Philanthropy
The Charitable Giving Market is Efficient After All
“The charitable giving market is highly inefficient.” In the five years I’ve been writing about philanthropy I’ve used that phrase, or at least that sentiment, more times than I could possibly count. That’s not a blinding insight on my part by any means—it long predates me and is a view shared by many who are working to improve the sector. The premise is that in well-functioning markets, capital moves to where it gets the best return. People or organizations who don’t generate a high enough return find it increasingly hard to raise funds... (continue reading this post)
“The charitable giving market is highly inefficient.” In the five years I’ve been writing about philanthropy I’ve used that phrase, or at least that sentiment, more times than I could possibly count. That’s not a blinding insight on my part by any means—it long predates me and is a view shared by many who are working to improve the sector.
The premise is that in well-functioning markets, capital moves to where it gets the best return. People or organizations who don’t generate a high enough return find it increasingly hard to raise funds, while those who produce high returns find it increasingly easier to find the funding they need. You don’t have to spend long looking to conclude that’s not the case in philanthropy. Nonprofits that aren’t very good at what they do can raise huge sums while highly effective programs struggle to get by.
I was a true believer of this perspective until a few months ago. While reviewing the work of a client, Hope Consulting, which had just completed one of the most comprehensive surveys of donor behavior and thinking for many years, it suddenly struck me: donors are getting exactly what they want from their charitable giving. In other words, the market is in fact efficient, even highly so.
That conclusion came from several data points from the Hope Consulting study, Money for Good. First, it showed how truly loyal donors are. Specifically, donors say that more than 80% of their giving is completely loyal—they will give to the same organizations year after year. If that sounds high, it is. In the consumer market, 80% loyalty is unheard of. A recent study of consumer brand loyalty found that the average brand lost a third of their most loyal customers every year.
The Hope Consulting study also asked donors about the overlap between what they viewed as important and how well nonprofits were performing. The only significant gap between the two measures was in frequency of solicitation. But donors thought that nonprofits were performing extremely well in terms of leadership quality and effectiveness.
When you contrast these responses with the well-documented falling public trust in nonprofits, it becomes clear that donors are living in Lake Wobegon. While they recognize there are ineffective and wasteful nonprofits, they believe that all of the nonprofits they support are above average. In other words, by and large donors are getting exactly what they want from the nonprofits they support—that’s an efficient market.
For those who think charitable giving could be accomplishing much more than it is, this is a sobering realization. It means the challenge isn’t getting donors better information so they can choose the charities that are more closely matched with what they want.
The challenge is changing what donors want.
If you’re committed to trying to get more money to the most effective nonprofits that means approaching the issue more like global warming than like consumer finance reform. In the latter case, the issue is incomplete and misleading information (if consumers got their hands on understandable, reliable information they wouldn’t choose mortgages that would force them into bankruptcy). Helping people do something about global warming, though, is about far more than information. It’s about changing fundamental attitudes, expectations and behavior patterns.
And that’s an even more daunting challenge than making the charitable giving market more efficient.
Tim Ogden is Executive Partner at Sona Partners, a thought leadership communications firm. He has edited 4 books on the intersection of business strategy and technology published by Harvard Business School Press and co-authored or ghostwritten several articles for Harvard Business Review. He is frequently quoted in the Wall Street Journal, New York Times, and Financial Times. You can follow him on Twitter: @philaction or @timothyogden.
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COMMENTS
BY Ken Berger
ON August 25, 2010 10:10 AM
Tim,
The problem is both. We need to change donor’s thinking AS WELL AS the fact that there is an inadequate amount of data on nonprofit performance. As my colleague Steve Goldberg has observed, the Hope Consulting study gave a good snap shot of what is a rational decision on the part of donors given current realities, but that does not mean that donors wouldn’t behave differently when good information on performance becomes available (and many of us are working on achieving that goal). After all, didn’t the survey indicate that the majority of donors ARE interested in performance? The fact that they don’t follow through on that interest is not always evidence of cognitive dissonance, it can also reflect the fact that there is nowhere to go to get what they need to know!
Ken Berger, Charity Navigator
BY Kirk Craig
ON August 26, 2010 01:27 PM
Tim,
Thanks for the good read.
2 thoughts
1. Who decides what consumers (donors) should want? And why?
2. How’s the family? How often do you get down to see Kirk? I served with him 2 years in Bolivia.
Kirk
BY Stevan Trooboff
ON August 26, 2010 01:33 PM
Tim,
Supporting a charity becuase you beleive in that charity is like supporting your children because they are your children. Even in the face of poor performance data, and in spite of pretty strong doses of reality feedback, parents often find it difficult to separate love from facts. There is a tendency for parents, especially in this generation, to persist in unrealistic expectations for their children way beyond any rational level of good judgment. Of course, you can argue, that’s love and parenthood.
The parallel in charity and fund rasising is that those things we believe and care about, the causes we love like the kids we love, we contribute to. To some exent, our contribution is less about supporting the particular organization and it’s effectiveness quotient, and more about investing in those things we believe in, even if the perforamcne outcome is less than perfect. Given this reality, perhaps there is another way to think about fund raising and performance outcomes.
It’s always seemed to me that in charities, there are really two businesses that need to be run in parallel. For most, business one is raising money. This generally has something to do with the work of the organization, but in many cases it’s more about donor marketing, selling the sizzle of the work of the organization and tapping into people’s intellectual and emotional ties to the charity’s cause. This is probably more true when the funding is consumer than foundation oriented, although even the latter groups are very susceptable to emotional presentation.
