Do people prefer when others pay for a nonprofits’ administrative costs?

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Greg Warner is CEO and Founder of MarketSmart, a revolutionary marketing software and services firm that helps nonprofits raise more for less. In 2012 Greg coined the phrase “Engagement Fundraising” to encapsulate his breakthrough fundraising formula for achieving extraordinary results. Using their own innovative strategies and technologies, MarketSmart helps fundraisers around the world zero in on the donors most ready to support their organizations and institutions with major and legacy gifts.

nonprofits administrative costsI know, I know… Dan Pallota thinks charities need a defense council to inform the public that administrative costs are a necessary part of a nonprofit structure. He wants supporters to accept that fact and understand that they must pay for their favorite charity’s administrative costs.
If you don’t know Dan, he gave us all a jolt in his famous TedTalk in which he discussed the need to defend the nonprofit sector. Throughout his presentation, he basically said supporters need to recognize that a nonprofit’s administrative costs should be paid for by donors and donors should accept that fact.
I was very excited when I first saw that video. But then I started feeling a nagging discomfort about it. I couldn’t put my finger on it for a while. But now I’m convinced that Dan’s call for a defense of administrative costs simply won’t work. Donors won’t accept the concept. They just won’t.
And, finally, I believe some smart folks at the University of California, San Diego (Uri Gneezy, Elizabeth Keenan, and Ayelet Gneezy) might have support for my discomfort.
They sent 4 appeals to a rented list of 40,000 people. Here are the results:
 
Appeal #1 – Described the project
Appeal #2 – Described the project and mentioned that a donor already gave seed money ($10,000) to support it
Appeal #3 – Same as #2 but offered a 1-to-1 match up to $10,000
Appeal #4 – Said a donor already gave “a grant in the amount of $10,000 to cover all the overhead costs associated with raising the needed donations.”
 
Even though #2, #3 and #4 are basically the same, which appeal won?  #4!
And, not only did it win, but it crushed the others garnering a response rate that was nearly 3 times better than the control with gift amounts almost 17% higher. And, compared with #2 and #3, although there was no sizable increase in gift amounts, the response rate for #4 (the grant appeal) were almost double compared with both of the others.
 
What does this mean?
I’m reading between the lines thinking that supporters don’t want to pay for administrative costs. They do, however, like when others pay for them entirely.
In other words, they don’t really want to see the sausages get made and they don’t want to pay for the costs of making them. They just want to eat it and they just want the sausages to taste good!
I like what Dan is saying but I don’t think we will ever be able to convince donors that they need to understand all of this stuff. You just can’t push it on them. Most of them just don’t want their donations to pay for overhead. They don’t want to be bothered with our drama. They just want to give and see results from their gifts.
A bit frustrating, right? So what should we do?
Here’s an idea:

  1. Take unrestricted gifts. Put them in an endowment. Manage the endowment well. Use the revenue from the growth/interest to fund administrative costs.
  2. Get more money to grow the endowment and your nonprofit’s administrative costs. Tell supporters what you are doing. Invite some to help further the funding of administrative costs. 
  3. Maybe even change your donation form to suggest a “tip” (the same way we tip waiters at restaurants).  The suggested contribution to overhead costs is 15% but give the donor the choice to select from the following: 
  • 100% supports administrative costs
  • 50% supports administrative costs
  • 25% supports administrative costs
  • 20% supports administrative costs
  • 15% supports administrative costs
  • 10% supports administrative costs
  • 5% supports administrative costs
  • Other %______
  • No contribution to administrative costs

 
Crazy or creative?
 

See Also:

>> What fundraisers can learn from restaurants and waiters
 

LEAVE YOUR COMMENTS BELOW!

6 responses to “Do people prefer when others pay for a nonprofits’ administrative costs?”

  1. kt says:

    Word. This illustrates the impact of behavioral economics in fundraising.

  2. It’s creative, but my own nagging feeling is that unrestricted gift donors, in the current mindset, will not be pleased to learn 100% of their gifts will go to administrative expenses. This, coupled with the fact that unrestricted gifts are becoming more
    scarce because increasingly, donors want to direct how their gifts are used, and we
    are back where we started. Personally, I think Ted is on the right track. Charities
    must invest wisely in their fundraising and this takes some risk and creativity….and there is a cost. Educating donors on what it takes to effectively raise the huge sums of money required for social capital today is essential. Disguising the true costs by providing for administrative costs through separate funds, and claiming that “!00% of your donations go to the cause”, seems rather like smoke and mirrors.
    Great discussion topic!

  3. one of your best, Greg…. I agree 100%.
    I don’t like to see very small or very new nonprofits starting an endowment…yet… so wouldn’t go there for some clients…. but they can ALL pay admin costs out of unrestricted! and can still honestly say that “special donors have already provided funds to cover the overhead costs associated with raising the needed donations.” so that all gifts earmarked for XXX will go directly to that project”…. or something like that!

  4. Greg Warner says:

    Thanks Margie. If they do that, they will get double the donations (at least if the success of Appeal #4 repeats itself).

  5. Scott Park says:

    Creative. What impresses me the most about your suggestion is that you’re giving the donor a choice. By putting them in control of their dollars, irrespective to the size of their gift, will most likely encourage more and larger gifts.

  6. Greg Warner says:

    Thanks Scott. Of course, I always think we should put the donor first.

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