Tuesday, December 09, 2014

The Fraud in the Mail from the "Humane" Movement

The Humane Society of the U.S. and the ASPCA paid multi-million dollar fines after being charged with fraud under the Racketeer Influenced and Corrupt Organizations Act (RICO).

PETA's conduct, aka "People for the Ethical Treatment of Animals," is even worse, even if it remains unindicted.

The RSPCA does almost nothing to help dogs and cats, as I have shown before.

How do these outfits make so much money in the mail, and why are they the wrong way to "help" if you are interested in improving the lot of pets?

Let me begin by cutting to the bottom line: Direct mails mills like HSUS, the ASPCA, PETA, and the RSPCA spend 75% of the money they raise in the mail sending out more direct mail.

How can that be so? 

Simple: the primary purpose of direct organizations is to keep their staffs in jobs.

Because the economics of direct mail are so marginal (and always have been) and are very similar, in some aspects, to a Ponzi Scheme, most of the money that comes in has to be spent on paying for more mail to go out.

If you "join" or contribute to one of these outfits, you will be hit up with multiple "special appeals" a year, and perhaps phone calls as well.

If you fail to donate after a year or two, the "charity" will then sell your name and address to another outfit, who will reach out and tap you for some other cause.

Donate even once, and you will be put on a perpetual list of "gullibles" and good luck if you ever hope to get off!

So how does it all work?  

Here's the basic math and operation of a direct mail machine:

  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.

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.

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, the ASPCA, the RSPCA, and PETA are 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."

The direct mail industry describes the system I have laid out here as "prospecting" for members and donors. The analogy is to gold: They put 100 tons of "dirt " (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!

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.

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.

And, of course, you can do more than just milk the living.

Organizations like HSUS, the ASPCA, RSPCA and PETA 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!

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 infrequently.

TO RECAP: Most of the people who write a check to the HSUS, the ASPCA, RSPCA and PETA 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, the ASPCA, the RSPCA, and PETA, and who 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 milked for profit.

And while HSUS, the ASPCA, the RSPCA, and PETA are not unique in this regard, they are distinct in that all four organizations ranks among the largest direct mail mills on earth.

1 comment:

jeffrey thurston said...

...it's why I read this blog- well done. I always wondered how this worked- I knew it (solicitation through mail) was a big fakeout but this piece concisely lays out the whole scam. Beautiful- thanks!