Donor migration to contractual relationships and the impact on charity income

A major challenge for charities is the volatility of individual donations. To guarantee a steady income, these organizations therefore increasingly strive to convert their donors into contractual contributors, who make fixed periodic donations, for example via direct debit. This research examines (1) how migration to contractual relationships affects a charity’s income; (2) whether charities should keep both noncontractual and contractual donors active or leave some of them dormant; and (3) how donor solicitation influences migration between noncontractual and contractual relationships and active and dormant states. We develop an econometric model that captures donation behavior, migration between observed relationships and latent states, and the effects of solicitations. We estimate our model on a large donor cohort of a human-rights organization and show that (1) the introduction of contractual relationships increases average donation amounts by approximately 33%; (2) activating dormant noncontractual donors pays off because it induces migration to contractual relationships, while waking up dormant contractual donors backfires because it triggers downgrading and contract termination; and (3) solicitations enable the organization to target and activate dormant noncontractual donors, thereby boosting customer equity, but may have negative effects in other donor segments.