the number of gifts received in that year would produce an average gift cost that would be far too high. The prospective donor would not have a "reasonably reliable" estimate of how much of each gift would be used for fund-raising in year Y.
In such a situation, a three- or four-year average cost per gift would be a more "reasonably reliable" indicator of how much of each gift in year Y would be used for fund-raising.
"Reasonably reliable" may also be considered as a relative statement. Reasonably reliable compared to what?
The comparison at present must be with the only indicator that is widely used: the fund-raising cost percentage.
Dividing the fund-raising cost for year X by the total amount of contributions received in year X would result in a too-high cost percentage.
Thus, in the case of Agency A, no matter which indicator is used, a three- or four-year average would be needed to give a reasonable indication of what costs may be in year Y.
In the reverse case, however, the relative usefulness of the two indicators turns out to be quite different.
If Agency A, instead of incurring extra expense in year X, had received one or two unexpected, large gifts in that year, the fund-raising percentage for the year would be markedly skewed downward. But there would be no skewing of the cost per gift.
Why? The average gift cost is the quotient obtained when total fund-raising costs are divided by the total number of gifts received. An increase of one or two gifts, regardless of their size, would decrease the average cost per gift by less than a penny (unless the organization received only a handful of gifts during the year).
Thus, in the case of nonrecurring ballooning of income (unlike the nonrecurring ballooning of expense) the average cost per gift maintains its reliability as an indicator of what gift costs may be. The fund-raising percentage does not.
At this point it may be helpful to delay discussion of Theories 2 and 3 and move to Theory 4. It turns out that Theory 4 is closely related to some of the conclusions we have reached in testing Theory l.
Theory 4 stated: The fund-raising cost percentage (last year's fund-raising expense divided by last year's public support, times 100) does not provide prospective donors with a reasonably reliable estimate of how much of each donor's gift may be used for fund-raising.
Thoughtful donors and government regulators who have used the fund-raising cost percentage in evaluating charities have long been aware that the percentage had many deficiencies as an evaluative tool. Theory 4 was an approach to identifying and more clearly defining these deficiencies.
All those who participated in the study could observe what professional fund raisers have long known: that an overall fund-raising cost percentage cannot be translated into meaningful cost per gift unless all gifts received by an organization are approximately the same size. Generally, this is not the case.
Table 1, based on the analysis of the data from the 125 organizations, shows how the average cost per gift varies with the average size of the gifts.
Not surprisingly, the cost per gift of obtaining large gifts is far greater than that of obtaining small gifts. As a practical matter, cost per gift varies directly with size of gift.
The median cost of obtaining a gift in the $1,000 - $2,999 range appears to be more than eight times the median cost of obtaining a gift in the $100 - $499 range. It is almost 16 times the cost of obtaining a gift in the $50 - $99 range.
The fund-raising cost percentage, however, goes in the reverse direction. The fund-raising cost percentage grows larger as the gift size becomes smaller. At the same time, the cost per gift also becomes smaller.
The table shows that the lower an organization's fund-raising percentage is, the greater will be the amount of each prospective donor's gift spent for fund-raising.
Thus the weakness in using the fund-raising cost percentage as the one test of reasonable fund-raising cost becomes apparent.
The table shows that, in the sample studied, the median fund-raising cost percentage for gifts of about $300 (in the $100-$499 range) was 14.9 or about 15%. For a $300 gift that amounts to $45.
The same percentage for gifts mainly in the $1,000- $2,999 range would mean the average cost of obtaining a $2,000 gift was $300.
The table shows 27 organizations had average gift sizes of $500 or more. In every range that includes a group of these organizations, the median fund-raising cost percentage was well under 15%. Yet 15% has often been cited as a "reasonable" fund-raising cost. Only by knowing the average gift size could a prospective donor decide whether 15% is, in fact, reasonable in the case of a specific organization.
Theories 1 and 4 express the mutually supplementary relationship of information on fund-raising cost percentages and information on gift size. It may, therefore, be useful to combine the two theories into a single statement as follows:
Combined Theories 1 and 4 (new Theory 1). The cost per gift in most cases provides current donors with an indication of how much of each gift was used for fund-raising. The fund-raising cost percentage usually does not. In most cases, the cost per gift provides prospective donors with an indication of how much of each gift will be used for fund-raising. Again, the fund-raising cost percentage usually does not.
