Shining a Light on the True Cost
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.
I've been enjoying the summer and feel relaxed and strong enough to tackle this subject. No, this isn't an argument that one method is better or even that another pricing model is evil. Rather, here's information you need to know when you're considering using an outside resource for fundraising assistance.
Let's get three things out of the way. First, for the sake of this article, I am 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'd 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 change.
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, 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 wanted to mail it to 250,000 prospects, he made $5,000. He gambled his initial time and had a 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 by clicking here.
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.
There's more to be said on this subject, so this old dog will continue it next week in this column. Also, if you send a question or comment to me at Pamela@pjbardeninc.com, I will try to answer it or may include it in a third column.
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.