The Charitable Giving Market is Efficient After All

“The charitable giving market is highly inefficient.” In the five years I’ve been writing about philanthropy I’ve used that phrase, or at least that sentiment, more times than I could possibly count. That’s not a blinding insight on my part by any means—it long predates me and is a view shared by many who are working to improve the sector.

The premise is that in well-functioning markets, capital moves to where it gets the best return. People or organizations who don’t generate a high enough return find it increasingly hard to raise funds, while those who produce high returns find it increasingly easier to find the funding they need. You don’t have to spend long looking to conclude that’s not the case in philanthropy. Nonprofits that aren’t very good at what they do can raise huge sums while highly effective programs struggle to get by.

I was a true believer of this perspective until a few months ago. While reviewing the work of a client, Hope Consulting, which had just completed one of the most comprehensive surveys of donor behavior and thinking for many years, it suddenly struck me: donors are getting exactly what they want from their charitable giving. In other words, the market is in fact efficient, even highly so.

That conclusion came from several data points from the Hope Consulting study, Money for Good. First, it showed how truly loyal donors are. Specifically, donors say that more than 80% of their giving is completely loyal—they will give to the same organizations year after year. If that sounds high, it is. In the consumer market, 80% loyalty is unheard of. A recent study of consumer brand loyalty found that the average brand lost a third of their most loyal customers every year.

The Hope Consulting study also asked donors about the overlap between what they viewed as important and how well nonprofits were performing. The only significant gap between the two measures was in frequency of solicitation. But donors thought that nonprofits were performing extremely well in terms of leadership quality and effectiveness.

When you contrast these responses with the well-documented falling public trust in nonprofits, it becomes clear that donors are living in Lake Wobegon. While they recognize there are ineffective and wasteful nonprofits, they believe that all of the nonprofits they support are above average. In other words, by and large donors are getting exactly what they want from the nonprofits they support—that’s an efficient market.

For those who think charitable giving could be accomplishing much more than it is, this is a sobering realization. It means the challenge isn’t getting donors better information so they can choose the charities that are more closely matched with what they want.

The challenge is changing what donors want.

If you’re committed to trying to get more money to the most effective nonprofits that means approaching the issue more like global warming than like consumer finance reform. In the latter case, the issue is incomplete and misleading information (if consumers got their hands on understandable, reliable information they wouldn’t choose mortgages that would force them into bankruptcy). Helping people do something about global warming, though, is about far more than information. It’s about changing fundamental attitudes, expectations and behavior patterns.

And that’s an even more daunting challenge than making the charitable giving market more efficient.

Read more stories by Timothy Ogden.