Saturday, November 10, 2007

Direct Mail Economics of the Humane Movement

In response to the above post about HSUS being a direct mail machine, "2catmom" asks how I figure that 70-75 cents out of every dollar that folks give in response to a Humane Society of the U.S direct mail letter actually goes to underwrite more direct mail.

She notes that "Charity Navigator," a charity-ranking site, says that "only 13.8% of funds raised [by HSUS] goes to support fundraising, and 79% of funds goes to programs."

Good question! There are two answers to this, the short one and the long one. The short answer gives you the whole story, but the long answer answer gives you the illuminating detail which shows you how HSUS and other direct mail mills work -- and why your grandmother's mail box is always so full.

First the short answer. "Charity Navigator" and most other charity-ranking sites allow organizations to claim most of their direct mail costs as a "program expense."

In fact, a huge portion of what is listed as a "program expense" for HSUS is really nothing more than direct mail costs for paper, printing, postage, name acquisition, and consultants to manage the direct mail machine.

Or, to put it bluntly, HSUS and many other nonprofit organizations lie, and charity ranking sites like "Charity Navigator" simply repeat those lies.

Think about it.

HSUS claims it has nearly 10 million members (Google it) and yet it also says it spends only $11.9 million on fundraising?

Those two number cannot sit on the same page with truth.

You cannot send membership renewal and special appeal letters to 10 million people for the expenses they are quoting for fundraising, much less send out prospect mailings to scores of millions of other people across the U.S. to replace all the HSUS members who will not renew their membership this year and every year (a majority of all new members).

Something is clearly wrong with the numbers on the Charity Navigator site, and as a 25-year veteran nonprofit manager I will tell you where the error is: the fundraising expense number.

These things are known lies and charity-ranking sites like Charity Navigator simply wink at the lie.

Why is this kind of cost-shifting allowed? Good question! All I can say for sure is that it is allowed by folks like Charity Navigator, and even by the IRS on their form 990 reports which are the public records you can get on all 501(c)3 nonprofit organizations.

I suppose this should be no surprise. The direct mail "charity" industry is a multi-billion dollar a year business, and like every other business they have written the law to suit their own ends. Never mind that counting most direct mail costs as a "program" expense is a lie.

All of this reminds me of the old Abraham Lincoln riddle:

  • Honest Abe: How many legs does a dog have if you call the tail a leg?

  • Answer: Four. Calling a tail a leg doesn't make it a leg.

  • The fact that the direct mail industry has spent a lot of time, money and influence
    getting the IRS and folks like Charity Navigator to allow them to call direct mail costs a "program expense" does not make it so.

    What it does do, however, is support the essential truth I made in my earlier post: The core business of many nonprofit organizations really IS direct mail. That IS their "program."

    OK, that's the short answer: They lie. See the Lincoln riddle, above.

    What about the long answer? For that, you might want to have paper and pencil ready, as a little math might be involved.

    The first point to know is that the IRS allows nonprofit groups like HSUS to calculate what "percentage" of their direct mail letters are to be counted as "fundraising."

    The calculations to support these numbers are pretty amusing. If they have a 4-page letter (the average length) which sets out "the problem" for 3.5 pages and asks for a gift in the last half page, then 87 percent of the letter is deemed to be "education" and listed as a "program expense," and only 13 percent or so is deemed to be "fundraising."

    If you think this makes sense, you are ready to join the Washington, D.C. nonprofit direct mail industry.

    In fact, a direct mail letter is no more about "education" than a used care salesman's pitch is about auto mechanics. Both exist for one reason: to close the sale and separate you from your wallet.

    In my earlier post I stressed that HSUS and PETA are not so different from many nonprofit organizations that are banging on your mail box this time of year.

    Because that is so, it's worth spending a little time looking at the economics of direct mail, and explaining how it all really works.

    I think, if you follow my narrative, you will see I am really quite conservative when I say 70 to 75 cents out of every dollar most folks give to HSUS will simply go to paying for more direct mail. The real figure, for the average donor to HSUS, is well over 100 percent.

    1. The lowest-cost direct mail solicitation letter will cost about 50 cents a unit if you are printing and lasering in massive quantities (and I mean really big numbers) and doing everything as cheaply as possible. The names and addresses alone will cost you about 10 cents a unit, plus there is the cost of postage, printing, mail merge (the purging of duplicate names acquired from multiple list-vendors), the cost of lasering the addresses and salutation, etc. The figures I am quoting here are VERY conservative and are not up to date. Real package production numbers are likely to top well over 75 cents a unit by now, even if you are printing in volumes that would shut down a landfill. No matter. Let's use the lower number anyway.

