Better Ratings Help Small Charities but Not Big Ones

Larger charities struggling to cut administrative costs to get a coveted third or fourth star from Charity Navigator may be wasting their time, a recent study suggests. Their fundraising didn’t get a boost when their ratings from the charity watchdog improved.

But for smaller charities, getting another star can be a bonanza: Those with less than $8.5 million in assets and relatively low fundraising expenses saw contributions soar by nearly 20 percent.

THE DATA

Bariş Yörük, an economist at the State University of New York at Albany, studied four years of Charity Navigator data, and his findings mirror research in the business world. Studies have shown, for instance, that a one-star increase in a rating on consumer-driven review site Yelp can help nonchain restaurants increase sales by up to 9 percent, but the site has a negligible effect on revenue at chain eateries.

The reason, Mr. Yörük suggests, is that places like Olive Garden and Red Lobster are so well-known that customers don’t need an independent rating to check on quality. Similarly, donors don’t typically depend on Charity Navigator to determine the effectiveness of brand-name nonprofits like the Salvation Army or Catholic Charities. Instead, they rely on the ratings to suss out little-known charities that don’t have the reach, advertising budget, and history of a more established organization. In those cases, an improved rating can really catch a donor’s eye. On average, an additional star resulted in an additional $353,000 in gifts.

DIGGING DEEPER

So should smaller nonprofits manipulate their budgets and cut spending to earn another star from Charity Navigator and attract more support? Bad idea, Mr. Yörük says. By slashing fundraising and administrative expenses, charities put their ability to function and attract donors in jeopardy; they risk a drop in fundraising more serious than the benefits an additional star can bring.

“There is always a trade-off,” the researcher writes.

FIND IT

The paper, “Charity Ratings,” was published in the Spring 2016 volume of the Journal of Economics & Management Strategy.