The Great Overhead Debate: The 100 Percent Model and Peer-to-Peer Fundraising

Your charity has an overhead rate of 5 percent and clearly spells out what it uses that money for and why it’s important to your operations.

A similar charity has an overhead rate of 25 percent, but says that a major donor has already paid for its overhead costs. As a result, it tells prospective peer-to-peer donors that all of the money they give will go directly to its mission.

Guess which charity is most likely to get a donor’s money?

According to a field experiment of 40,000 potential donors published this fall by Science magazine, informing potential donors that overhead costs are already covered by a benefactor increases the donation rate by 80 percent and total donations by 75 percent.

That’s a significant difference.

And it offers an interesting insight into the mindset of our donors. Simply put: they’re more willing to give if they feel as though their money is going to be used for your mission — not for your paycheck.

But at a time when overhead costs have become a point of great debate within the nonprofit field, should our organizations be telling volunteer fundraisers that all of their money is going to support the cause when we all know that overhead costs are necessary for our operations?

The question is an important one, but it doesn’t come with a clear-cut answer.

Some organizations, after all, already use this tactic — and with great success.

charity:water has made the “100 Percent Model” a central piece of its marketing efforts  —saying that it depends on private donors, foundations, and sponsors to cover its salaries, office space, and supplies. It relies on “angel investors” — such as entrepreneurs Michael and Xochi Birch, who have contributed $10.5 million to the charity — to cover those costs.

As a result, charity:water’s solicitations to the public can claim that the full value of their donations will go to support water projects.

This approach is also used by a number of peer-to-peer fundraising efforts — including the Pan-Mass Challenge. As Pan-Mass founder Billy Starr explains, the organization relies on corporate and other supporters to underwrite its program expenses and can tell riders that every dollar they raise goes directly to the cause.

That model has helped the Pan-Mass Challenge raise more than $455 million since 1980, including $41 million in 2014.

“In our world, whether it’s a double standard or not, it’s proven to be a very dynamic stimulus for the people you’re asking to raise money using the event’s name and the charity’s name,” Starr said in a recent webinar.

But critics of the 100 percent model say it is disingenuous and provides donors with the false idea that nonprofits don’t need to spend money to provide quality services. Dan Pallotta, who created the Charity Defense Council to help lead a crusade to change the public’s perception about overhead, says nonprofits need to be sending the opposite message — otherwise they should simply close up shop.

“If we roll over and accept the public’s misguided approach to giving—and any approach that stifles the growth we need to solve problems is deeply misguided—then, yes, all hope in our ability to change the world is lost,” Pallotta wrote in an essay in The Chronicle of Philanthropy. “We should all go home.”

Where do you stand on this issue? Should nonprofits find ways to appeal to the psychology of donors and present them with ways to provide gifts that strictly go to support their missions? Or should they work to change the perception of overhead?