Disasters or Opportunities?
Imagine an organization that thrived when others suffered, earned revenue during times of crisis and disaster, such an organization would be well-suited to benefit from the effects of climate change. Enter, the American Red Cross.
No More Budget Deficits
In a 2014 email to the leadership of the American Red Cross, Gail McGovern, a former HBS marketing professor and the CEO of the American Red Cross sought to explain the non-profit’s $70 million FY14 deficit. McGovern described the root cause of the budget deficit as “fundraising that fell short of our target in a year without any huge national disasters.”[1] In a post climate change world, the Red Cross would no longer have to lament the dearth of death, instead being able to focus on increasing their revenues from their 4% administrative fee[2] and 17-26% of donations spent on fundraising.[3]
Climate Change and Natural Disasters
While the potential effects of climate change may be quite varied, one of the clearest results would be a rise in the number of and devastation caused by natural disasters. Sea levels would rise, flooding homes along the world’s coastlines, extreme weather patterns would increase the number of floods and droughts on land, warmer temperatures would lead to heatwaves and more hurricanes and typhoons, all necessitating disaster relief efforts. Global conflicts would likely increase as a result of the scarcity of resources creating refugees who would seek the safer shores of the United States. Though such disaster would spread throughout the globe, the United States would be affected by flooding, hurricanes, heatwaves and said refugees seeking a new home. In this situation, the American Red Cross would be called upon to provide disaster relief and the American people would increase donations.
Revenues Rise with Sea Levels
The American Red Cross is a tax-exempt, non-profit formed in 1881[4] with revenues of over $2 billion a year.[5] The Red Cross’s financial figures are notoriously opaque due to combining revenues and expenses from the organization’s separate fundraising and blood supply efforts. In 2014, NPR worked with ProPublica to research the true administrative and spending figures for the American Red Cross and found that 17-26% of all money donated is spent on fundraising, on top of the 3-4% spent on administrative fees. [6] Using these figures with the current $2 billion a year in tax-free revenues the Red Cross is earning roughly $80 million in admin fees per year and spending around $400 million on fundraising. In the aftermath of Hurricane Katrina in 2005, the American Red Cross raised over $3 billion, displaying the huge impact each natural disaster has on the Red Cross’s bottom line.[7] As the rate and severity of natural disasters increases we can only expect to see more donations to the American Red Cross, raising revenues and their associated administrative fees.
Disaster Fatigue
Perhaps the most important issue with which the American Red Cross would have to deal is so-called disaster fatigue. As the frequency of natural disasters increases, donors will feel less and less obligated to donate to the Red Cross during each subsequent event. One cause of disaster fatigue could be donors who set yearly donation budgets which may be met early in a year. Another effect of climate change would be decreased media coverage of each natural disaster as the public tires of watching the same videos of death and destruction on the news every night. As awareness for natural disasters decreases and so many more events occur, the Red Cross will receive far less donations for each disaster as they did before. In order to cope, the American Red Cross will either need to decrease services provided, be forced to look for internal cost cutting measures, or seek to raise awareness of disasters to keep the money flowing. This would be a very serious problem and the Red Cross would be unable to cut costs enough and would have to start providing fewer services with each natural disaster or seek federal funding to continue their disaster relief efforts. Although, the American Red Cross will be a short-term beneficiary of climate change, the American public will grow desensitized to others’ suffering and less likely to donate in the long run.
(698 words)
[1] “CEO Gail McGovern Email on Red Cross Deficit – September 2014.” – ProPublica. Accessed November 03, 2016. https://www.propublica.org/documents/item/1348173-ceo-gail-mcgovern-email-on-red-cross-deficit.html.
[2] “Rating for American Red Cross,” January 10, 2016, accessed November 4, 2016, https://www.charitynavigator.org/index.cfm?bay=search.summary&orgid=3277.
[3] “The Red Cross CEO Has Been Serially Misleading About Where Donors’ Dollars Are Going,” Red Cross, December 4, 2014, accessed November 4, 2016, https://www.propublica.org/article/red-cross-ceo-has-been-misleading-about-donations.
[4] “Our Federal Charter | American Red Cross,” 2016, accessed November 4, 2016, http://www.redcross.org/about-us/history/federal-charter.
[5] “Red Cross Misstates How Donors’ Dollars Are Spent,” December 4, 2014, accessed November 4, 2016, http://www.npr.org/2014/12/04/368453320/red-cross-misstates-how-donors-dollars-are-spent.
[6] “The Red Cross CEO Has Been Serially Misleading About Where Donors’ Dollars Are Going,” Red Cross, December 4, 2014, accessed November 4, 2016, https://www.propublica.org/article/red-cross-ceo-has-been-misleading-about-donations.
[7] “Hurricane Katrina 5 Year Summary,” accessed November 4, 2016, http://www.redcross.org/images/MEDIA_CustomProductCatalog/m3640083_Katrina5Year_Sum.pdf.