Having reached this tentative formulation, let us now move on to Theory 2.
Theory 2. The technique of counting the number of gifts and dividing the total into the fund-raising expense is valid for computing average cost per gift.
The key word in this theory is "valid."
The study so far indicates Theory 2 is valid when all gifts are obtained by the same type of solicitation--e.g., mass direct mail, or individual approaches, or special events. Some organizations that use many types of fund-raising state that to divide their total number of gifts into their total fund-raising cost may result in too gross a figure. The gross figure may not be "valid" because the different types of fund-raising have widely differing costs. As a result, a direct-mail donor, looking at a cost per gift that includes both direct mail and the far greater expense of personal solicitation, may decide the cost of obtaining his or her modest gift may be too high.
True, the method of computing the average cost per gift, as proposed in Theory 2, does result in a gross figure. But the fund-raising cost percentage is also a gross figure--and for the same reason: various types of fund-raising costs are included in it.
When charities are better able to refine their record-keeping and can make detailed fund-raising cost breakdowns available, both charities and donors may expect to benefit.
Meanwhile, the average gift size factor provides additional information to donors. And, unlike the cost percentage, the gift size and cost per gift can help donors decide not only whether to give but what size a reasonably cost effective gift might be. (A five dollar gift to an organization with an average gift cost of five dollars would hardly be considered cost effective by most donors, but a gift of $50 probably would be.)
The technique for computing the average gift cost produces a result that does provide additional insights for use in making philanthropic decisions. Donors and regulators may not have as much information as they might like, but they will have a good deal more than they had before.
Considered, then, as a step forward, and not as a total solution, the technique described in Theory 2 may be considered valid for computing the average cost per gift at this time.
Theory 3. Counting the number of gifts--both overall and by category, if desired, is simple and inexpensive; can easily be audited and reported in the notes to financial statements; is currently being done in-house as part of virtually all fund-raising operations.
The key word in Theory 3 is "gift."
What is a gift? This question has been raised regarding Theory 3 because of such situations as:
(1) An organization collects contributions in canisters placed in public places or carried by volunteers. There is no way to keep a count of the number of individual gifts dropped in the canisters.
(2) Funds are collected in house-to-house solicitation by volunteers who do not keep detailed records.
(3) A special event involves several kinds of gifts given by the same persons in the course of the event. If tickets are sold, each contribution portion per ticket is recorded, but only the total of contributions made at or during the event is recorded.
CPA's interviewed in the study responded to these situations by stating there would be no difficulty in auditing the totals of (1), (2), or (3) if adequate records of the totals were kept. Since the auditable figure in each case is a total, however, it may be necessary, for consistency, to define "gift" in these instances as the total of the contributions received from each such activity.
Accountants pointed out one exception to their ability to audit these figures: some national organizations prepare consolidated financial reports that include their locals, and may not have the necessary back up information, although the locals presumably would have it.
As to the cost of the audit, remember a leading accounting firm estimates that the inclusion of the total number of gifts should have little or no effect on the auditor's fee.
In view of the comments that have been received, Theory 3 may therefore be modified to read as follows:
Theory 3 (revised). Counting the overall number of gifts (and counting the totals of funds raised through canisters, house-to-house canvass for cash contributions, or contributions at special events as one gift per total) is simple and inexpensive; can easily be audited and reported in the notes to financial statements.
Theory 4 has been combined with Theory 1, so we shall move on to Theory 5.
Theory 5. Organizations with the lowest costs per gift always use the lowest percentage of each donor's gift for fund-raising regardless of the overall fund-raising cost percentage.
This theory's general correctness was demonstrated in Table 3 published with the 1981 PM article on The Average Gift Size Factor. That table is reprinted here for reference but has been re-numbered Table 2. The table shows that, for any one organization, the theory holds good when the gift size changes but the average cost per gift remains the same.
| The implication of the Average Gift Size Study findings is that fund- raising costs of organizations with widely differing average gift sizes should not be compared if the reader is seeking an appropriate evaluation of fund-raising management and effectiveness. |
Table 1, however, shows the average cost per gift rises as the average gift size rises, but at a rate that is generally slower. (In the sample studied, when the gift size doubles, the median cost per gift increases by one one-half or two-thirds.)
Realistically, then, an irreducible cost per gift must be assumed for almost any type of organized fund-raising. And that cost may be expected to rise with--but more slowly than--the average gift size.
