‘Marginal Cost’ can be a useful tool for direct response fundraisers…
In my 16+ years as a direct response fundraiser working both in-house and as a consultant with dozens of charities, I haven’t often heard talk of marginal cost in discussions of expenses. I’m not sure why.
We all know about cost per piece. But if your overall cost per contact is $1.00 and you’re contacting say 100,000 donors, how much more will you spend if you contact another 5,000 donors? Intuitively, we know the answer is not $5,000 because we all understand the concept of economies of scale.
The actual cost of contacting an additional donor will be the marginal cost. To calculate it, you’ll need some understanding of what are your fixed costs (up-front costs you have regardless of quantity) and variable costs (costs that occur on a per contact basis.)
If the example above was a mailing, many of your fixed costs (such as design, the setting up of a printer, etc.) will not change whether you print 100,000 or 105,000. A variable cost would be something like paper or postage. Once you strip the fixed costs from your $1.00 cost per piece, you may find a variable cost closer to perhaps $.50.
So how to use marginal cost? You can use it, for example, in comparing different fundraising tactics. Trying to decide whether to put a group of lapsed donors in the phone or mail? – use marginal cost to determine what your ultimate net revenue from each approach will be.
You should also use marginal cost to determine your contact quantities. Once you know the marginal cost for any kind of appeal, you can do a few simple calculations to calculate break-even points. Are those donors from 3 years ago really worth soliciting? Armed with marginal cost information, you can accurately decide whether or not these donors will be profitable for your organization. (You can of course also use long-term value (LTV) calculations to help your decisions.)
So if you want to dazzle your Board at their next meeting, show them how you’ve used marginal cost calculations to reduce a mailing by 10% and improved your net revenue at the same time…
