How Accurate is the Pareto Principle?

How Accurate is the Pareto Principle?

Hopefully you know all about the Pareto Principle, also known as the 80/20 rule.
 
In fundraising it means concentrating more resources on the 20% of people who would, theoretically, give you 80% of your future revenue.
 
Pareto2 (Pareto squared) is a little bit more complex.  It is when we look at those top 20% of donors, and note that 20% of them will give a majority of income too.
 
Again, theoretically, this small number (20% of 20%, which is 4%) would give you 80% of 80% of your revenue – 64%.
 
This theory can really help with resource allocation.  But how close is reality to theory?
 
The Principle ‘works’ to different degrees.  A charity with a database consisting of only monthly donors would have a ‘flat’ Pareto score.  Their top 20% of donors might give just 45% of donations for example.
 
Whereas a charity who has a broader portfolio of donors and is good at maximising revenue from bequests and mid-major donors would be much closer to the ‘true’ Pareto principle.
 
At Pareto Fundraising, we have a ton of data, so we had a look at all the individual donations made to all 75 charities in the Pareto Benchmarking study, and we saw something really interesting.
 
Bringing the charities together, you would expect the charities who are reliant on monthly giving would ‘balance out’ the charities who do well in bequests and major donors to get us close to the Pareto principle.
 
And indeed they do.
One off donations – including bequests – come very close to the ‘Perfect Pareto’.
 
With 73% of revenue coming from 20% of donors, and 46% coming from 4%, those one off gifts are close to theory.  When charities are really good at their bequests and major donors, their Pareto principle will be closer to 80/20 and 64/4.
 
But monthly givers are nice and ‘flat’ with the top 20% of donors ‘only’ giving 45% of revenue, and the top 4% just giving 16%.
SeanTriner_ParetoPrincipleVsReality

Pareto Principle – Theory v Reality 

So what does that mean when you develop a plan for your mid value, major donors and bequests?
 
Well, the lessons of Pareto still apply – there is more potential now and into the future from a minority of your donors. Your approach should be the same.
 
Here are my thoughts about the Pareto principle and Pareto2, even if the numbers are not quite 80/20 and 64/4.
  • You will get a majority of your revenue from a minority of donors
  • If you have a ‘flat Pareto score’ – like 20% of donors giving you 50% or less of revenue – then you are probably not doing enough work in the areas of bequests, mid and major donors
  • If you have a ‘steep Pareto score’ – like than 5% of donors giving you 80% of revenue – then you may be too reliant on a few donors for your whole operation. Time to invest in some monthly givers?
  • Increasing investment in your ‘top’ donors is likely to reap rewards. What type of investment?
    • Better stewardship
    • Visits, events and meeting donors ‘in the field’
    • Bigger, better direct mail to fewer donors
    • Integrating direct mail with digital, phone, visits and events
So don’t worry if you don’t have a perfect Pareto score, the learnings still apply and can guide you in your future planning.
PS – If you work in a charity with lots of donations (at least 10,000) you are almost certainly interested in being part of Benchmarking. Please email Jesse at Pareto.
  
Sean
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