Why “Retention Is Cheaper” May Lead Nonprofits Astray…(Pt. 1)
One of the most widely repeated ideas in nonprofit marketing and fundraising goes something like this: it costs far more to acquire a new donor than to retain an existing one.
The claim often appears in presentations and articles, accompanied by a familiar statistic suggesting nonprofits may spend about $1.50 to raise a dollar from a new donor, compared with roughly $0.20 to raise a dollar from an existing one.
At first glance, the conclusion feels obvious. If retention is so much cheaper, why not focus our efforts on that?
To be clear, before going further, retention in the nonprofit sector matters. Loyal supporters help maintain organizations, deepen connections to the mission and are often some of the most important donors, volunteers and advocates. But when we step back and look carefully at the math and the research behind these comparisons and what drives growth, we may be a bit less dogmatic about this metric.
What the statement actually means
When people say acquisition is more expensive than retention, they are usually referring to a common fundraising metric: cost per dollar raised. The math itself appears straightforward. You divide the cost of a campaign by its revenue. Using the commonly cited example, the comparison might look like this:
Retention Campaign Acquisition Campaign
$10,000 cost ÷ $50,000 raised $75,000 cost ÷ $50,000 raised
= $0.20 to raise $1 = $1.50 to raise $1
Looking only at those figures, retention appears dramatically more efficient. But the vulnerability in the data is that this is essentially a mathematical model rather than observed or empirical. Meaning, it is a calculation that is based on assumptions, equations and logic.
So, let’s look more closely at the math. In practice, comparisons between acquisition and retention can encounter two measurement challenges: numerator problems and denominator problems. Let’s look at a couple:
The numerator represents the cost of the campaign. For acquisition programs, those costs, such as advertising, direct mail, events, or outreach to bring new supports into the organization, are often visible and easily accounted.
Costs can be a bit more opaque for retention efforts. For example, these campaigns often rely on infrastructure that already exists. Email platforms, CRM systems, stewardship programs, communications teams, and organizational overhead all help sustain donor relationships. Those costs are real, but they are not always fully allocated when retention efficiency is calculated.
There are other considerations as well. For example, every donor who can be retained was originally acquired through some earlier investment, and these costs are often not factored into the calculation. When the historical acquisition costs are excluded, retention programs can appear less expensive than they truly are.
The denominator, the revenue attributed to the campaign, can introduce its own complications.
Retention programs often count all returning donors of the retention effort. Yet some of those donors may have given again regardless of the campaign. This raises a question of proper attribution. Research suggests donor loyalty exists, although limited. Several benchmark studies report up to 20–30% of first-time donors give again the following year.² ³
A simple illustration
Using the previously mentioned items, the table below shows how the comparison can change when different assumptions are applied to the numerator and denominator.
These figures are illustrative, used simply to demonstrate how the math works. The goal is not to prove a specific cost difference, but to show how sensitive the comparison can be to the assumptions built into the numerator and denominator.
For the purpose illustration, we’ll use 25% as a midpoint assumption for naturally recurring donations - that is, the folks who would have given in any case, regardless of a specific retention campaign. Also, we’ll assume $5000 of shared existing costs to be allocated into the costs.
Retention is still more efficient. But in this example the cost per dollar raised via retention doubled, and you can see how the cost gap begins to narrow. Importantly, this illustration doesn’t begin to account for other impactful influences like previous outreach/contact impact on retention. Also, retention costs are typically calculated only on donors who give again (excluding those who lapse) while acquisition includes all failed attempts. This creates a form of survivorship bias that overstates the efficiency of retention and understates the long-term value of acquisition.
I don’t want to suggest the measurement is completely meaningless. And retention may be more cost efficient than acquisition. Still, it does demonstrate that this one metric is subject to a wide range assumptions that do not make it as concrete as it is sometimes portrayed. More importantly, I fear, the comparison as oft-quoted (i.e. $1.50 for acquisition vs. $.20 for retention), deters and distracts nonprofits away from pursuing the key strategic lever for growth - donor acquisition.
Another, bigger question. If the math behind the acquisition-versus-retention debate is more complicated than it first appears, an important question follows. What does observational and empirical research say about how organizations grow when considering acquisition vs retention?
Next, we’ll step back from the math and look at what research reveals about how organizations grow and why reaching more people may be the necessary ingredient in many nonprofit marketing and development strategies.
I’d love to hear your thoughts and experiences in the math of donor strategies!
References — Part 1
1 Fundraising Effectiveness Project (2023). Fundraising Effectiveness Project Report.
2 Bloomerang (2023). The State of Donor Retention.
This economy is brought to you by the letter K
It’s not news that the U.S. has entered a phase of deep social and political polarization. We continue to argue about topical issues that range Presidential ballrooms, and Bad Bunny v Kid Rock, to tariffs, Iran, and immigration, but, I fear, we are not addressing the key underlying causes. This is about one such cause.
If you have been keeping abreast of recent economic data and analysis, you may have come across the term— “K-shaped” economy. This descriptor appears to have its origins in the early 2000s and the initial impact of 1980s Reagan-era deregulation and economic reorganization.
In essence, the arm of the K (the upper diagonal) signifies the increasing economic wealth and consumption concentrated amongst the wealthiest Americans, while the leg of the K (the lower diagonal) signifies the decreasing economic wealth and consumption concentrated amongst the less wealthy.
(Interestingly, where the three lines intersect is called the “crotch”—reflecting where most of us get kicked on our path to lower wealth and consumption.)
The top 1% of our households now account for 32% of total net worth. According to the Gini Coefficient, which measures relative wealth inequality, we have reached 42 which is a 60-year high in the gap. In addition, current data shows the top 20% of Americans by income make up about 60% of consumer spending. Et voila. Welcome to the K-shaped economy.
So, when headline numbers about national GDP or unemployment or real income growth are presented, they often mask the problem. And one already disproportionately felt by minority communities. Real income is up this quarter! GDP is solid this month! Travel spending is up! These gains are likely being enjoyed by the top quintile in the country. For those of us in the other four quintiles, we are in an “affordability crisis.”
The implications of a K-shaped economy can be profound. History has shown that over time societies don’t tolerate this sort of grand wealth divergence very well. In fact, the historical outcomes of this wealth difference are already manifesting: increasing social and cultural inequalities, declining trust in government and institutions, regulatory capture by the wealthy and elite, eroding civic participation and civil behaviors, and…higher polarization. Generally, the resolutions of these outcomes have ranged from major policy reform (USA 1900s and 1940s) to revolution and civil war (France, 1790s; Russia 1920s) to state collapse (Roman Empire).
Without an aligned vision and concerted policy effort from political leaders, this trend will continue, with meaningful mid- to long-term implications for communities and for nonprofits, particularly 501(c)(3) organizations. First, recognize this is a secular trend. Demand for services continues to grow for the foreseeable future as economic pressures widen. Second, donor concentration will likely intensify as more households face tighter discretionary budgets. And, third, government funding may remain unpredictable as public budgets respond to economic pressure and shifting political priorities.
As we (implore and) wait for policy makers to address these underlying issues, nonprofits should be focusing on building the foundations and systems for sustainability. Strong partnerships and collaborations, diversified revenue streams, distinctive positioning and assets, and broader reach help create the stability and visibility organizations are going to need to sustain their missions.
To dig deeper into the topic, organizations such as The Urban Institute, Brookings, or the Economic Policy Institute - along with Minneapolis resources such as Minnesota Economics Big Data Institute (MEBDI) - research, promote understanding and advocate on this issue.
Let me know what you think! Mike
mike@depauw-co.com