In my fundraising role I lived off the ROI measure for a good part of my nonprofit fundraising career. It was ROI, ROI, ROI when introducing, measuring, or reporting on the results of a campaign. But is ROI the best measure of success? No. Let me repeat this: NO! ROI measures efficiency only in regards to the fundraising campaign. This is too narrow a measure in determining the impact of funds raised.
The ROI measure looks at nonprofit fundraising income against the cost of acquiring donations. In this silo, based on the type of fundraising used, ROI results can be incredible especially when compared to for-profit returns. However just because a nonprofit raises a million dollars while only allocating costs of $200,000, a 400% ROI, does not truly reveal how effective a nonprofit is in its operations.
I won’t address the problem nonprofits have with cost accounting which effects this measure. I’ve done this elsewhere. See Fundraising and Overhead Costs Are A Good Measure of a Nonprofit’s Impact … Not! Lets just assume we have a good grasp on revenues and expenses and focus on ROI as a measure in determining the effectiveness of funds raised. Consider two hypothetical nonprofits: A & B. Nonprofit A may tell you that it raised $100,000 and spent only $10,000 to acquire these dollars, a 900% return. Wow! Nonprofit B reports spending a whopping $500,000 and only raising $1,000,000 in funds, a 100% return. Not too impressive compared to nonprofit A. Didn’t nonprofit A do better? Not necessarily. This is because ROI does not measure the impact of the dollars raised. If it cost both oganizations $9 to serve a homeless meal then nonprofit A’s 900% ROI campaign raised enough funds to serve 10,000 meals. Nonprofit B’s 100% ROI raised enough funds to serve 55,555 meals! In fact, even if Nonprofit B’s cost of meals was $27 per meal, three times the cost of Nonprofit A’s meals, Nonprofit B would still serve over 18,500 meals, 85% more meals than Nonprofit A. Further if both organization’s operate with a 6% net profit margin on funds raised then nonprofit A would experience an incremental net profit of $6,000. Nonprofit B $60,000. Indeed Nonprofit B could operate at a meager .5% net profit on funds raised and still match Nonprofit B’s margin. So in terms of impact nonprofit B’s fundraising has had greater impact and effectiveness.
Using ROI alone to measure return severely limits an organization’s ability to gauge success. Marginal profit to deliver services are a better measure of effectiveness. This takes into account all the cost of production against total revenue to deliver the service. Again the reason nonprofits focus so intently on ROI is because they fail to recognize they are in the business of delivering maximum marginal service at effective marginal profit. So the important question to ask regarding a fundraising campaign is what impact the dollars raised will have on outcomes.