ESSENTIAL DESTINATIONS

DECEMBER2003

Direct mailings to multiply in 2004

WASHINGTON D.C.--Donors can expect to get more direct mail appeals than ever in 2004, and more from animal charities they never heard of than they thought possible, due to a recent change in U.S. postal rules.

Direct mailers will now be allowed to use nonprofit bulk rates to send appeals in which they have a financial interest.

Translation: if a charity cannot afford to pay the mailer up front, the mailer can front the money at credit card rates, send the appeal out by the cheapest means, and pay itself back with the returns, even if the charity that the mailing is done in the name of does not net a red cent.

That always could be done, and often was, but until mid-November 2003 that modus operandi was riskier for the fundraising companies, because a for-profit fundraising company that fronted the cost of doing an appeal mailing could not legally send the appeal at the nonprofit bulk rate. Because the fundraising company in such a case is investing in the mailing in the hope of making a profit, the appeal had to be sent at the standard third class bulk rate, or first class.

The idea behind the old rule was to discourage unscrupulous fundraising companies from turning small and inexperienced charities into mere cover for direct mail mills, by extending credit to them to do mailings in the name of "prospecting" and "list-building" that would bring in little more revenue than the cost of the mailer's services.

Instead of curtailing speculative mailings that chiefly enriched fundraising companies, however, the rule may only have reduced the chances of a small and inexperienced charity breaking even on "prospecting" and "list-building."

More mailings rather than fewer may have been done just to pay off debt accumulated on previous mailings, with little or no money going to charitable programs.

The old rule was most prominently enforced against the Boston firm Vantage Financial Services. The Postal Inspection Service warned Vantage in 1990 that it had improperly used nonprofit rates for mailings in which it had a financial stake, then charged Vantage with postal fraud in 1998.

Reported The Chronicle of Philanth-ropy, "According to the government's complaint, Vantage signed agreements with its nonprofit clients stating that if the amount of money raised in a campaign was not enough to cover its costs, Vantage would be permitted to continue soliciting funds until it took in enough to eliminate its losseseven though none of the money it raised subsequently from donors would actually go to the charity. "

In November 2003, only days before the rule change that made the Vantage practices legal, Vantage agreed to pay $4.5 million in civil penalties.

How mailings work

There are two basic types of direct mail fundraising: appeals sent to established donors and supporters of a charity, which are often done by charities themselves, using lists that are jealously guarded, and "cold" mailings, done to complete strangers using rented lists. "Cold" mailings are typically jobbed out to professional fundraising firms.

Lists made available for rental or exchange typically consist of lapsed members, irregular donors, and donors whose contributions each year amount to less than the cost of soliciting them. The response rate to cold mailings tends to fall below 1%. A "successful" cold mailing breaks even. Any benefit to the charity comes whenand ifthe respondent becomes a regular donor. However, respondents to cold mailings relatively seldom become frequent donors or high donors.

Frequent donors and high donors tend to be won through meaningful personal contact and responsive service.

The direct mail fundraising industry defends high-volume, low-yield prospecting and list-building as essential to discover potential donors to new charities and little-known causes, and argues that without doing such mailings a charity cannot build a donor list large enough to grow and fulfill its mission.

In truth, direct mail prospecting is cost-competitive with telephone solicitation and bulk e-mail, as shown by fundraising data from the years 2000-2002 recently published by the state charity regulation bureaus of California, Pennsylvania, and Washington.

Regardless of the solicitation method used, fundraising companies hired to do prospecting and list-building rarely achieve a net return on investment of more than 50¢ on the dollarwhereas, the overall average net rate of return among animal charities reviewed each year by ANIMAL PEOPLE is $2.62, and few charities could stay below the ceiling of 35% for combined fundraising and administrative expense recommended by the Wise Giving Alliance without achieving a net rate of return of at least $2.00 per dollar invested. [Tables only available in our hard print edition.)

Acknowledging that cold prospecting is expensive is far from agreeing that high-volume prospecting is the best way to build a charity. In the 14 years that ANIMAL PEOPLE has annually reviewed animal charities' financial filings, no charity that ever spent more than two-thirds of its budget on prospecting has managed to get below the 35% ceiling for fundraising and administrative expense. Conversely, the fastest-growing animal charity over that time, the Best Friends Animal Society, has never exceeded the ceiling, even counting all direct mail expense as fundraising.

(See "Who gets the money?" on pages 12-20 of our hard print edition.)