I agree with the risk of short-term benefits of climate change (more disasters = more $) and long-term risks from disaster fatigue (we care more about the seventh flood of the year). Cynically, I wonder about marketing disaster relief – how do some of the principles we learn in marketing apply to Red Cross campaigns and is it OK to advertise disasters for a “good cause”? Another long-term play by the Red Cross might be to separate funding from individual disasters – solicit donations consistently throughout the year while minimizing ties to individual disasters (a harder sell but maybe possible?), invest them in a portfolio, and draw from the long-term portfolio when disaster strike.
*we care less about the seventh flood of the year
If disasters directly impact more people at an increasing rate and if media coverage becomes increasingly selective of which disaster to cover (given the increasing choice of disasters), then shouldn’t disaster fatigue be highly improbable? The thought is that as disasters hit more people, there may be a greater need for disaster relief, which, in turn, could end up boosting the Red Cross’s revenues. Similarly, if only the most spectacular disasters are publicized, then media consumers shouldn’t have an incentive to become complacent when deciding if and when to donate, thereby ensuring a continuous supply of revenues. However, if the disaster market does become increasingly lucrative, competition could pose an additional threat.
Your perspective on Red Cross’s business model is interesting, and I understand your point that increased disasters will likely result in increased donations (and therefore, increased revenue) for the organization in the short-term. However, I think an interesting additional analysis could explore the composition of Red Cross’s donor base. Is this money coming from national or state-level governments? Surely, these governments face a variety of disaster risks of their own. Is it coming from corporations highly exposed to climate change risks (e.g., oil, aviation, transportation)? How might disasters that directly impact these donors affect their desire to donate to a globalized organization like Red Cross? Would capital and relief efforts become more localized? If so, the Red Cross is at risk of severe declines in fundraising in the long-term.
I hear the author’s point around “disaster fatigue” as described. I was interested to come across a different use of the term, as defined by the Red Cross itself: “Disaster fatigue is a phenomenon that occurs when an individual, family or community is faced with a string of crises”.
Leaving aside questions around defining what exactly is the correct usage of the term, it is sad to envision a future where an increasingly volatile climate makes rebuilding communities in certain areas difficult. I think a major secondary effect will be great human migrations inland or to locations with less volatility, which will strain those locations’ infrastructures further (though may lead to increased economic benefits with increased immigration). Hard to predict how it will play out.
http://www.redcross.org/news/article/local/south-carolina/Red-Cross-cautions-residents-of-the-dangers-of-disaster-fatigue
I appreciated this interesting take on how the Red Cross in the short term could benefit from climate change and an increase in natural disasters. I disagree, however, that an increase in natural disasters would desensitize donors from contributing to the Red Cross’s efforts. With an increase in natural disasters, assuming human empathy levels stay the same, the feeling that “this could happen to me” could go up. With social media driving more interconnectedness than ever, and with a media world that allows anyone to publish information, I don’t think we’d necessarily see a decrease in awareness of natural disasters. Perhaps it’s my more optimistic point of view but I’d like to hope that the donor base would grow in size if natural disasters were to increase in frequency and impact.
The exploration of the Red Cross’s top-line impact from climate change is interesting, but ultimately a non-profit is measuring itself by the services that it provides. I think this is a cynical view, as the the increase in disasters is not an increase in revenue, but an increase in need for the services that the Red Cross provides, so in reality it is really an increase expense! Not only that, but the cost of providing these services could end up being more expensive, as resource are being deployed to locations with increasingly weakened infrastructure and political and economic systems, not to mention the fact that they may be deployed to more concurrent disasters at any given time, increasing the complexity of their operations. Yes, this may be a boon to donations, but I expect it does nothing to the ever-present non profit funding gap.
Thank you for a very interesting post. In my view, it would be very useful to examine historical data, if this data is publicly available, in order to determine whether the amount of actual donations to the Red Cross tends to decrease, increase, or remain neutral during periods characterized by a relatively increased number of disasters and see whether a trend can be deduced from such observations.
Interesting juxtaposition of a non-profit and climate change as one of its revenue drivers. I find the case to be very similar to doctors as a profession, whose livelihood and success is purely dependent on the existence of the sick and the healthy. Indeed, this is a profession that thrives while others suffer. However, our society doesn’t penalize our doctors nor do we even think about the monetary benefits for the doctor because they fulfil an important and functional need for society, just like the American Red Cross. While every organization has its P&L, the existence of the Red Cross is to serve the unfortunate population devastated by natural disasters, and its success is predicated on the value of services it provides. It is, therefore, up to the marketing and campaign professionals to do their job and make sure the donations are coming in just enough to sustain operations and provide the services that humanity needs.
I found this post very interesting, thank you. For an organization that comes in when disaster strikes, it is going to be increasingly important to keep track of where they have impact and ensure that help is given where it is needed the most. Most people give lots of money when big disasters occur. However, as these become more common, will we as a species become desensitized?