Nonprofits sometimes ask us what the ROI is on a given effort. While ROI is a very important metric, it can be deceptive. If your fundraising goal is to be strictly efficient, then it makes sense to look at ROI. However, a high ROI effort does not necessarily mean it’s producing the most net revenue for your organization.
Yes, I said net revenue. Here are two scenarios to consider:
Scenario 1: Compare two campaigns from a high-volume mailer — both are highly effective.
- Mailing 1: This is a very expensive campaign with a very high response rate (80% greater than Mailing 2). But because the package is so expensive, the ROI is only 1.89.
- Mailing 2: This is a very efficient letter mailing with an average response rate but a strong average gift (95% better than Mailing 1). ROI is 4.30.
With no other information than ROI, you may elect to drop Mailing 1 with its low ROI. But, when we look at the actual net revenue that is produced for the organization, the low ROI mailing is producing 10% more net revenue.
Variance: Mailing 1 to Mailing 2
|Net Income per Name||+83%|
Furthermore, the expensive Mailing 1 was also found to significantly contribute to retention rates, thanks to the high response rate. So, not only would focusing solely on higher ROI negatively impact immediate net revenue, but it could also have a negative impact on retention, which would in turn negatively affect long-term revenue.
Scenario 2: In another example, a relatively new mailer has room in their calendar to add mailings, unlike the organization in Scenario 1. Using the findings from Scenario 1, they simply execute Mailing 2 more frequently across their calendar, which will spread out the high package cost and lower per-piece costs. As expected, this tactic improves retention rates and net revenue. Because each added incremental mailing will have lower performance than the existing mailings year-over-year, ROI will actually decrease by 12%. However, net revenue will increase by 30%.
A Note About Channel: While this post does not address cross-channel attribution, this is another area where looking solely at ROI can be misleading. If your organization raises significant “unattributed” online revenue, your overall digital ROI probably looks very good. However, ROI can be difficult to track by digital effort. Furthermore, the next dollar you spend isn’t likely to raise as much as the last dollar you spent. So, in digital especially, chasing a very high ROI can be a losing proposition. If your digital budget is small, it’s nearly certain you could raise incremental net revenue by increasing your investment in digital — but be prepared for your ROI to go down.
When evaluating your marketing efforts, efficiency is important, but more net revenue means doing more for your mission. Make sure ROI isn’t the only metric you evaluate.
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