Why People Donate: A Story of Markets

One can convincingly make the argument that Melbourne is Australia’s most socially conscious city – on any given day the metropolitan area is dotted with enthusiastic, flyer-distributing representatives from nonprofit and charity organisations (whether or not we stop to respond is fodder for another argument in a different article). This month, Melbourne has even welcomed its latest charity fixture: the 5cent change deposit box located in the midst of Melbourne Central’s busiest intersection.

When I walked up to take a closer look this yielded only minimal information – intriguingly, the box was unmanned but instead designed to be self-sufficient in information dissemination (directing you to their website) and donation method, a deposit slot (result: a mount of five cents and a few twisties). Pretty innovative, I thought, could this be the ‘new’ way to fundraise? And while it no doubt saves on significant labour costs, will it work?

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At first glance, what I usually notice when I cross paths with nonprofits are:

(1) their advertised prices[1]; and of course

(2) the cause itself or in economic terms, the collective good that they supply.

Whether or not we end up donating to the nonprofit in question is almost always a function of these judgments. Coming back to 5cent, their price is rock bottom (literally donations in increments of five cents) and their advertising subtle, pleasant and laid back. So 5cent should become a raging success, right?

Well, maybe. It still depends on us.

In their study of determinants of donations in nonprofit markets, Okten and Weisbrod pose the question: ‘how responsive are private donations to conventional economic factors in markets?’ Or: how much are we, the potential givers, affected by variations in price, advertising (fundraising) and the availability of other revenue to the nonprofit?

The findings of Okten and Weisbrod are mixed: some are startling, others intuitive. What I carried away from them was a strong conviction that fundraising behaviour does not get enough of the right kind of attention that it deserves. In order for nonprofits to do their job better, we need to understand how we respond to these strategies.

First of all, the ‘price of giving’, or size of donation, should be thought of in terms of its contribution to output, not in terms of its face value. Instead of thinking about my donation of five dollars, what I should be concerned with is the marginal output yielded by each of those five dollars. You’ll see nonprofit giants like World Vision or Live Below the Line designate the value of a $20 donation as ‘the amount for a student’s school boarding’ – this is the expected output.

If we define prices in terms of output, then we’re going to need to know more about the quality of the output if we want to make a good choice. To use a more complex example, think about a nonprofit engaging in conservation of the Southern Ocean Albatross. We’d need to know specific information about the plight it faces, numbers on species and habitat loss and any other relevant statistics, and what the nonprofit is doing about it.

We often take for granted this kind of information, but nonprofits’ fundraising expenditures reduce these information costs for us, making us more likely to donate and in greater quantity.  “Subsequently, the elasticity of fundraising has been shown to be significantly positive, meaning that we are highly responsive to increases and decreases in fundraising expenditure.”

However, Okten and Weisbrod’s study also points to instances of fundraising expenditure indirectly decreasing contributions. Increases in fundraising activities which generate significant private donations can also activate strong bias in both nonprofits and the public against hardcore fundraising and marketing – traditionally seen as too commercial, for-profit and not at all where we want our money to be going (think back to the measurement of output). Success can also reduce Government grants for the organisation.

Second of all, we need to look at whether nonprofits are maximizing net revenue for fundraising. A non-profit organisation maximises its revenue by fundraising  ‘until marginal donation raised from a dollar spent on fundraising is zero’.

This can also be represented by the derivative formula:

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where revenue maximization requires that

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Unsurprisingly, Okten and Weisbrod found that overall, nonprofits do not spend enough on fundraising to maximise net revenue, that is, more donation could be raised from more fundraising dollars. However, a notable aspect of this study is that conclusions vary across nonprofit industries. In this instance, it was found that social welfare charities do not fundraise enough to maximise net revenue, health and overseas charities do maximise net revenue, and religious charities exceed fundraising levels to maximise net revenue.

All in all, this article aims not to discern good from bad fundraising practice, but rather consider the difficult fundraising terrain faced by nonprofits. For most nonprofits, it’s not about fundraising the hell out of their campaign but about figuring out how to maximise net revenue without driving away anti-marketing donors. We need to be more understanding of this conflicted nonprofit identity. Next time I’ll be talking about the effects of government grants and tax laws on private donations.


  1. C. Okten and B.A. Weisbrod 2003, Determinants of donations in private nonprofit markets, Department of Economics Northwestern University
  2. Dan Pallotta 2013, ‘The way we think about charity is dead wrong’, TED Talks http://www.ted.com/talks/dan_pallotta_the_way_we_think_about_charity_is_dead_wrong.html
  3. 5cent/ygap, Live below the Line, World Wildlife Fund

[1] I use ‘advertise’ in the knowledge that this is usually terminology reserved for commercial and for-profit enterprises, mostly due to cognitive bias.