Making the Most of Your FSP Investment
As the donor public has been focused on nonprofit overhead in recent months, it seems that nonprofits have in turn been focusing on their costs to raise money. That’s perfectly logical and wise, but this has generated a lot of questions and misunderstandings about what and how consultants or agencies charge.
Following is some information you need to know when considering using an outside resource for fundraising assistance. (And, no, this isn’t an argument that one method is better than another.)
Let’s get three things out of the way. First, for the sake of this article, I’m going to use the acronym FSP (fundraising service provider) to refer to consultants, agencies, trusted partners, vendors or any other nomenclature you (or they) want to use to describe this resource. Trying to be politically correct by constantly including all the possible titles would be too taxing.
Secondly, I am an FSP. I’ve worked for two agencies — one at the beginning of my career and one more recently — and currently own a one-person consulting company. I also worked for nonprofit organizations (NPOs) for nearly three decades. So I like to think that this background gives me at least a little insight into both sides of the aisle, as it were.
Thirdly, FSPs all have expenses to cover, just like your NPO. They pay salaries and benefits, have utility bills, and have to buy paper and ink for the printer and copier.
Unlike an NPO, they exist to make a profit. This may be the expectation of the owner(s), and in some cases it is the obligation that company has to its shareholders. No matter how much the staff loves your mission, if an FSP isn’t making money by working for you, it won’t remain in business if it keeps working for you.
FSPs have different ways of pricing their services to you, their NPO client. Following are explanations of several ways. This may not be an exhaustive list, but it represents billing strategies that I have encountered in the past. An FSP may use multiple methods or just one.
Flat rate or ‘menu’ pricing
When you go to a restaurant, the menu lists the food offered and shows how much it costs. You pay $6.99 for the daily special or $5.25 for the budget breakfast. You can see what you’re getting and what it costs by reading the menu. If you want to make a change — for example, you want the budget breakfast, but you want two eggs instead of one — you pay an extra charge.
For your FSP, that’s menu pricing. Want a two-page appeal letter with one round of edits? That’s this price. Want an e-blast? That’s this amount. Oh, you want two rounds of edits, not one? No problem — but there will be an additional charge.
An FSP may charge by the hour (or an increment thereof). Often it will be able to give you an idea of what doing a specific job will most likely run in terms of hours (and therefore cost), assuming you don’t ask for something that is outside the norm.
‘Not to exceed’ fee
This is closely related to the hourly fee, except that it has a cap on it. Basically, your FSP says it will provide you with X for a price not to exceed $Y.
Your FSP may charge a monthly retainer. This is the fee that covers all the conversations you have that are not related to a specific job. It may provide access to a certain amount of time from its senior leadership. It could include a quarterly review and a semiannual strategy meeting. This prevents your FSP from having to bill you for that six-minute call you made to ask a question.
Here’s where it’s easy to get confused. (Trust me, it took me years to really understand this.) The FSP may mark up the cost of certain items — usually printing, mail services, list rental, media airtime, ad space, online ad buys, etc. FSPs seldom add markup to travel, or to postage and other things that do not require an investment of their time.
The confusion is that frequently FSPs will tell you they mark up 15 percent (could be more or less; 15 percent is often the standard). But it’s not always how you and I might think of 15 percent because the FSP wants to earn 15 percent of what it bills you. So it’s actually a 17.65 percent markup. No, the FSP folks are not liars. It’s just math. Here’s how it works, using a hypothetical $100 invoice from a printer:
- $100 printer invoice + 15 percent markup = $115 billed to NPO
- FSP pays $100 to printer, keeps $15. That means it earns $15 on a $115 invoice.
- $15 is 13 percent of $115, meaning the FSP’s profit margin is only 13 percent, not 15 percent.
So, instead of adding 15 percent to the invoice, the FSP adds 17.65 percent. Here’s why:
- $100 printer invoice + 17.65 percent markup = $117.65 billed to NPO
- FSP pays $100 to printer, keeps $17.65, earning $17.65 on a $117.65 invoice
- $17.65 is 15 percent of $117.65, meaning the FSP’s profit margin is 15 percent
While in this example the difference is only $2.65, when you’re talking invoices in the thousands, this can add up to a significant amount.
