Make More for Your Cause with the Pareto Principle
Direct MailMajor and Mid Value DonorsMaths of Fundraising

Finding Your Best Donors with the Secret of “Pareto Squared”

If you are a fundraiser, you probably already know all about the Pareto Principle or 80/20 rule.

This rule tells you that 80% of revenue will come from 20% of your donors.

But you might not yet have heard about Pareto2 or Pareto Squared.

This rule only works across a large data set, and across a few years, but it is another useful thing to understand if you want to maximise future income.

What is it?

It digs deeper than 80% of revenue will come from 20% of donors.

It shows you that 80% of that 80% will come from 20% of the 20%.

Lost you?

It means that, in theory, 20% of my top 20% donors, which is 4% of all my donors will give me 80% of 80% of my revenue – which is 64% of all the revenue.

Wow.  64% of revenue will come from just 4% of donors.

Beautiful – and, if you are good at following up mid-value donors, major donors and bequests, surprisingly accurate.

The implications for how you should focus your time are amazing. And you can find out more in The Fundraisingology Lab.

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Pareto Principle
Maths of FundraisingMonthly Giving

How Accurate is the Pareto Principle?

Hopefully, you know all about the Pareto Principle, also known as the 80/20 rule.
 
In fundraising, it means concentrating more resources on the 20% of people who would, theoretically, give you 80% of your future revenue.
 
Pareto2 (Pareto squared) is a little bit more complex.  It is when we look at those top 20% of donors and note that 20% of them will give a majority of income too.
 
Again, theoretically, this small number (20% of 20%, which is 4%) would give you 80% of 80% of your revenue – 64%.
 
This theory can really help with resource allocation.  But how close is the reality to theory?
 
The Principle ‘works’ to different degrees.  A charity with a database consisting of only monthly donors would have a ‘flat’ Pareto score.  Their top 20% of donors might give just 45% of donations for example.
 
Whereas a charity who has a broader portfolio of donors and is good at maximising revenue from bequests and mid-major donors would be much closer to the ‘true’ Pareto principle.
 
At Pareto Fundraising, we have a ton of data, so we had a look at all the individual donations made to all 75 charities in the Pareto Benchmarking study, and we saw something really interesting.
 
Bringing the charities together, you would expect the charities who are reliant on monthly giving would ‘balance out’ the charities who do well in bequests and major donors to get us closer to the Pareto principle.
 
And indeed they do.
One-off donations – including bequests – come very close to the ‘Perfect Pareto’.
 
With 73% of revenue coming from 20% of donors, and 46% coming from 4%, those one-off gifts are close to theory.  When charities are really good at their bequests and major donors, their Pareto principle will be closer to 80/20 and 64/4.
 
But monthly givers are nice and ‘flat’ with the top 20% of donors ‘only’ giving 45% of revenue, and the top 4% just giving 16%.
SeanTriner_ParetoPrincipleVsReality

Pareto Principle – Theory v Reality 

So what does that mean when you develop a plan for your mid value, major donors, and bequests?
 
Well, the lessons of Pareto still apply – there is more potential now and into the future from a minority of your donors. Your approach should be the same.
 
Here are my thoughts about the Pareto principle and Pareto2, even if the numbers are not quite 80/20 and 64/4.
  • You will get a majority of your revenue from a minority of donors
  • If you have a ‘flat Pareto score’ – like 20% of donors giving you 50% or less of revenue – then you are probably not doing enough work in the areas of bequests, mid and major donors
  • If you have a ‘steep Pareto score’ – like than 5% of donors giving you 80% of revenue – then you may be too reliant on a few donors for your whole operation. Time to invest in some monthly givers?
  • Increasing investment in your ‘top’ donors is likely to reap rewards. What type of investment?
    • Better stewardship
    • Visits, events and meeting donors ‘in the field’
    • Bigger, better direct mail to fewer donors
    • Integrating direct mail with digital, phone, visits and events
So don’t worry if you don’t have a perfect Pareto score, the learnings still apply and can guide you in your future planning.
PS – If you work in a charity with lots of donations (at least 10,000) you are almost certainly interested in being part of Benchmarking. Please email Jesse at Pareto.
  
Sean
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Direct MailMajor and Mid Value DonorsMaths of Fundraising

Pareto Principle and Direct Mail

I’ve reminded you all about the Pareto Principle, and written about Pareto2.  It’s all well and good in theory.

But how can it be applied in practice?

One of the most obvious applications is when targeting and budgeting in direct mail.

If I am working on a direct mail pack to my house file (people who have donated through direct mail before) I can use the principle to increase revenue. And usually for no extra cost!

A fundamental mistake in direct mail is when the goal is to reach as many people as possible, as cheaply as possible.

Generally the bigger and better the pack, the better it will perform.  A ‘better’ pack may get a higher response rate and/or a higher average donation.  But it probably costs more per pack to mail.

Applying the logic of the Pareto principle, we can quickly work out that sending a bigger, better pack to fewer donors will raise more money.

A really easy example is that I may be planning on spending $1.50 for a standard pack to 20,000 people. That will cost me $30,000.  (Print and production is expensive here in Australia!)

My ‘better’ pack is going to cost me $3, but my budget is stuck at $30,000.

I would mail the $3 pack to the top 20%, about 4,000 people. Wiping out $12,000 of my budget I now only have $18,000 left and 16,000 people I could still mail.

Now, with the remaining budget I can either:

Mail a much cheaper pack to all of them ($18,000/16,000 = $1.12 per pack) OR

I only mail 12,000 people with the $1.50 pack.

Whichever I choose, I will raise more money in total. But only if the pack really was better.

Nice and clear?

Here it is in a video.

A call to action about the Mid-Value Donor Super Course.

If you want to learn more about how to write and develop Direct Mail that will get you results – click here to find out more about my Mid-Value Donor Super Course. it’s available for all members in The Fundraisingology Lab.

In it, we focus on how to write and develop direct mail aimed at Mid Value (or Mid Level) Donors.

Click here to find out more about the techniques for writing and developing a successful direct mail pack aimed at mid value donors. In the course, I also provide essential tips to help you write effective copy. And much, much, much more.

Sean

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