by Derric Bakker, President, DickersonBakker
When asked to name a ‘philanthropist’, the first names that pop into many Americans’ minds are people like MacKenzie Scott, Warren Buffet, Bill & Melinda Gates, and Elon Musk, who have pledged billions to charity. Truth is, however, giving from these ultra-high-net-worth donors, while on the rise, typically only accounts for three to five percent of total giving in the United States.
Contrary to commonly held perceptions, the majority of giving in this country traditionally comes from middle-income households. These everyday Americans comprise approximately 90% of most nonprofit organizations’ donors and account for nearly two-thirds of their fundraising income.
Collectively, middle-income households have been the backbone of charitable giving for most of the past century. Unfortunately, giving from this critical segment of donors has been shrinking for over a decade, and is on the verge of collapse.
Fewer and fewer middle-income Americans are donating to charity. A recent study by the Indiana University Lilly Family School of Philanthropy showed that the share of American households donating to charity declined from 66 percent in 2000 to less than 50 percent today. In another recent report, the Fundraising Effectiveness Project (FEP) noted the number of donors giving less than $500 was down 7 percent in the last year alone. For donors giving $100 or less, the drop was an even steeper 17 percent. By almost any measure, giving from middle- income Americans is in a freefall. Average donor retention rates – which have been steadily declining over most of the past decade – have cratered in each of the last two years. At the same time, the rate at which new donors are being added is steadily dropping, resulting in a record high, triple-digit average cost for each new donor acquired.
What’s causing this collapse of a historically rock-solid sector of charitable giving?
America’s widening economic divide is certainly one culprit. In December of 2022, Pew Charitable Trust released an assessment of aggregate household income showing that the share of total US income held by middle-class households has plunged by nearly 50% over the last half-century. Over the same period, upper-income households saw a massive increase. Simply put, today’s typical working-class American family is struggling to keep up with ever-rising costs of living and has significantly fewer hard-earned dollars to give away.
America’s changing values are another contributing factor. A recent Wall Street Journal-NORC poll shows that Americans are pulling back from many of the bedrock values that have traditionally defined middle-class culture. For instance, the share of Americans who rated “community involvement” as “very important” fell to 27% — its lowest level in 25 years of polling, down from a high of 62%. Similarly, only 39% said religion was very important, also sharply down from previous polling. Commitment to faith and community are particularly important drivers of middle-income giving, so it should come as no surprise that as working- class Americans increasingly abandon these values, overall charitable giving from this group will also decline.
Recent tax changes have also compounded the problem. The 2017 Tax Cuts and Jobs Act brought sweeping changes to the tax code. One of the big changes was to nearly double the standard deduction, which is the amount tax filers can subtract from taxable income without needing to itemize specific deductions like charitable giving. This made the tax filing simpler for tens of millions of middle-income households, but also wiped out any tax benefits they would have otherwise received for making a gift to charity. As a result, the number of taxpayers filing deductions for gifts to charity dropped from nearly 40 million in 2017 to just a little over 12 million in 2021. At the same time, other tax code changes increased the charitable deduction for high-income earners and made it more beneficial for them to give to charity.
For most of the last forty years, appealing to middle-income donors with a “one size fits all” approach has been the bread and butter of the fundraising industry. Many of today’s biggest fundraising agencies were built on this model. Those old patterns are failing fast, however, and an ever-increasing number of organizations are in a race to the bottom, competing to squeeze every last drop from this fast-shrinking pool.
The bright spot in all of this is that the year-over-year total value of dollars fundraised has still been steadily rising, largely due to increased giving by major donors.
A decade ago, upper-income households made up less than a third of all charitable deductions. Today, giving from affluent donors is approaching 60% of the whole and will likely continue to grow as their wealth compounds and giving vehicles favored by these donors continue to blossom.
To take advantage of this, we must forge a better way to fundraise in this new modern era. Fundamentally, this means flipping the paradigm from “one-size fits all” to mass-personalization and universal connectivity. To coin a phrase: nonprofits need to start treating every donor like a major donor. In the future, nonprofits that fail to make this shift will likely struggle and may even be forced to close their doors. Those who do it successfully will thrive.
What does it look like to “treat every donor like a major donor”? Here are five practical tips to help you get started:
- Build more opportunities for relational connection into donor development pathways for every donor in your file, not just for a select few major donors at the top. If we learned one thing from COVID, it’s that major giving is not dependent on how many face-to-face visits you make with donors. Concentrate on finding cost-effective ways to build connectivity with your donors at every level of giving.
- Personalize whenever possible. With a good donor database and today’s mass- personalization technologies, you can give every single one of your donors the kind of highly individualized treatment that in the past could only be afforded to major donors.
- Calibrate your communications with donors, building an intentional cadence of storytelling, impact reporting, and two-way communication for each donor, wherever they are in their journey with you. Whether they’re giving $100 or $100,000, every donor wants to know that they are valued and that their giving is making a difference.
- Elevate your asks. Rather than flooding them with repeated low-value transactional appeals, invite donors to invest in making a transformational impact in the lives of the people you serve, in a way that lines up with their personal giving priorities. Encourage them to give from giving instruments and assets instead of just from their cash accounts.
- Re-engineer your metrics. There’s an old saying that “what gets measured gets managed”. Shift your attention away from old-school metrics like donor file size and total gross revenue to a focus on measuring and maximizing things like donor retention, connectivity, lift, lifetime value, and net revenue.
Building an agency designed for the future of fundraising
Seeing these changes coming, our team at DickersonBakker recognized that we needed to help our clients rethink how they engage with donors across the entire fundraising continuum versus just at the upper reaches of giving, which has been our traditional focus. That’s why we are going all-in and launching a new direct response fundraising service line that’s built from the ground up to elevate donor experiences and deploy scalable fundraising platforms focused on “treating every donor like a major donor”, so that our clients will be better prepared for this coming sea-change in giving.
Is your fundraising “future-ready”? If not, why not reach out and start a conversation with us about how our team can help you discover a better way to fundraise?