NONPROFIT ORGANIZATIONS AND THE JUNE 30 2002 POSTAL RATE INCREASE
DMA Economic Briefing No. 6
NONPROFIT ORGANIZATIONS
AND THE JUNE 30 2002 POSTAL RATE INCREASE
by
Peter A. Johnson, Ph.D.
Economist
The Direct Marketing Association
Strategic Information Unit
October 17, 2002
Executive Summary
The recent (June 30, 2002) postal rate increases have had a measurable and adverse effect on Nonprofit organizations’ ability to raise funds and deliver programs to their communities.
The Direct Marketing Association (The DMA), in conjunction with The DMA Nonprofit Federation, conducted an online survey of member organizations with respect to their past, present and future mailing activities, as part of The DMA’s on-going efforts to study the health and future of the finances of the United States Postal Service (USPS). In the course of this study, it was found that the rate increase had three measurably negative effects: in the assessment of Nonprofit organizations ability to raise funds and deliver program; in the share of their budgets accounted for by direct mail fundraising and program delivery; and in their cost-containment adjustments to rate increases, in terms of both reducing existing mail costs and in terms of finding alternatives to the mail.
Thus, the study found that, measured by an Index out of 100, in which 100 is significantly positive and 0 = significantly negative, the recent rate change was rated 39 for fundraising from existing donors, a 26 for fundraising from new donors, and a very disturbing 31 for its negative effect on program delivery to their community.
The share of overall budgets eaten up by postal charges between the third quarter of 2001 and the third quarter of 2002 increased by a net one third of one percent. While this figure may not seem large at first sight, it must be contrasted with the over 4% rise in postal rates, and the three-fourths of a percent drop in budgetary share accounted for by program. In other words, while the postage rate increase was a strong tug on the budget towards greater postal expenses, Nonprofits managed to keep the net drain on program delivery to less than 1%.
Finally, though Nonprofits have traditionally depended heavily on direct mail fundraising, they are taking measurable steps to reduce the impact of rate increases. Their three preferred strategies are: to seek worksharing discounts; change the format of their individual pieces to avoid additional postage charges; and most significantly, explore other channels, particularly email and the Internet, to find ways of avoiding a future dependence on mail and postage rate increases.
Thus, while the recent rate hike has hurt to some degree, this may be one of the last rate increases for which Nonprofit mailers have no alternative recourse. The rise of the Internet and email may herald a day when fundraising may become less expensive, to the benefit of Nonprofits and their charitable purposes, but at the cost of future USPS revenues.
I. INTRODUCTION
Nonprofit organizations play a vital role in American society. They feed the hungry, care for the sick, preserve the environment, educate the young, and champion causes big and small. Especially in the wake of the events of 9/11, they also are being called upon to help bring Americans together and foster a sense of community and strength.
The means by which Nonprofit organizations achieve all these goals are as myriad as the organizations themselves. Still, one vital activity they all share is the raising of funds to support themselves and their programs. A common way they do this is through direct mail solicitations of donors or supporting members.
The difficult but necessary task of raising funds through mail solicitations is affected directly by the postal rates. As one leader of a member Nonprofit organization expressed it, "Our fundraising efficiency is impacted anytime postal rates increase." Generally speaking, an extra dollar that Nonprofits must pay in postage is one less dollar that is available for other purposes--including delivery of programs or services to their community.
As part of The Direct Marketing Association’s (The DMA’s) efforts to gauge the health and efficiency of the United States Postal Service (USPS), The DMA’s Strategic Information Unit conducted an on-line survey of Nonprofit organizations to understand how their mail volumes and other activities are being affected by changes in the rates.
The results presented below indicate that Nonprofit organizations were indeed adversely impacted by the rate increase. The main ways in which they were affected were in their rising costs for mail solicitations, the less money available for program delivery, and their increased efforts to find alternative channels that yield the same response as does mail.