Cost per thousand
For some work, the FSP will quote a price that is per thousand, as in, “The letter in the mail will be $ZZZ per thousand.” Basically, you are not seeing the math that goes into figuring this calculation, but in that fee is the cost of raw materials (paper and ink, for example, with a mailing) plus the profit the FSP needs to make to remain in business.
Pricing tied to using a specific service provider chosen by the FSP
An FSP may require you to use a certain printer, mailer, designer, etc., and often you directly pay that service provider; your FSP is not adding a markup. However, remember that the FSP is in business to make a profit — so what’s happening here?
Quite likely, the FSP may have an agreement with the service provider that states that the service provider will pay the FSP a share of the profits on any work the FSP sends to that provider. And since the service provider is also in business to make a profit, that provider has added to the price it is charging you both the profit it needs to make and the portion of the invoiced amount that it must then pay to the FSP.
Ongoing user charge or license fee
This is infrequent, but I have seen it (and paid it). Basically, an FSP offers to provide something to you at no or a very low charge for one-time use. If it works and you want to use it again, you pay a few cents for every usage.
For example, a writer wrote an acquisition letter but didn’t charge the NPO where I worked. Our contract stated that I could mail 25,000 copies of that letter. If the results were good and I wanted to mail it again, I would pay 2 cents for every letter I mailed. My initial risk was $0, and the writer’s risk was the cost of his time to write a letter.
But since the letter worked, every time I mailed it again, I paid a few pennies for every piece in the mail. When I mailed it to 50,000 prospects, he made $1,000. If it worked really well and I mailed it to 250,000 prospects, he made $5,000. He gambled his initial time and had the potential to earn far more than his initial investment of time over months and years.
I include this so I don’t leave someone wondering, but the bottom line is that percentage-based pricing is considered unethical by the Association of Fundraising Professionals. It is not illegal. But since it can cause a person to, in the worst case, exploit a potential donor, it is considered unethical. For example, if I know I will earn 5 percent for every dollar I earn going door to door for your NPO, I may not be as honest as I should be, and I may try to take advantage of someone to get a larger donation (so I get a larger paycheck). If you want to learn more about this subject, you can read the AFP’s position paper here.
The bottom line is that your FSP cannot afford to work for your NPO without making a profit; somehow, someway, it is being compensated. None of the ways described above (except percentage-based) is wrong; they are just different means to accomplish the same end. You need to choose FSPs with pricing models that make sense to you and you feel best represent the interests of your NPO.
This subject can sometimes be an uncomfortable one for NPOs to discuss with their FSPs, or when you do discuss it you can end up more confused than enlightened, so let’s shine a light on it together.
Following are a few more thoughts to help you manage FSPs for the greatest benefit to your nonprofit.
1. The lowest cost may not be in the best interest of your nonprofit. There are two things to keep in mind. First, part of what an FSP is selling is experience. Someone with less experience may charge less. So, in addition to looking at price, you also have to determine the depth of experience you need.
Secondly, a large firm has a variety of experience on its staff. If you negotiate a lower price, you may have access to less experienced people. That could be fine, but you need to know what you’re “buying” as you discuss pricing.
2. Using an FSP can be a wonderful investment for your nonprofit. An FSP can help you do something that you don’t have the time (or expertise) to do yourself. FSPs often look more objectively at your programs and help you “repackage” them in more compelling ways. They can help you better target your message to smaller segments of donors.
3. An FSP can challenge the status quo. Sometimes we hire an FSP because we want change — but when we see what change looks like, we panic. It’s easy to get in a comfort zone and start saying things like, “Oh, but our donors are different …” and “Our donors would never go for that.” The FSP you choose should have depth of experience and a good handle on the overall fundraising market. But if you don’t trust your FSP’s people, you won’t truly benefit from their knowledge.
