How Removing Overhead Can Improve Donation Rates

One number can doom a nonprofit’s fundraising efforts before they even begin.

That number indicates how much of a nonprofit’s budget is allocated to its overhead, which can be found on GuideStar, Charity Navigator and BBB Wise Giving Alliance. A high number can doom a nonprofit’s hopes to raise money. Guidestar recommends that nonprofits spend less than 20 percent of their budget on overhead, which includes administrative and fundraising costs. And if your ratio is higher than the magic number, it may drive potential donors to other organizations.

The Overhead Issue

The three bureaus mentioned above started a campaign called The Overhead Myth to combat some of these problems—but most donors want their money to go towards making a difference, and not Erin in accounting or to pay for postage on fundraising letters.

Is it fair? Not really. All nonprofits have overhead expenses and each require a different amount to run effective organizations and achieve their missions. Cost of living and supplies affect this ratio as well.

As Guidestar points out, program ratios aren’t the last word for how successful a nonprofit is. They tell donors to focus on long-term success and overall impact the nonprofit is making. Despite the campaign against it, the program/overhead ratio is still used by donors to make decisions on where to give their money.

Finding a Different Approach

Almost all nonprofits strive to be as efficient as possible and stretch the dollar as far as they can. Even if you have an acceptable rate, you can still come up on the short end when it comes to donation time. People want to give knowing their money will have a direct, positive impact.

One way to combat this stigma is to promise donors that 100 percent of their donation will go to your mission-focused programming.

Uri Gneezy, an economist at the Rady School of Management at the University of California San Diego, conducted two studies to test the theory that more people will donate if they know their money will go directly to the cause and not overhead.

In the first test, a group of 449 college students were given the choice of donating $100 to two charities (Kids Korps USA and charity: water). The subjects were then provided with variable information saying their donation with either be matched by another donor at either a 1-1 or 3-1 ratio, added to a seed fund or a promise that the donation would go to the cause because another donor covered the overhead. The results proved that removing the overhead makes a large difference. Against the seed fund, mission-focused received 80 percent more donations and it also out-performed the matching donation rate by 94 percent.

Later in the real world, Uri and his research team sent out 40,000 donations requests for an educational charity. The mailings suggested a donation between $20 and $100, and had four different treatments: mission-only giving because overhead had already been covered by a previous donor, matching funds, seed fund and a control group with no special terms attached. The overhead-free group donated $13,220, which was 64 percent more than the amount raised by the control group.

Making it Work for Your Nonprofit

You don’t have to perform any tricks or lie to anyone about the usage of their money. The first task to cover this is to receive enough unrestricted funds to cover your overhead. That sounds simple in theory, but how do you go about doing that?

The first tactic is to approach major donors and ask if they will cover your overhead costs with their donations. This might not be an easy sell right away, as major donors also want the feel-good feelings that come from seeing their money make a direct impact on their favorite charity. If you explain the strategy and find new ways to recognize major donors, they might be more willing to go along with the idea.

Another approach is to use the funds raised by a fundraiser to meet your overhead needs. Either way, once you have enough money to cover your overhead, you can turn your focus to mass appeals to help out with your mission-centric spending.

Donations make people feel all warm and fuzzy inside. So when they know they are making a difference, they will be more likely to give. This can be especially true with first-time donors or people who are more likely to make small donations. The tricky part of this approach is attracting the major donor or pool of donors to cover the overhead costs. Paying for overhead isn’t the sexy side of donations—but if they’re giving more money, chances are they believe in your mission and understand the costs associated with the means that eventually reach the ends. Once donors have an established relationship with your nonprofit they will understand the costs associated with providing the difference-making service.

The important part is to hold up your end of the bargain and be upfront with all donors. Let them know where their money is going, what you are spending it on and the impact it is having. This approach isn’t for everyone, but it can help your nonprofit out from the burdensome overhead number.


Lincoln Arneal

Lincoln Arneal was a Senior Editor at Nonprofit Hub who brought loads of real-world nonprofit experience to the team. He was the past executive director of a nonprofit that provided leadership development to junior high and high school students. He looked to bring the insights from his time forming, developing, and running a nonprofit to help others in their quest to do good. Lincoln also had a legal background and had written for various newspapers (covering high school sports) for the past 15 years. He could be followed on Twitter at @NPLNK.

November 17, 2014

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