    2. The return rate on "new prospect" direct mail is about 1 percent. This means that out of 100 letters that are sent out, only ONE business reply envelope will come back to the sending organization with a donation in it. For environmentalists out there, this means about 6 pounds of paper (which is generally not recyclable due to the use of gummed stickers, window envelopes, coated stock, and staples) will be sent out in order to raise just ONE direct mail donor for a nonprofit organization.

    3. How much money will this ONE donor give to the organization he joins? Not much. The average direct mail donor to an organization like HSUS will give a gift of $25.

    4. Those with a paper and pencil are, no doubt, trying to figure out how anyone can make money on direct mail. After all, based on the numbers I have quoted here, every person that joins a nonprofit organization like HSUS is actually COSTING that organization $20 to $30 per person. How can that be?

    5. The answer is that HSUS and other direct mail organizations make money by going back to their membership again and again asking them to give more and more money. For example, if you joined the Humane Society of the U.S. last year, you are sure to have received a "Special Appeal" from HSUS asking you to give more more money for the "special" cause of dealing with the Michael Vick dog fighting case (never mind that HSUS had nothing to do with those dogs or that case). Special appeals like this are regular fair for every nonprofit organization, and lightning-fast "creative teams" are hired to hammer out the direct mail copy, produce the art, and get the production out and in the mail in very short order.

    6. The response rates for Special Appeals are much higher than for new-membership solicitation pieces (called acquisition or prospect pieces), but they still garner only a 15 percent response rate for even a very successful program and an excellent appeal. The good news here, however, is that a 15 percent response rate for a Special Appeal is a very cash-positive thing. If the average donation to a Special Appeal is $20, and the special appeal costs $1 a unit (Special Appeals generally costs more than acquisition packages due to smaller print runs), then a $100 investment in a direct mail package sent to 100 new members will generate $300, for a net profit of $200. Since the organization will be sending out four Special Appeals a year, this works out to be $800 in to help defray the $2,500 acquisition cost of adding those 100 new members to the organization's roles in the first place. You still have a massive deficit, but we are making progress at reducing it.

    7. More money comes in from Membership Renewals. An organization like HSUS can expect to have 75 percent of its first-time members never renew. In short, 75 out of 100 first year HSUS members are going to be total economic losses for HSUS. On the other hand, 25 percent of HSUS's membership are likely to renew, so that loser of a 1 percent "prospect" mailing becomes a cash-generating machine when it is recycled as a renewal letter. A renewal package will cost about $1 a unit (due to smaller mailing volumes and higher production costs), but a $100 investment here can be expected to bring in $700 or so, for a total "profit" of $600 per 100-person renewal mailing.

    8. Now, if you are following along, you will see that over time we are recouping our money. Though we had huge costs up front, and a massive negative cash flow that first year, by the second year we are beginning to recover some of our money back. We are still running a massive direct mail deficit, but the numbers are starting to go down.

    9. After two years of Special Appeals and two successful renewal cycles, the surviving member/donor to a direct mail organization will become a cash cow in Year Three -- the cash cow that enables the direct mail machine to pump out more direct mail in perpetuity. If everything has gone perfect, our direct mail progam will now have broken even.

    10. But, you will notice, NOT A DIME has yet gone out to support real program work. What was the initial cause we were raising money for again? Helping dogs and cats? Sorry, that's not yet on the agenda. Not yet. Maybe later. Or maybe never.

    11. Now, if you do a leaf-plot of this, or any other nonprofit direct mail cohort, you will see that the average donor to HSUS is actually costing the organization more than he or she ever donates, and that MORE than 100 percent of the money these folks give (i.e. the majority of all donors to the organization) will see their total donations simply spin down the drain to pay for more direct mail. HSUS is not unique in this regard; this is the way it is with most direct mail "fright factory" organizations asking for "your most generous contribution at this critical time."

    12. The direct mail industry describes the system I have layed out here as "prospecting" for members and donors. The analogy is to gold: They put 100 tons of earth (i.e., the names and addresses of people they have bought from a direct mail list vendor)into the front of their gold-sluicing machine , and then they do a hard wash of the dirt to float off as much of scum as possible. What starts out as a ton of earth is actually 99.99999 percent dirt and 00.000001 percent gold. After one pass through the gold-washing machine, however, the remainder is reduced to 99 percent dirt and 1 percent gold. With each pass through the wash, the amount of dirt goes down, and the amount of gold goes up. You never get much lower than 80 percent dirt and 20 percent gold, but 20 percent gold is the stuff of direct mail dreams. Twenty percent gold? Imagine!