Since many organizations conduct a variety of fund-raising activities, each of which may have a different cost per gift and a different average gift size, we should revise Theory 5 to read as follows:
Theory 5 (revised). Fund-raising activities with the lowest cost per gift always use the lowest percentage of each donor's gift for fund-raising, regardless of the overall fund-raising cost percent age.
If agencies can develop average gift cost information and fund-raising cost percentages for their various types of fund-raising activities, they may find ranges within which the average gift size can be increased while the average cost per gift can be held constant or nearly constant. Some organizations that receive mostly small gifts may thus find it possible to reduce significantly their fund-raising cost percentages.
Theory 5 has prompted some respondents to raise two interesting questions:
1. Should the organizations in the two lowest ranges of Table 1 be praised for their low costs per gift or criticized for their high fund-raising cost percentages?
2. Conversely, should the organizations in the highest ranges of Table 1 be praised for their low fund-raising cost percentages or criticized for their high costs per gift?
Perhaps neither question is the right one. Neither addresses the point: praised or criticized in comparison to what?
The implication of The Average Gift Size Study findings is that fund-raising costs of organizations with different average gift sizes should not be compared. In other words, it is inappropriate to try to compare organizations in the higher ranges of Table 1 with those in the lower ranges.
When the 125 organizations are divided into groups, a more useful basis for comparison appears. Within each group, organizations that have below-median fund-raising cost percentages generally have below-median costs per gift and vice versa.
The praise/criticize dilemma which exists when gift sizes vary greatly is eliminated when agencies with like gift sizes are compared.
The usefulness of grouping organizations according to average gift size is particularly apparent in the case of those in the $1 - $4 range. Although the group's median cost percent is 57.9, it should be noted this group has the lowest median cost per gift ($1.65). Therefore, organizations in this group will generally use less of each donor's gift for fund-raising than organizations in the higher gift size ranges.
The $1 - $4 group is thus the only group that enables the $2 - $3 donor to make a real financial contribution to a cause. (Note: In Table 1 the median costs per gift in the other groups start at approximately $3 and go up from there.)
It might be hoped that donors would not make contributions in the $1 - $4 range. Once they choose to do so, however, they can expect a higher proportion of their gifts to be used for program activities when they give to organizations in the lowest gift size range.
Data and respondents in The Average Gift Size Study have generally confirmed the desirability and practicality of using cost- per-gift and average-gift-size information in evaluating charities and deciding whether and how much to contribute.
Practicality aside, however, the study has been confronted repeatedly with a philosophical question: What role, if any, should the small donor play in philanthropy today?
The question is prompted by the fact that charities receiving mostly small (under $10) gifts are usually those with fund-raising cost percentages of more than 30%. (Table 1 illustrates this.) Since many donors, watchdog agencies, and regulators consider 30% the largest permissible ratio of fund-raising costs to contributions, some argue that charities that do not now meet this standard should find a way to lower their cost percentages or go out of business.
Data available to the study suggest, however, this argument overlooks several facts that may be important.
For example,. in New York State in 1981, approximately 7% of the $2 billion in contributions reported by charitable agencies was raised at a cost of 30% or more. This 7% amounted to $162,000,000 and cost $59,000,000, leaving $103,000,000 available for charitable purposes.
Based on the more detailed data used in the study, as well as on other information, it appears the $162,000,000 came from more donors than contributed the remaining $1,860,000,000 (93% of the $2 billion total). In other words, a few contributed far more than the many, as most professional fund raisers would have predicted.
In spite of the seemingly high percentage cost of raising the $162,000,000 from small donors, the $103,000,000 remaining after fund-raising costs were deducted is a substantial sum--enough to support several major organizations or many medium-sized agencies. If these organizations were banned from soliciting because their fund-raising percentages were considered too high, would their work continue--and would our country be the better or the worse if their services were no longer provided?
Also to be considered is the small donor as a person. If five dollars is all a donor can spare, should that donor be told to keep the money because half of it must be spent on asking for it? Or should the donor be told the rest of the story and left to make his or her individual decision?
If small donors knew the cost of each fund-raising solicitation, would they be more likely to make fewer but larger gifts, or to pledge a series of regular gifts to be made with minimal or no prompting?
Clearly, the aim of every philanthropic organization that appeals for funds should be to obtain the needed contributions at the lowest possible cost.
