An Economist’s Projections for How a New Charity’s Fundraising Would Fare in the Long Run

August 16, 2012 | Read Time: 4 minutes

The Disabled National Veterans Foundation was set up in 2007 by six female veterans to provide services to sick and wounded veterans. The president is Precilla Landry Wilkewitz, a Vietnam War veteran who holds a prominent position with the Veterans of Foreign Wars.

The disabled veterans charity signed a seven-year contract naming Brickmill Marketing Services, a subsidiary of the direct-marketing firm Quadriga Art, its fundraising consultant. The company agreed to advance the money that was needed to get the direct-mail operations off the ground—and DVNF agreed to pay the company back out of an escrow fund that would hold the fundraising proceeds.

Following a CNN exposé, the Senate Finance Committee opened an investigation into DVNF in May. Sens. Max Baucus, the committee’s Democratic chairman, and Richard Burr, the senior Republican on the Veterans Committee, said they were concerned the group was spending most of the money it raised on Quadriga and Brickmill and little on direct services to veterans.

Expert Opinion

In its defense, the charity has cited an expert opinion written in 2010 by Richard Steinberg, a professor of economics, philanthropic studies, and public affairs at Indiana University-Purdue University—who was paid by the Disabled National Veterans Foundation lawyer, Errol Copilevitz, to write the report.

He made the following points:

It takes big money to recruit donors. After the foundation started in 2008, Brickmill coordinated two mailings to about 3.6 million people. Each contained a small gift—known in the direct-mail business as a premium—a request for donations, and information about DVNF. The mailings resulted in 528,049 donations from an estimated 496,000 people—a roughly14-percent response rate. (According to a fundraising expert cited by Mr. Steinberg, an acceptable response rate for a mailing to recruit new donors is between 0.5 percent and 2.5 percent.) All those who gave more than $10 were put on the charity’s list for future appeals. More than 1.9 million additional packages were sent to them during 2008, resulting in 223,512 additional donations.

Appeals weren’t only focused on fundraising. They also included a call to action—for example, “Remember, let people see you proudly wearing your Patriotic T-shirt reminding everyone that we must honor our veterans. They’ll follow your example, caring for our veterans!”

Expensive premiums produced better donation results. Some of the charity’s mailings were expensive because they included costly premiums. For example, it cost $3.31, including packaging and postage, to mail a fleece blanket and $2.89 to mail a large calculator and planner. However, in 2008 mailings, they generally attracted a bigger share of donors to give than low-cost premiums like mugs or notepads. One third of previous donors who received the calculator responded with a donation, earning the company $2.60 after expenses. However, some mailings sent with premiums in 2010 failed. One that sent a blanket and slipper socks lost $305,000, and two mailings sent the same day, one with a thermometer and another with a flag and flag pin, lost $71,000.

Financial losses early would be erased later and turned into big revenue. Over all, the 2008 direct-mail campaigns lost money. They brought in $11.2-million but cost $18-million. However, mailings to previous donors were profitable. They cost $3.2-million and raised $3.5-million. In 2009, the charity spent $7.4-million to solicit previous donors, raising $10.1-million. Mr. Steinberg, who has developed a formula for calculating the lifetime value of donors, projects that the 2008 donors will generate about $6.6-million in net revenues through 2033 (though he did additional calculations showing that figure could be as low as $74,000 or as high as $23-million under different scenarios).

Charity should have spent more. Under a mathematical test that Mr. Steinberg developed, DVNF would have raised more money if it had increased its spending on repeat donors in 2009. Every extra dollar spent would have raised $1.58, providing 58 cents more in proceeds.

Mr. Steinberg’s conclusion: Data from the first two years of the contract are “highly encouraging. There is no evidence suggesting campaign expenditures are excessive.”

DVNF Today

DVNF, which has six full-time staff members, has accumulated 2 million donors since it began, a figure that the charity and Quadriga say shows that its direct-mail strategy has been successful.

However, the group’s debts keep mounting. It reported net liabilities of $6.1-million on its 2008 Form 990 tax form, a figure that had grown to $15.5-million on its 2011 form.

The charity owes $1.46-million to Brickmill, which offers database management and other services, and almost $15.6-million to Quadriga, which produces and packages the premiums that are included in mailings, a Quadriga spokeswoman said.

According to its 2011 audited financial statements, DVNF raised $20-million from its direct-mail campaigns. However, it spent less than 2 percent of that on direct services to veterans—about $344,000 in grants. (For example, the charity provides awards of up to $1,000 to help veterans avoid homelessness and grants to other groups that help veterans.)

It reported receiving $8.8-million in donated goods like hygiene products, blankets, hand sanitizers, candy, and cough drops from Charity Services International, a group that specializes in directing such product donations to charities. That amount accounted for close to half of the $19-million that DVNF reported spending on program services in 2011. It also listed as program costs $9.5-million that it spent on direct mail that included an educational message.

Raegan Rivers, DVNF’s chief administrative officer, said in an e-mail that DVNF expects to reach “a point of self-sufficiency in the next five years,” adding that the group was expanding its fundraising strategies to include planned giving, corporate giving, and e-mail and online campaigns.