II. AREAS AFFECTED BY JUNE 30 RATE INCREASE
The DMA study asked voting members of the Nonprofit Federation to rate the effect of the June 30 rate change on key areas of organization activity: Fundraising from existing members or donors; fundraising from new members or donors; general administration; and program. Respondents were asked to use a scale of 1 to 5, where 1 = "significantly negative" and 5 = "significantly positive." These results were then averaged, and converted to a score out of 100, for an "Impact Index," to permit easy comparisons across areas of activity and over time.
TABLE 1. Impact of June 30 Rate Increase By Area of Activity.
JUNE 30TH RATE INCREASE IMPACT BY AREA OF ACTIVITY
Fundraising--Existing Members/Donors Fundraising--New Members/Donors General Administration Program Delivery
IMPACT INDEX 39 26 38 31
Several points stand out from these results. First and foremost, of course, is the generally negative impact on program delivery. An Index number between 40 and 60 is generally neutral. Therefore, the Index of 31 means that for the Nonprofit sector, on average, the June 30 rate increase was somewhat harmful to their ability to deliver program or services.
But even more sharply affected than program delivery was fundraising from new members or donors. To understand the significance of this impact, it is first crucial to understand the distinction between two different types of fundraising: that from a "housefile" and that from "prospects." Fundraising from a housefile is what Nonprofit organizations mean when they raise money from existing members or donors. The housefile is a list maintained "in-house" by the organization of individuals or entities with a proven commitment or willingness to donate money or take out a membership. These individuals or entities, because they will have a higher (and often more generous) response rate to solicitation, are the prime recipients for fundraising mailings.
However, no Nonprofit organization can survive, much less grow, by relying on solicitations to the housefile (existing members or donors) alone. Unless it is replenished from positive results from mailings to new prospects, the list of existing members or donors will gradually wither away over time. This attrition will occur because existing members or donors may move to a new locality (if the organization is not national), may die, may change their donating priorities, or may no longer be able to afford a previous level of commitment.
Compared to raising money from the housefile of existing members or donors, raising money from new members or donors is a much less fruitful endeavor. Generally speaking, prospective donors have a lower response rate to mailed solicitations, and are less generous. All other things being equal, Nonprofit organizations need to mail many more letters to proportionately more prospects than they would to members.
This generally lower response rate for prospect mailings, and the resultant need to mail more often, is the Achilles’ heel of Nonprofit associations when it comes to postal rates. If they are vulnerable anywhere, it is in their ability to reach out to the larger but unknown audience of their future donors or members that becomes proportionately more difficult when postage rates increase.
Not surprisingly, then, the respondents rated this area of activity as the one most severely hurt by the June 30 rate increase, with an Impact Index score of 26, a full 13 points below the impact felt in fundraising to existing members or donors.
The significance, broadly stated, is this: assuming Nonprofit organizations strive to keep the ratio of housefile mailings volume to prospect mailings volume constant, increased postage charges will make prospect mailings more expensive, because they have a lower probable return in terms of new members or donations. Postal rates increase thus risk the future of Nonprofits: increased costs in fundraising to prospects could eventually mean fewer new donors or members to replace those who are being lost from the housefile.
III. BUDGETARY IMPACT ON NONPROFITS
The results summarized in the Impact Indexes above are confirmed by the share in overall budgetary allocations reported by Nonprofit organizations.
TABLE 2. Nonprofit Budget Allocations: Before and After June 30
Charities All Nonprofits
3Q 2001 3Q 2002 Difference 3Q 2001 3Q 2002 Difference
Budget % % % % % % %
Direct Mail Fundraising from housefile 12.07 11.43 -0.64 25.45 24.58 -0.87
Direct Mail Fundraising from prospects 4.32 5.31 0.99 14.26 14.90 0.64
Fundraising by email 0.00 0.00 0.00 0.71 1.36 0.64
Fundraising by telephone 0.00 0.00 0.00 8.21 7.50 -0.71
Fundraising by print or broadcast 0.00 0.00 0.00 4.57 4.71 0.14
Fundraising--other 0.00 0.00 0.00 5.14 5.36 0.21
General Administration 7.45 7.83 0.38 9.66 9.65 -0.01
Program Delivery 76.16 75.43 -0.73 31.99 31.94 -0.05
100.00 100.00 100.00 100.00
While the primary purpose of The DMA study was to ascertain the future trend of USPS volumes and revenues from this segment of the USPS mail stream by comparing mail behavior between the third quarter of 2001 and the third quarter of 2002, the results clearly show the somewhat adverse impact of the June 30 2002 rate increase. We can see this effect in terms of concrete share of total budgets accounted for by various Nonprofit activities over the two comparison quarters.