Efforts to upgrade givers in the past have not used the argument that a single larger gift (rather than three or four small ones) provides extra money for the cause--because it enables the organization to spend funds on program that would otherwise be needed to solicit the multiple gifts. Perhaps this approach may be tested by two or three organizations. If so, The Average Gift Size Study would welcome information about the tests and their outcomes.
Donors, watchdog agencies, and government regulators need not wait for charities to use information about average gift size and cost per gift to upgrade giving or to offer that information to others. Donors, watchdog agencies, and government regulators can request this information from charities.
It makes sense for them to do so, because:
l. Only the cost per gift can tell a donor how much of his or her gift will probably be used for fund-raising, and how much for the "good cause." This, in turn, enables the donor to decide not only whether, but how much, to give at any one time.
2. Only the gift size and cost per gift can, with a minimum of expense and effort on the part of all concerned, enable watchdogs and regulators more clearly to see results in relation to costs. Grouping agencies by gift size and cost per gift provides a more realistic basis for evaluating fund-raising management and effectiveness because comparable agencies are being compared. Gift size and cost per gift can then be far more useful than the fund-raising cost percentage alone in identifying organizations that may be poorly managed. They can also provide new insights into the notable efficiency of some organizations that have almost rock bottom gift costs but high fund-raising cost percentages because their average gift size happens to be small.
3. Ranges and medians of actual costs per gift and of actual average gift sizes can be combined with the ranges and medians of actual fund-raising cost percentages in an instrument against which individual organizations can be measured. Table 1 is an example of such an instrument. Based on only 125 organizations' reports, it is a rough measuring device, but one that suggests what could be done. The caption under the table explains how it might be used.
If organizations are required to include in their reports to state regulators the number of gifts received, any donor or watchdog agency can calculate the cost per gift. As the amount of such data grows, more comprehensive tables like Table 1 can be prepared, showing performance ranges and medians. Organizations may be encouraged or required to inform prospective donors of their average cost per gift. Sophisticated donors can compare a grant applicant's performance with that of other organizations in the same average-gift-size range. And, as use of average-gift-size information grows, more small donors will become aware of its significance and will be more likely to accept it, along with the fund-raising percentage, as information they can use in their decision making.
The 1981 PM article posed the following question:
In order that users of financial statements (especially donors) may have information that will enable them more accurately and completely to evaluate and more effectively regulate fund raising costs, should regulators, and others in the charitable oversight system, and accountants require charities to report the number of gifts they receive each year so average-gift-size and cost-per-gift factors can be calculated?
The data received and the interviews held to date indicate that average-gift-size and cost-per-gift factors can be used to overcome deficiencies in the widely used fund-raising cost percentage. In particular, the two new factors can provide more realistic standards for:
(1) evaluating organizations with low average gift sizes and high fund-raising cost percentages, and
(2) evaluating organizations with apparently low fund-raising cost percentages and high average gift sizes.
Neither the cost per gift nor the fund-raising cost percentage is a perfect evaluation tool. Used together, however, the two are far more reliable, and make possible better-balanced assessments than either when used alone.
Use of the average gift size factor introduces no problems in calculation or application that are not already problems in the use of the fund-raising cost percentage, and it eliminates some of the problems associated with the use of the percentage.
In view of the new insights and practical benefits to be gained by the use of the average gift size factor, the project staff believe state regulators may wish to consider adding to charity report forms a question on the number of gifts received. Several regulators have indicated interest in doing so. Rather than taking action unilaterally, however, they would like to see the private sector--donors and voluntary charitable organizations--take some initiative in asking for such a reporting requirement so charities may be judged more fairly.
The greater part of The Average Gift Size Study has now been completed. When additional data become available, the project staff will include it in analyses. Obviously, the best source of such data would be state charity reports that include the number of gifts each charity has received in the past year.
All participants who supplied data or comments for the study were assured of confidentiality. Therefore, we cannot thank them individually here. They have been thanked personally and know their contributions to the study are deeply appreciated.
We are also grateful to the corporations and organizations that provided funding for the project.
We shall continue to welcome comments on any aspect of the analyses or conclusions, and we shall be glad to work with donors, regulators, accountants, or others who may be interested in using or further examining the potential of the average gift size factor.
