Should charities invest more in marketing?

In 2013 Dan Pallotta, an American fundraiser and author, gave a TED talk called The way we think about charity is dead wrong. It has been watched more than five million times on TED's site alone, and it still shapes how boards and donors argue about one question: should a charity spend money on marketing and fundraising, or should every dollar go "to the cause"?

Verifly works with not-for-profits, so we have a stake in this debate. Here is what the talk actually says, where it has been challenged, and what we think a charity should take from it.

What the talk argues

Pallotta's case is that we run the not-for-profit sector on a different rule book from the rest of the economy, and that it holds charities back in five ways: how they can pay people, whether they can advertise, whether they can take risks on new ways of raising money, how much time they are given to grow, and the lack of investment capital. On marketing, his line is blunt: we tell businesses to spend on advertising "until the last dollar no longer produces a penny of value", but we don't like to see donations spent the same way, "as if the money invested in advertising could not bring in dramatically greater sums of money to serve the needy".

His evidence is his own company's events. Over nine years the AIDS Rides and breast cancer three-day walks had 182,000 participants and raised US$581 million, recruited with full-page newspaper ads and prime-time radio and television. By his account, US$50,000 of start-up money became US$108 million for AIDS services after all expenses, and US$350,000 became US$194 million for breast cancer research. He also points out that charitable giving in the United States had sat at about two per cent of GDP since the 1970s, and asks how a sector could win a bigger share "if it isn't really allowed to market".

"Who cares if the bake sale only has five percent overhead if it's tiny?"

That is the heart of it. A bake sale with five per cent overhead that nets $71 is not morally superior to a professional campaign with 40 per cent overhead that nets $71 million. The percentage tells you nothing until you know the size of the pie.

Where it has been challenged

The talk is persuasive, and it is also contested. Phil Buchanan of the Center for Effective Philanthropy called it "rooted in fallacy and distortion". His main points are worth hearing: the fact that poverty and disease persist is not proof that charities have failed; corporate pay is a poor model to copy; and donors have a legitimate interest in knowing how much of their gift ends up with for-profit fundraisers, because some operators really have kept most of it.

Pallotta's own events ended when sponsors walked away over the share of revenue spent on recruiting and running them. He says net income for the cause fell by 84 per cent the year after. His critics say that proves donors' instincts matter. Both can be true.

Where the sector landed

A few months after the talk, the heads of GuideStar, Charity Navigator and the BBB Wise Giving Alliance, the three main charity-rating bodies in the US, published an open letter to donors known as the Overhead Myth letter. It called the share of spending on administration and fundraising "a poor measure of a charity's performance", while noting that extreme ratios can still flag fraud or poor management. Its closing line: the people charities serve "don't need low overhead, they need high performance".

What we take from it

We agree with the central point. Acquisition is an investment, and a charity that refuses to invest in finding new supporters will shrink in real terms as existing supporters age out. The critics are also right that spending more is only a virtue if it works, and if the people doing the spending can show it works.

So the question for a board is not "how low is our fundraising cost?" but "what does each dollar of fundraising return, and over how long?" For face-to-face, that means asking:

• Cost per supporter who is still giving after 12 months, not cost per sign-up. A cheap sign-up that cancels in month two is the most expensive kind.
• Retention and complaint rates, in writing, by campaign. We wrote about why retention beats volume and what a supporter who stays is actually worth.
• Who is accountable for quality. At Verifly every sign-up is quality-reviewed before anyone is paid a bonus on it, and every complaint is investigated and answered in writing. If an agency cannot show you that, the overhead question is the right one to ask.

Pallotta ends his talk by asking donors not to ask about a charity's overhead but about "the scale of their dreams". We would add one word: ask about the scale of their dreams, and the evidence. Invest in growth, measure it honestly, and the pie gets bigger for everyone.

Sources: Dan Pallotta, "The way we think about charity is dead wrong", TED, March 2013 (transcript); Phil Buchanan, Nonprofit Quarterly, 2013; GuideStar, Charity Navigator and BBB Wise Giving Alliance, "The Overhead Myth" open letter, June 2013. Figures are Pallotta's own, in US dollars.