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Behavioral Economics Modeling

AI for Good: Building Sustainable Nonprofits with AI Driven Behavioral Economics Modeling Services

Nonprofits fill critical gaps in our societal safety net, nimbly providing services that government and private industry either cannot or will not supply. Demand for nonprofit services has risen rapidly in recent years and 2023 is projected to be another challenging year due to the anticipated recession.

However, while nonprofits saw a surge in giving during the peak of the Covid-19 pandemic, the Giving USA 2022 Report says that the rate of increase was slowing quickly, from 9.4% in 2020 to 4.0% in 2021. BDO also reports that financial reserves are declining for most nonprofits.

Inflation has further compounded the financial pressure on nonprofits. Though recent economic news shows inflation cooling off, annual rates are still over 6.5% and specific supplies for fundraising, such as paper, envelopes, printing, postage, transportation, and labor, have seen increases of over 20% in the last year.

Nonprofits have a growing financial gap in a volatile fundraising environment, and as such, they need to define new approaches to understanding and influencing donor giving behavior.

The most advanced solution to this challenge is Behavioral Economics Modeling driven by advanced AI services. BEM-Ai services are being used today by leading nonprofits, enabling them increase fundraising revenue while optimizing solicitation costs and retaining donors.

What is Behavioral Economics Modeling?

According to The University of Chicago, “Behavioral economics combines elements of economics and psychology to understand how and why people behave the way they do in the real world.” One key element of behavioral economics is that it “…is grounded in empirical observations of human behavior…” – that is, you can build quantitative models of people’s behavior. Further, the understandings developed from behavioral economics can be used to construct “nudges” – which are prompts to push people to take particular actions.

Innovative nonprofit organizations have applied Behavioral Economic Modeling Services to accurately measure individual donor sentiment toward a specific nonprofit at a precise moment in time, and then use these individual insights to improve giving levels while reducing the cost per dollar raised. The BEM-Ai services answer the fundamental questions of how much to ask of an individual donor, and when to solicit them for a gift. It’s all about finding the unique point of equilibrium between donor sentiment and nudging them to the optimal level of sustained giving.

Knowing “How much” to ask of an individual donor can increase revenue while sustaining donor participation rates because the gift request is precisely tuned to that donor’s individual sentiment at a specific moment in time. It is the optimal ask amount to improve giving levels. Knowing “Whom to ask When” reduces fundraising costs, because it eliminates the expense of solicitations that are unlikely to result in an immediate gift. If it is clear that the donor is not likely to provide a gift at that moment in time, then why would a nonprofit organization diminish its brand and invest unnecessarily in making that solicitation?

What is the role of AI?

Developing an individual gift array estimate for a single high net worth donor can easily be done by a giving officer with a simple spreadsheet. However, what happens when there are thousands of donors? It is neither humanly possible nor cost efficient to create insightful individual giving models for each donor at that scale.

Traditional fundraising professionals provide highly personalized, white glove treatment to major donors, but mid-level and lower dollar core donors are broken up into broad segmentation cohorts with gift array values calculated using standardized-multiple formulas such as 1.0, 1.5, and 2.0 times a previous gift amount. Decisions are made about the ask amounts in direct fundraising campaigns without material individual donor insights.

This broad cohort approach reduces the complexity of fundraising, but it comes with risks. Asking too little risks not securing the right level gift, while not asking at the right moment in time risks spending excessively for the same level gift or worse yet, alienating the donor and causing them to discontinue their annual giving.  

BEM-Ai Services provide “segment of one” fundraising at scale. The underlying machine learning algorithms are uniquely suited to ingest very large data sets and reveal keen insights into donor giving behavior. The best practice in the BEM-Ai discipline is to update models monthly, learning from the latest donor behavior, and then optimizing giving levels through real time insights on changes in donor sentiment.

The process of developing nonprofit-specific and donor-specific BEM-Ai models requires numerous steps and using a variety of proprietary algorithms enables the services provider to glean actionable insights in donor behavior from monthly updates on giving levels. A data scientist typically needs to use multiple AI variants, (unsupervised AI, supervised AI, and reinforcement learning), to successfully assess donor behavior and prescribe the appropriate decision of how much to ask at the moment of the solicitation to move the donor to the optimal level of giving.

BEM-Ai can be used by nonprofits to optimize fundraising across a wide array of campaign types (sustaining, lapsed, renewal, special appeal, and acquisition) and channels (direct mail, email, SMS, and phone). It is important for nonprofits to provide the donor with a consistent omni-channel experience on the appropriate giving amounts and the timing of gift requests. As a result, nonprofits are encouraged to use BEM-Ai services across all campaign types and channels.

What are the benefits of BEM-Ai?

Well-constructed BEM-Ai, when paired with a suitable donor data set, can increase direct response fundraising by an average 12%, advancing donors toward higher levels of giving approximately 11% faster, while reducing monthly direct mail solicitation costs by 10% – 30%, and delivering an ROI of 50%–250%.

Beyond the quantitative numbers, BEM-Ai also has the advantage of improving donor relations and building the nonprofit’s brand equity. When a nonprofit is soliciting the appropriate gift amounts, at the appropriate times, a donor is more likely to look favorably at the nonprofit and maintain their relationship over the long term.

How can a nonprofit implement BEM-Ai?

While some nonprofits are very technologically advanced, many do not have the skills or technology on hand to build, implement, and manage BEM-Ai models. However, this does not preclude them from realizing the benefits of BEM-Ai, as these services can now be delivered as a simple service from an outside specialist. The allows nonprofits to access the benefits of BEM-Ai within a few days, without disrupting marketing agency relationships, changing business rules, fundraising processes, or existing fundraising systems. Additionally, as a service there are no capital costs, licensing fees, maintenance expenses or set-up fees, or training required.

The privacy and security of donor records should be paramount to a nonprofit. If they engage with a BEM-Ai services provider, it is imperative that the provider does not require the use of Personally Identifiable Information (PII) to build and maintain their AI models. BEM-Ai models can be built using persistent and anonymized donor identification codes instead of names, and not depend on demographic data.  The critical data when building a BEM-Ai model is the donor’s observable historic giving and response behavior.

Next steps

As nonprofits navigate difficult economic times, they need new and innovative ways to financially stabilize their missions. AI driven Behavioral Economic Modeling Services are proven to improve fundraising revenue and while reducing operating costs. Nonprofits who do not have the systems or data science capabilities in-house can always fill that gap with a reputable BEM-Ai services vendor. BEM-Ai is the next level opportunity to amplify the good that nonprofit organizations deliver to society.