Readers interested in further information, including the supporting data from which Table 1 was constructed, should write to: PM, Box 989, New Milford, CT 06776 (ref. The Average Gift Size Study Project).
| Table 1 | |||||
| FUND-RAISING COST EVALUATION | |||||
|---|---|---|---|---|---|
| (using average gift size, cost per gift
and cost percentage data of 125 organizations) | |||||
| Average Gift Size Range | Number of Gifts | Average Cost Per Gift | Fund-raising Cost Percentage | ||
| Range | Median | Range | Median | ||
| $2,500 - up | 4 | * | * | * | * |
| 1,000 - 2,499 | 10 | $32.96 - 381.31 | $191.44 | 2.3 - 37.6% | 9.5% |
| 500 - 999 | 13 | 51.32 - 206.31 | 95.44 | 5.4 - 31.5 | 12.9 |
| 100 - 499 | 48 | 9.92 - 241.97 | 25.76 | 3.2 - 59.6 | 15.0 |
| 50 - 99 | 14 | 3.53 - 44.93 | 11.96 | 5.9 - 62.9 | 14.7 |
| 25 - 49 | 9 | 4.38 - 25.25 | 10.44 | 9.3 - 63.5 | 28.4 |
| 15 - 24 | 11 | 2.99 - 10.04 | 5.45 | 13.2 - 51.7 | 28.6 |
| 5 - 14 | 10 | 2.05 - 6.14 | 2.97 | 17.9 - 75.9 | 38.6 |
| 1 - 4 | 6 | 1.20 - 2.46 | 1.65 | 38.5 - 83.9 | 57.9 |
|
*sufficient data not available How to use the information in Table 1 in your evaluation of the fund-raising costs of grant applicants: When agency A approaches you for a grant, ask A to send you its annual financial statements and a copy of its IRS Form 990. Also ask A to state the total number of gifts it received in the period covered by the report. From the financial statements or from Form 990 take the contributions total (line 1 don 990) and divide by the number of gifts. You now have the average gift size. Then from the same document take the total fund-raising expense (line 15 on 990) and divide by the number of gifts. The result is the average cost per gift. This provides general donors with an indication of how much of each gift was used for fund-raising, On Table 1 above find the average gift size range into which your applicant's gift size fits. Look at the cost-per-gift range for that gift-size range. Note the median cost per gift. Is your applicant's gift cost below or not too far above the median? If so, good. Now take the total fund-raising expense again and this time divide it by the contribution total. The quotient multiplied by 100 is your applicant's fundraisng cost percentage. On Table 1 look at the fund-raising-cost percentage range for the applicant's gift-size range. Note the median. Is your applicant's percentage below or not far above the median? If so, good. Your use of the average gift size factor, as outlined above, should provide new insights for your grant decision making, Further, you may find it useful at times to give grant applicants the opportunity to explain their too--far-above-the-median fund-raising cost percentages or costs per gift. | |||||
| Table 2 | ||||
| ILLUSTRATIVE FUND-RAISING PERFORMANCE COMPARISON | ||||
|---|---|---|---|---|
| Size of Each Donor's Gift | CHARITY 45 Fund Raising Performance |
CHARITY 15 Fund Raising Performance | ||
| Cost Per Gift | Fund Raising Cost Percentage (each gift) |
Cost Per Gift | Fund Raising Cost Percentage (each gift) | |
| (A) | (B) | (C=B/Ax100) | (D) | (E=D/Ax100) |
| $100 | $2.25 | 2.25% | $5 | 5 % |
| 75 | 2.25 | 3 | 5 | 6.67 |
| 50 | 2.25 | 4.50 | 5 | 10 |
| 40 | 2.25 | 5.63 | 5 | 12.5 |
| 33.33 (average for Charity 15) |
2.25 | 7 | 5 | 15 |
| 30 | 2.25 | 7.5 | 5 | 16.67 |
| 25 | 2.25 | 9 | 5 | 20 |
| 20 | 2.25 | 11.25 | 5 | 25 |
| 15 | 2.25 | 15 | 5 | 33.33 |
| 10 | 2.25 | 23 | 5 | 50 |
| 5 (average for Charity 45) |
2.25 | 45 | 5 | 100 |
| 4 | 2.25 | 56 | 5 | 125 |
| 3 | 2.25 | 75 | 5 | 167 |
| 2 | 2.25 | 113 | 5 | 250 |
| 1 | 2.25 | 225 | 5 | 500 |
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