4. FSPs will only be as good as you let them be. Withholding important information (often unintentionally), taking a committee approach to editing or ignoring best practices are all within your purview, but they will make your investment in your FSP less effective. Make sure you are ready to let go a bit before you invest in outside counsel. You’ll want to share information about your donor profile, past successes and failures (and believe me, we all have them!), organizational foibles, and the unnegotiables.
5. An FSP is not a cure-all. Mission creep, a lack of vision, poor program performance, an aging donor file or a myriad of other issues need to be addressed, but simply throwing an FSP at them won’t make them go away. An FSP can help you identify these problems and work out solutions, but things won’t really change unless your NPO has the organizational fortitude needed to bring about the transformation.
The most important thing to remember is that when it comes to hiring FSPs, clear communication is critical. You need to understand their strengths and limitations as well as their pricing structures, and the FSP needs to understand your organization’s needs and what you want to accomplish from the relationship.
Otherwise, the relationship is headed for failure.
Getting the best value
There is simply too much to do in fundraising today — personal visits, legacy societies, direct mail, e-mail campaigns, newsletters (on- and offline), events, websites, telemarketing … and the list can go on and on.
Very few of us can be experts in all of these. The smart professional knows when to ask for help rather than trying to do it all alone. But the smartest professional makes sure that the money being spent on FSPs — and yes, internal-only projects, too — is a good investment that ultimately raises money to carry out the mission.
I use the word “ultimately” deliberately because we learn early in our fundraising careers that acquiring new donors most often is done at a net loss. But over time, the donors who continue to give pay back our initial investment and provide a steady stream of ongoing income to fund programs and overhead. (That’s why calculating the long-term value of donors by acquisition source matters.)
So to bring this all together, here are some reminders as you work with FSPs to increase your income and ultimately further advance your mission.
1. If it seems too good to be true, it is. Remember that FSPs are generally for-profit companies. That means they are making a profit. You need to understand their profit models. There are many models, but some may make more sense for your nonprofit or be better aligned with your board members’ expectations. Make sure you know and understand the terminology used and are comfortable with the compensation you are paying to an FSP.
2. Bringing in the right FSP can be very beneficial to your nonprofit. Some of us like to be martyrs. “I can do it myself!” is our battle cry. But sometimes, we can’t. There may be an area that holds a great deal of promise that we aren’t (yet) proficient in. Or, if we take on anything else, we risk mistakes that ultimately can backfire on us.
Another reality in fundraising is turnover. As professionals, committed to a mission, we have an obligation to document important pieces of the job so if we aren’t around one day, the nonprofit can continue. I once had a boss who constantly asked me to document things “in case you are hit by a bus tonight.” Not a happy thought (at least not for me — for him, who knows?!), but very valid. Finding time to ensure your programs can continue almost without a hiccup if you are gone for any reason may be resolved by turning some work over to an FSP.
3. If an FSP isn’t returning value to your nonprofit, find an alternative solution. Don’t keep wasting money — but also don’t terminate an arrangement with an FSP unless you have a plan in place to continue that program via another means.
Not recontracting with the FSP that is writing, designing, printing and mailing your monthly direct-mail appeals, for example, without having a solid strategy for continuing to get direct mail of the same (or better) quality isn’t thrifty — it’s organizational suicide. The same applies to your e-mail provider, website manager or any other task you are using an FSP to complete.
Find an alternative (or know how you are going to get it done with your existing staff) before terminating an FSP. The money you raise is about your mission; your decision needs to be based on how you can return more money for the mission. That’s our bottom line as fundraisers.
Regardless of what we were promised 30 years ago, we are far from a paperless society. We still get massive proposals from FSPs and equally massive contracts, often in a font size that we all know would be death to a direct-mail appeal. Understanding what you are paying and the products and services that will be delivered for your investment demands an investment of time — something fundraisers have far too little of. But truly understanding how an FSP is being compensated matters. Don’t be wowed by flashy presentations and overpriced meals; you owe it to your donors to invest their dollars in FSPs who will help you return more dollars to your nonprofit for accomplishing the mission. And that requires comprehending the profit model of your FSPs.