I hate booking flights. Some people love the thrill of finding the best day and being in control but for me it’s just stressful and annoying. 13 tabs open in two browsers. A spreadsheet to capture and calculate costs. A piece of scratch paper to jot things down. Calendar open to make sure I have the right dates. And invariably I think to myself, “what a waste of my time“.
Meaning, how else could I be spending my time. This is a great example of an opportunity cost or “… the benefits you could have received by taking an alternative action.” And opportunity costs are one of the three types of costs that nonprofits seem to struggle with, okay, they suck at, in terms of knowing what they are and incorporating those costs into their decision making.
Let’s look at these three cost areas, use the flight analogy to explain, apply the concept to nonprofits and discuss some examples of solutions.
3 Types of Costs Nonprofits Suck at Evaluating
1. Opportunity costs
This is what else you could be doing. When it comes to flights, it’s all the alternatives. Questions like, “Should you even fly? Why not drive”, “Layovers or direct”, “First class or Economy” are all opportunity cost related questions. And for each decision, there is a cost of the decision you make but there are costs associated with the decisions you don’t make.
If you choose a layover to save money, for example, the money you save is worth the extra time it costs to get to where you want to go. And instead of using a travel agent or asking my wife to book the trip, I spend my time doing it instead of working, writing or grading papers (I really need to grade those papers…).
For nonprofits, this often comes down to how they use their time. With a poor donor database or CRM, for example, staff have to spend more time manually entering valuable information or managing key data in a series of spreadsheets, emails and pieces of paper. And time spent managing poor systems means less time can be spent on things like customer service (donor stewardship), donor acquisition or meeting with customers/donors. And the lack of time in those areas has a financial cost to it.
Or with events. With those rubber chicken dinners, events often get a bad name because of all the time and resources they take just to ‘break even’. But if you cut the event, how do you replace that revenue? That volunteer opportunity? That time in front of donors and possible donors to communicate your story, mission and impact?
Key Takeaway: There are costs to everything that you do but also to what you choose not to do. Evaluate other courses of action and their costs/opportunities before making your decision.
2. Marginal costs
This is the incremental cost of doing a bit more of what you’re already doing. It’s usually the first bit that’s most expensive. Buying print materials in bigger quantities, paying a staff person a little bit more and using a pro or premium plan instead of basic for subscription tools are common examples of this.
In the flight example, choosing to fly business or first class instead of economy is a marginal cost. You are already paying to fly from here to there, and there’s a, not-so-slight, cost to upgrade your experience.
For nonprofits, often in the search for lowest cost solutions under the banner of ‘efficiency, only the minimums are considered. Buy print materials in the smallest quantities. Pay new staff as little as you can. Use the basic email provider plan. And these choices can often cut costs in the short term.
But when you need more brochures and have to order more, the cost is much greater than if you would’ve ordered a few more at the time. When that staff person leaves in a year or two, it costs a heck of a lot more to hire someone else. And by not upgrading your plan from ‘basic’ to ‘pro’, you now have to manage data manually which takes extra time (also an opportunity cost here).
For nonprofits, I think data management and CRM’s are most in play when it comes to marginal costs. Organizations choose no solution or a cheap solution to manage their data and donors. But this often leads to poor or inadequate information (not the end of the world..) which leads to poor customer service, not knowing customers well, and a lack of business intelligence information (still maybe not the end of the world but getting pretty darn close when it comes to fundraising).
Key Takeaway: You are already making a decision to purchase something, think about the added benefits of spending a little bit more now that will pay off in great ways later.
3. Hidden costs
This is what isn’t tangibly accounted for but carries a cost to it. Or an, “Expense not normally included in the purchase price of an equipment or machine, such as for maintenance, supplies, training, and upgrades.”
The airline industry is the King/Devil when it comes to this with baggage fees being the most obvious example. When you book your flight, it doesn’t calculate your $25 or $50 baggage fee, the cost of beer or alcoholic drinks or food (things that are complimentary in first class and should factor into your decision to upgrade your seat or not…).
For nonprofits, hidden costs often come down to time. Again. Time is the most misused resource across nonprofits. For example, it’s the hidden costs that often make events so expensive, but it’s also the hidden costs that make online donation fees so reasonable.
Most donation tools charge 2% – 3% plus Credit Card fees with Crowdfunding tools often charging a bit more. Having worked for a couple crowdfunding and donation processing companies I can’t tell you how much crap nonprofits put up over the (relatively) low percentages. “Cheques are free” they say or “why can’t donors just call in with their Credit Card information?”
First off, cheques aren’t free. Someone has to cash them, enter them into a database system, issue a thank you letter and a tax receipt – all things, most, donation tools automate for you. At Chimp, we estimated it took $15 to $25 for a nonprofit to process a cheque. So when someone sends in a $50 cheque, it is hardly ‘efficient’.
Secondly, asking donors to inconvenience themselves for our benefit means a bunch won’t do it. This mindset is partly why charitable giving, as a percentage of GDP, has barely moved, if at all, in the last 40 years! This example also brings in things like opportunity costs (allowing or not allowing online donations) and marginal costs (you are already paying the Credit Card fees, why not pay a bit more and allow donors to process it themselves?).
Key Takeaway: When it comes to costs, there are often real costs – dollars and time – that are not factored in. Not easily anyway. But it’s including these costs that can really make a difference in strategic and purchasing decisions.
How Good Technology and Partners Can Help
I’ve mentioned Chimp – where I used to work – as a company working to help with marginal, hidden and opportunity costs. There are plenty of others in this space like Classy, Virtuous, Kindful and FundRazr, to name just a few, working to lower the cost of capital to raise money online.
In my work at Shift, we try to do this as well but through service provision (let us focus on things nonprofits may not be great at so they can focus more on their donors and customers).
But another company doing great work in this area and a relevant example to the costs conversation is 121 Giving (Disclosure: I’m a non-compensated friend and advisor to 121 Giving).
On the surface, 121 Giving is a crowdfunding platform that allows donors to give directly to products causes need – like beds for a homeless shelter. But what they are really doing, and why I got involved with them, is making it easier, and reducing the costs, for charities to get products for their work.
Instead of a staff person, or persons, trying to find the product, source the product, price compare the product and search for a discount on the product, they can just log in through 121 and purchase the items they need because 121 has already done that hard work for them.They don’t have to think about bulk or plan ahead because 121 has scale and inventory on demand. And they don’t have to calculate shipping, freight, taxes and other fees for these products because, again, 121 Giving does that.
They don’t have to think about bulk or plan ahead because 121 has scale and inventory on demand. And they don’t have to calculate shipping, freight, taxes and other fees for these products because, again, 121 Giving does that.
Now this isn’t meant as a plug for 121, although they are great (I did say I get no compensation there right?), but a plug for all the new, old, and great companies working to help nonprofits reduce their costs. Specifically, the hidden, marginal and opportunity costs charities generally suck at. But for these companies to be useful (and profitable), nonprofits and their leaders need to better understand and evaluate their costs. All their costs.
If nonprofits and their leaders can better understand the costs of doing or not doing something (opportunity), of going that bit further when thinking about the longer-term (marginal), and the real costs including those unseen ones like time (hidden), they can then make better decisions when it comes to strategies and tools to use. In the end, this means more resources invested in ways that will lead to the most good and biggest impact – and isn’t that what we should all be focusing on?
Now about those flights…