    13. The level of dirt washing that goes on inside a direct mail operation is astounding. Nonprofit donors are analyzed with machines that would make a Comstock gold assayor green with envy. Today computers keep careful tabs on such things as "recency, frequency and monetary," and each donor's "highest gift to date." This data, in turn, is used to determine how large a gift to ask for in the next letter, and how often to send any particular donor another letter asking for more money. The goal of every direct mail factory is to move the donors up the "giving ladder" by increasing the frequency of the giving and the amount of each donation. The theory is that anyone who gives $50 can give $100, and that anyone who gives $100 can give $500, etc.

    14. And, of course, you can do more than just milk the living. Organizations like HSUS have active bequest and planned giving programs too. Bequests are really fine things. After all, the dead never complain too loudly about what you are doing with their money!

    15. What does a nonprofit direct mail mill do with all of its "mill tailings" -- the folks who joined the organization in Year One, but have never given again despite four Special Appeals and three to six Renewal notices after that? The names and address of these folks are bundled up and sold or traded with other direct mail organizations. This is how your name and address migrates from one direct mail organization to another. If you stop giving to HSUS, your name will simply be sold off to the Sierra Club, or NOW, or Mothers Against Drunk Driving. Organizations like HSUS will even sell their active donor lists for a price -- the price determined by a "recency, frequency, monetary" calculation. A list of donors who only give small amounts infrequently will be cheaper than a list of donors who give a little more money a little less frequently.

    TO RECAP: Most of the people who write a check to the HSUS are actually costing the organization more money than they are donating. In this sense, 100 percent of their checks (and then some!) are going down the rat hole of direct mail. The same is true for people who join HSUS, give money to a special appeal, and even renew their membership for a second year of direct mail abuse. The average two-year member/donor to HSUS is still costing the organization more money than it is bringing in by having them on the roles. It is only after someone has been a member of HSUS for MORE than two years that the member moves from being a "direct mail cash calf" that sucks money out of the system into being a direct mail "cash cow" that can be miled for profit.

    And to recap, HSUS is not unique in this regard. The same economic engine is at work inside most nonprofit direct mail mills. The distinction of HSUS is not that it is the only nonprofit direct mail mill out there, but that it is one of the largest direct mail mills on earth.

    More money is sucked up for less use at HSUS than almost any other organization in America.

    Now, to answer a final question: Why do direct mail mills target senior citizens?

    Well, for one thing, senior citizens actually sit and read. Younger people tend to listen to I-Pods, watch TV, and run off to the gym to work out before dashing off to the elementary school to pick up their kids.

    Also, seniors are less likely to be educated (or, if you prefer, they are less sophisticated)and are more trusting than younger people.

    Also, as a population ages, it tends to skew more to women. The older a population is, the more women it will have. While women are not quite as likely to be big donors to an organization as men are, they are more likely to respond to direct mail prospect letters, and they are more likely to be frequent donors as well. Women are also more likely to be influenced by emotion-based direct mail appeals; the kind of appeals that the Animal Right crowd specializes in.

    And then, of course, we have seniors who donate to charities because it means at least something can be found in their mail box a couple of times a week. You would be surprised how many lonely old people out there thrill at getting something in the mail that is actually addressed to them. Their own kids never write. At least that nice-looking Mr. Pacelle does.

    And so there it is. That's how it works.

    If Wayne Pacelle or anyone at HSUS wants to go over specific HSUS numbers with me, I am more than happy to do so, as I work right around the corner from their office in Washington, D.C., and I would be only too happy to drop by to pick up a copy of their accounting ledgers.

    In fact, if Mr. Pacelle will give me a copy of their raw direct mail expense and income data (not the processed IRS-990 data, but the real numbers showing the costs of postage, printing, paper, creative consultants, cost of caging operations, etc), I will buy him lunch and we can go over the data and run a cohort analysis to figure out how long it takes for a HSUS member to "go green" and get out of the red.

    My only stipulation is that after I run the data, I can publicize it. After all, who knew truth to suffer in a free and open investigation?

    If am wrong about the fact that 70-75% of all HSUS direct mail money is going out to pay for more direct mail, I will be more than happy to report my error. After all, as Charles Barkley so famously said, "I could be wrong . . . but I doubt it."


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