Is Direct Mail Worth The Trouble?

By Mal Warwick

Copyright © 2004

 

The questions come up all the time, whether from clients, reporters, or readers: what’s really going on in direct mail these days? What are the trends?

 

All too often, these people want to know whether personalized notepads are replacing name-stickers, whether courtesy reply envelopes are out-pulling business reply envelopes, or whether long letters still work.

 

Such questions deserve answers, of course, but they have precious little to do with the significant trends in direct mail fundraising. So it is that in lectures, workshops, articles, and columns that purport to discuss “trends,” the meaningful, long-term developments are either lost in the shuffle or totally ignored.

 

With apologies, then -- just in case you’re really wondering about those personalized notepads or courtesy reply envelopes -- this and the next few columns will give the four “big picture” trends that are shaping the present and setting the course for the future direction of direct mail fundraising. In this issue, we’ll explore the first trend:

 

It’s beginning to dawn on fundraisers that direct mail isn’t always worthwhile exclusively for its own sake.

 

Here’s the ugly truth many direct mail fundraising specialists have been dodging for years. In the face of constantly rising costs and growing competition -- not to mention the increasing sophistication of donors -- net returns from direct mail simply aren’t what they used to be.

 

Trustees, self-appointed charity watchdogs, and other observers, rarely well disposed toward direct mail in the first place, are questioning its cost-effectiveness as never before. In defense, specialists cite the long-term revenue that results from the major gifts and bequests later contributed by direct mail-acquired donors rather than just from the direct mail fundraising program itself.

 

For example, consider the following hypothetical picture, which depicts the net revenue derived at five-year intervals from a reasonably large direct mail fundraising program. (See table 1.)

 

Table 1

		1983	1988	1993	1998	2003
1	Acq cost	$250	$350	$450	$550	$650
2	# donors	250	250	250	250	250
3	House cost	200	220	240	260	280
4	House rev	$2,000	$2,000	$2,000	$2,000	$2,000
5	Net DM revenue	$1,550	$1,430	$1,310	$1,190	$1,070

  
Notes: All figures cited are in thousands (000) and in inflation-adjusted dollars. “Acq cost” = total annual cost of acquiring new donors. “# donors” = total number of 24-month-active donors at year-end. “House cost” = total annual cost of house mailings. “House rev” = total annual gross revenue from house mailings. “Net DM revenue” net direct mail revenue = row 4 – row 1 – row 3.

 

To keep this example simple, the size of the active donor file remains constant at 250,000 throughout the 20-year period, and revenue from house mailings remains static. Thus, steeply rising donor acquisition and house mailing costs result in a reduction of about one-third over the 20-year period.

 

Perhaps even more significantly, at least from the perspective of board members with sharp pencils, the net revenue in 2003 is now significantly less than two times the cost of acquiring enough new donors to keep the size of the active donor file constant.

 

Does this picture look attractive to you? Would it strike the members of your board of directors as attractive? Keep in mind that, in addition to all the money (and risk) invested in acquiring more and more new donors each year, there’s a lot of time and trouble expended, too.

 

Despite all that, however, you (and your board) might still think the whole effort is well worthwhile. After all, this is a fundraising program that still yields annual net revenue of more than $1 million (even if the trend suggests that that barrier will be broken in 2004 or very soon thereafter).

 

It’s difficult to defend this scenario if it fairly represents the whole picture. But chances are slim that that’s the case.

 

It’s possible that some nonprofit somewhere in the vast reaches of the North American hinterland depends exclusively on the returns from its direct mail program, receiving no revenue whatsoever from bequests or major gifts. Fortunately, however, that is less and less likely as time goes on.

 

Even if a nonprofit organization does virtually nothing to encourage its donors to leave legacy gifts, odds are high that many will do so, anyway.

 

Even a modest program to solicit major gifts from the best prospects on an active file of 250,000 names is likely to produce something meaningful. So, taking these additional activities into account yields these results. (See table 2)

 

Table 2

 

		1983	1988	1993	1998	2003
1	Acq cost	$250	$350	$450	$550	$650
2	# donors	250	250	250	250	250
3	House cost	$200	$220	$240	$260	$280
4	House rev	$2,000	$2,000	$2,000	$2,000	$2,000
5	Net DM revenue	$1,550	$1,430	$1,310	$1,190	$1,070
6	Net legacies	$500	$500	$500	$500	$500
7	Net major gifts	$250	$250	$250	$250	$250
8	Net FR revenue	$2,300	$2,180	$2,060	$1,940	$1,820

 

Notes: “Net legacies” = revenue from bequests and other planned gifts, net of any costs associated with soliciting and processing them. “Net major gifts” = revenue from major gifts, net of any costs associated with soliciting and processing them. “Net FR revenue” = net fundraising revenue = row 5 + row 6 + row 7.

 

This expanded example shows a brighter picture. Yet, this particular example assumes very little if any active efforts to promote legacies or major gifts. It’s not unusual for a charity with a quarter-million donors to receive each year half a million dollars or more in bequest income “over the transom,” given by dedicated donors.

 

By contrast, then, here’s what the picture might look like if this hypothetical nonprofit were to have initiated active legacy and major gift fundraising efforts 20 years ago. (See table 3)

 

Table 3

 

		1983	1988	1993	1998	2003
1	Acq cost	$250	$350	$450	$550	$650
2	#donors	250	250	250	250	250
3	House cost	$200	$220	$240	$260	$280
4	House rev	$2,000	$2,000	$2,000	$2,000	$2,000
5	Net DM revenue	$1,550	$1,430	$1,310	$1,190	$1,070
6	Net legacies	$500	$1,000	$1,500	$2,000	$2,500
7	Net major gifts	$250	$400	$550	$750	$1,000
8	Net FR revenue	$2,300	$2,830	$3,360	$3,940	$4,570

 

Quite a different scenario, no? With intelligent and sustained efforts to secure major gifts and legacies, that quarter-million-name donor file looks much more productive.

 

Despite a dramatic downward trend in the cost-effectiveness of the direct mail program, the overall fundraising program has become far more lucrative, doubling net revenue in 20 years. In fact, the picture presented in this last scenario is a conservative rendering of reality.

 

Of course, direct mail fundraising still doesn’t work at all for some nonprofits -- for example, one that addresses an obscure or difficult issue, possesses an unproven (or uneven) track record, or shows a lack of focus in its mission.

 

However, most nonprofit organizations have found that -- rising costs and competition notwithstanding -- direct mail remains the most cost-effective means to acquire, educate, and cultivate new donors.

 

But today’s harsher reality demands that the whole picture be viewed when analyzing the cost-effectiveness of any direct mail fundraising program. Revenue generated from direct mail-acquired donors through other means can dwarf that from direct mail itself.