The second task of the organization is performance, actually doing something. This area is more complex, the metrics variable and the donor often not interested in these details except in the largest sense. Trying to tie the two tasks together is often a mistake. So, rather than trying to change market perceptions and tie together performance and funding, which might be good in some categories of funding but not others, let’s parse these two areas and treat each separately linking them only as required.
My two cents.
Steve Trooboff
BY Mary Shirley
ON August 26, 2010 07:55 PM
Okay, but you’re operating under the assumption that donors make their decisions based solely on rational thinking. What about the well-documented studies (2006, Dr. Antoine Bechara) of traumatic brain injury victims who have had their emotion centers in the brain damaged? Thinking and functioning of his subjects remained normal, but they become unable to make a decision!
What I’m getting at is that donors don’t make their decisions based on cold, hard facts. Numbers, measurables, data—that may or may not sway their decision to give or not to give. So nonprofit funding is based on something far more complicated than a measure of effectiveness—not that “effectiveness” is necessarily an easy thing to measure.
BY Greg Ulrich
ON August 27, 2010 06:19 PM
Tim, very nice post. As the author of the Money for Good work, I thought I would put in my two cents on this article and some of the comments.
Tim, in short I agree with your post. In Ken’s comment he says that we need to change donor’s thinking and to improve the information on nonprofit performance – and I also agree with this, with some additional context. There are certainly donors out there for whom better information will be both welcomed and immediately used, and even addressing the needs of just the 3% of donors who currently use information on nonprofit performance to determine which nonprofit is the “best” can influence >$5B in giving each year. But overall, I fear that getting donors to “behave differently when good information on performance becomes available” is going to be a long, uphill battle. I say that for three main reasons.
First, as Steve and Mary allude to in their posts, most donors don’t give because of a nonprofit’s performance. There are many reasons why people give to charities. In fact, we measured the importance of different drivers of donor decision-making and found out that drivers related to “impact” or performance (such as giving to the most effective organization, or to fund underserved causes) came out in the middle of the pack. The attributes that are most important to donors overall (caring about the cause, impact of the organization/cause on a loved one, etc) don’t have a lot to do with data or information.
Second, donors do not appear to have significant unmet needs around the giving experience (this, I believe, is the main jist of Tim’s post). The way that we typically think about future opportunities is that they map to major unmet consumer needs. People often say that “no one knew they wanted an iPod until they had one”, but in fact consumers could point to pain points such as “my CD’s skip when I run with my portable CD player” or “its annoying to have to lug around all my music” - needs that the iPod met. In the case of giving, we found that donors believe that nonprofits are performing reasonably well on the dimensions that are important to them. Donors don’t see a burning platform for change.
Finally, if donors were looking for more information but not finding it, we would expect to see more activity around looking for but not finding information (e.g., more efforts to seek information, and more dissatisfaction around the lack of good information). Instead, we see only a third of donors doing any research at all, on any gift in the course of a calendar year, and little dissatisfaction around this state of affairs.
Now, while I believe that for the reasons above that this will be an uphill battle, I also believe that we need better information on nonprofit performance, and that getting donors to use that information is important and meaningful work (Charity Navigator “2.0” is a good example of this). But given the challenges we face today, we just have to be very thoughtful about what types of information, in what package, and delivered through which channel, will cause donors to really use this information to make more informed giving decisions. And figuring that out begins with a solid understanding of donor’s needs and giving behaviors.
Greg Ulrich
BY melissa@sceneeast.com
ON August 28, 2010 06:44 AM
As a pure business person who has written many checks to nonprofits, I am trying to get my arms around this issue. Multiple trips to Africa and site visits to the nonprofits I support illustrate my point: for every perceived or real need, there are too many groups trying to do exactly the same thing. Most are sub-scale and don’t benefit from any operating efficiencies or improved clout with suppliers, local politicians or other constituents, and they don’t have the financial strength to be able to afford to hire top-notch operating and fundraising talent. It seems that they get in each other’s way and diminish the credibility of the overall effort.
I am a longtime financial analyst and I know how to look at a company’s operating results, financial position and competitive strengths/weaknesses to determine if they are optimizing their return on capital vs their cost of capital. As a nonprofit donor—even where I am increasingly involved on the ground with a group’s mission—I have no idea how to do this. Can anyone provide direction for a donor trying to take a more businesslike approach to this?
BY Diana
ON September 1, 2010 10:53 AM
Tim,
Please keep in mind it shouldn’t be about quantity but quality. If a charity can make a difference in one persons life, that has a ripple effect. That person may be the person who will change the lives of many in some other way all because they had been helped by that charity. What we measure shouldn’t always be about money and profits but in the gains we make in society and human life as well.
BY Kim
ON October 5, 2010 08:15 AM
Until my job required that I start to look at charitable giving options I did not even know that a great organization like Charity Navigator existed. Research findings aside, I think many of us would appreciate the resources to analyze a given charity but we simply don’t know about them and don’t have the time to go out looking for them. Our lifestyles are so hectic that we just want something to be simple and not require hours of research. So a subject that touches our personal and internal value system is going to also move us to donate. We “hope” that there is follow through and that the organization is good at what they do. I don’t think it meas we are “satisfied” by the experience but that we have learned to accept what we can get.