Thus, direct mail fundraising declined by over half a percentage point, and the cost of direct mail fundraising from prospects increased by almost a full percentage point. In light of the greater than 4% rate increase of June 30, this means that Nonprofit associations have had to allocate slightly more money to less successful (but necessary) fundraising from nonmembers or new donors, with the potentially adverse effect on long-term growth and survival outlined in the previous section.
Similarly, while the share of the budget accounted for by direct mail fundraising from new members or donors increased significantly, Nonprofit Associations have had to curb slightly the share of their total budget allocated to program delivery. It must be emphasized, though, that the reduction in budget share does not translate into fewer dollars spent, nor does the reduction match the increase in postage rates--despite a four percent increase in postage charges for Nonprofits, and other difficulties arising from the recent recession, charities surveyed for this report managed to cut back program delivery’s share in their overall budgets by less than one percent. Similar but less pronounced trends can by found in the results for all Nonprofit organizations surveyed as a whole.
IV. NONPROFIT ADJUSTMENT STRATEGIES
Inevitably, rising costs spur the search for cost reduction measures. As would be expected, the June 30 rate increase has led Nonprofit organizations to explore their alternatives, both as alternatives to direct mail fundraising, and alternatives within direct mail fundraising.
TABLE 3. Nonprofit Mail Cost Reduction Strategies
NONPROFIT MAIL COST REDUCTION MEASURES (POST JUNE 30th)
Commingling, Compiling, or Presorting Change Format Reduced Frequency Adopt Other Channels
IMPACT INDEX 57 56 49 63
Prior to the rise of email and the Internet, no other channel of communications matched direct mail’s attractive combination of relatively low cost and reasonably high response rate. Telephone solicitation can be highly effective but it costs far more in comparison, and often works best with potential members or donors with whom the organization has a strong tie (as with college or high school alumni, for example.)
Thus, for those organizations with few alternatives to the mail, the question arises: how can costs be managed? Three broad strategies are available: "commingling, compiling, or presorting" to achieve bulk or worksharing discounts; changing the shape or size of a mailing to avoid additional postage charges or fees; or mailing less frequently.
Member organizations were surveyed regarding these strategies. Employing an Index number similar to that used for the areas of impact, in which 100 = "use significantly more" and 0 = "use significantly less," the survey found that both discount strategies and format strategies were being pursued to some degree (57 and 56, respectively) while the rate increase has not produced any effect on the frequency by which Nonprofits send their mail.
Then there is the question of alternative channels to direct mail as a whole. Certainly, neither email nor the Internet has yet to establish itself as having the response rates achieved by direct mail. Nevertheless, it is striking that direct mailers express a clear interest in exploring alternative channels, and this in all likelihood means a greater exploration of the opportunities offered by the Information superhighway.
V. CONCLUSION
Given the close dependence of Nonprofit organizations on direct mail for fundraising, especially so with charities, it is clear that postage rate increases must only be undertaken as a last resort. In the past, this was a moral imperative, as postage rate increases would inevitably hurt program delivery. Now a new dynamic may be arising, in which Nonprofit organizations, like direct mailers in the world of for-profit commerce, may be exploring alternative channels to direct mail. If these alternatives, such as email and the Internet prove effective over the next few years, the USPS may find that future rate increases not only hurt program delivery by Nonprofit organizations, but also encourage them to employ alternative channels that drain money away from the postal system. This prospect offers benefits to few.