Which ROI definition do you use?
Fundraisers often engage in conversations with each other to exchange knowledge, one of the incredibly positive aspects of our sector. In these discussions, various things are shared, and soon you hear retention rates and ROIs being thrown around. However, almost everyone uses a different definition. The metric ROI tells you how many euros you get back per euro invested over a specific period. I will show you the different definitions I come across.
Two formulas
To start, I see two formulas circulating in the market:
ROI = Revenue / Investments
ROI = (Revenue - Investments) / Investments
In formula (1), you get the gross metric, and in (2), you get the net metric. In (1), the number 1.0 is the break-even point, and in (2), it's 0.0. That is the point where you have received more income than the investments made. If you read the break-even point over time, you end up with the so-called payback period.
Period
Another difference is that ROIs can be calculated for specific periods. This is something that happens too infrequently. Many fundraisers stop after 1 year. As long as there are active donors from a fundraising campaign, there will still be income, ensuring that the ROI increases over time. At least, as long as the additional income exceeds further investments. Generally, that is the case because acquisition is more expensive than retention.
ROIs should ideally always be expressed in a specific period, often after 12, 24, 36, 48, 60, etc. months. If someone tells you that the ROI of a fundraising campaign is 2.3, you should ask whether that is the ROI after 12 months, 24 months, etc.
Investments
Scalable fundraising always costs money. I prefer to talk about investments rather than costs. Some consider only direct recruitment investments, while others also include allocated personnel costs in an ROI calculation. That already makes a big difference. But you also have to ask whether only the acquisition investment is taken into account, or also the investments made to retain donors. That can, again, make a difference.
Income
Just as there are differences on the investment side, there are also differences on the income side. Do you only include the income from the initial recruitment action? Or also additional gifts and/or upgrades?
VAT and attrition?
With some embarrassment, I must admit that I still come across ROIs that do not take the VAT of investments into account. Completely absurd. Makes no sense.
And in the same category, I see ROI calculations that ignore attrition. So, income is calculated based on the pledged annual value. That is also wrong and amounts to counting oneself rich. I would say: stop that immediately.
Differences
Definitions can, of course, differ, but then you shouldn't compare them. It can lead to a lot of confusion and even incorrect decisions. As long as you use the same definition internally. A definition must be clear to everyone with whom you discuss it.
In Forward, we go for the best ROI definition in my opinion. We take into account cumulative income and investments, including attrition, upgrades, and additional gifts, expressed over 12-month periods.
Do you want to know what the 60-month ROI of each of your acquisition channels is?
Ask for a demo of Forward!
