The nonprofit sector has been very focused on giving as a percentage of Gross Domestic Product (GDP) for many years now. Since the 1970s, charitable giving as a percentage of GDP in the United States has hovered around 2%. To put that in perspective, the agriculture, forestry, fishing, and hunting industry represents 1.1% of GDP, mining is 1.7%, and administrative and waste management services is 3.1%. Sitting somewhere in the middle is charitable giving, putting it between a rock and a waste place.
A point that I argued in Data Driven Nonprofits was that GDP is likely a poor growth metric for the nonprofit sector. The more useful metric to focus on might be the percentage of disposable income given to charity. As it turns out, according to Giving USA, that metric has also been stuck at about 2% since the mid-1970s. Compare that with about 3% of average annual household spending on apparel and services and 5% spent on entertainment in the United States.
When viewed from this perspective, discretionary spending becomes a share of wallet discussion for nonprofit organizations. Keep in mind that 72% of giving in the U.S. comes from individuals. Not to mention another 8% going to bequests. Giving by individuals and households is influenced by discretionary spending. With this in mind, share of wallet becomes more important than share of the economy.
The Blackbaud Institute has just published the new report “Share of the American Wallet: How Discretionary Spending Identifies the Best Donor Prospects” and researcher Christopher Dann explores this topic in more detail. In the report, discretionary spending is defined as household spending not obligated to be spent on items such as taxes, debt repayments, or basic living necessities. Dann makes the point that “charitable giving may be virtually alone as a purely discretionary expense.”
The research leveraged data from the Consumer Expenditure Survey (CES), which is conducted by the U.S. Census Bureau for the Bureau of Labor Statistics. The data set sampled 7,100 consumer units (households and individuals) by interview and another 7.100 units through diaries of monthly expenditures. This report draws on the 21st edition of Household Spending, based on the 2014 CES.
As it turns out, there are three significant indicators of discretionary income: age, education, and household composition. Age correlates highly to both earning capacity and debt reduction. Educational attainment influences financial capacity and career opportunities. Household makeup also has an influence on discretionary spending and giving. The report goes on to note that “both giving to educational institutions and to charities forges way ahead in the above $150,000+ (income) realm.”
There are additional areas that are explored in the report, including understanding different giving patterns among faith-based and educational institution donors. Dann also provides some recommendations on donor characteristics that present better opportunities for prospecting and viability.
WHAT IT ALL MEANS
There are several key takeaways from the report and its implications for the nonprofit sector. First, when we set aside mega-gifts, the reality is that a tremendous amount of charitable giving for the foreseeable future is inextricably linked to discretionary spending. Factor in the number of nonprofits that individuals and households give to and share of wallet gets even more fragmented. Nonprofit organizations need to adopt a share of wallet mindset as part of a donor engagement and development strategy.
Second, any mid-level and major gift program will need to take into account variables such as age, education, and household composition and the role they play in discretionary spending. Target Analytics, a division of Blackbaud, has been using discretionary spending data as part of predictive modeling and segmentation with nonprofit organizations. There is a greater level of granularity in this data that can help organizations to implement their strategies with more precision.
Finally, nonprofit organizations need to focus on making giving a habit, especially among younger constituents. We are now living in the Sustainer Economy. Think of the number of services consumers now subscribe to on a monthly basis. Netflix, Spotify, Blue Apron, Mantry, Birchbox, Dollar Shave Club, Loot Crate, Hulu, and more. Guess what? These are all discretionary spending choices too. It has never been more important for nonprofit fundraisers to embrace monthly giving programs. Organizations can begin to build giving habits with younger donors and set the stage for long-term relationships.
The “Share of the American Wallet” report gives insights into donor behavior that can be helpful to nonprofits of all sizes and missions. Making the most from these insights will require organizations to develop a share of wallet mindset. Consumer and donor behavior are linked together and this will continue to influence fundraising programs. This adds an important new dimension to traditional thinking about donor capacity and affinity. The nonprofit sector must continue to leverage this type of data for strategic planning and fundraising execution.