Opportunity Costs and Risk

30 Oct Opportunity Costs and Risk

By David Allen, Development for Conservation

Things would be so different if they were not as they are.

– Anna Russell

Jeff Brooks posted a guest blog by Christiana Stergiou speculating on the unquantifiable – opportunity costs. An “opportunity cost” is the amount of money we leave behind by doing one thing instead of doing something else. How much money could we be raising if we were doing things differently?

The picture Stergiou paints is an organization without a planned giving program of any sort and 10,000 annual donors. Versus that same organization with a strong planned giving program. She concludes that the opportunity cost of not having a planned giving program is $17 million.

You can read the full post here:
How to Lose $17 Million Without Even Trying.

As an aside, she presents the $17 million as a static number. I would add to her calculation that an organization with 10,000 members is recruiting a new 10,000 members every 3-4 years (or so). Meaning that there is a new $17 million lost every four years. The opportunity cost is actually more like $4 million per year!

Argue what you will and downsize the story to meet your reality (an organization having 500 members loses only $650,000 – or $160,000 per year), but the idea is provocative. What about the other opportunity costs we incur every day?

There are two problems with opportunity costs. First, we cannot measure what isn’t there. How can you measure what could have been? And second, most opportunity costs are related to a time frame longer than 12 months. If we only look down at our feet, how do we consistently choose the right path?

Here are some quick examples, but I’d be interested in your thoughts on this as well. (Maybe THIS turns into next year’s Rally presentation!)

I’ve documented, from 12 different organizations, that the average 5-year value of members recruited in 2013 was $342 between 2013 and 2017. The range was $140 to $1,600. I do not have cost information to share, but even if it cost $140 to recruit a member (which would be VERY high), the worst case is break even.

It seems more likely that the “opportunity cost” of not spending the money to recruit 100 new members every year is at least $202 ($342-$140) times 100 = $20,000 per year.

Not including planned giving!

What about a major gift development program? If we hired a Major Gift Officer and paid her the going rate, we would be adding $80,000-$100,000 to the operations budget. In the first year, say she qualifies a “portfolio” of 120 from an initial list of 350 or so – and raises just $50,000 more than would have been raised anyway.

Then she raises $150,000 the second year and $300,000 the third.

By the fifth year, she is raising $500,000-600,000 per year from her portfolio.

So, the opportunity cost of not hiring major gift staff is in the neighborhood of $1.5 million less the $500,000 budget expense. You can do the math.

Again, not including planned giving!

In most circumstances, it comes down to managing risk. Organizations comfortable with risk take these calculated flyers while being realistic about immediate expectations. And they accept that not every venture will be a winner.

Organizations uncomfortable with risk end up paying the opportunity cost.

Cheers, and have a great week.

-da

Photo by Toa Heftiba courtesy of Stocksnap.io.