Here’s a business adage you’ve heard before: You have to spend money to make money. To rephrase that in the context of political fundraising: You have to spend lots of money on vendors to make money via direct mail.

That direct mail has high costs associated with it shouldn’t really shock anyone. From the creative to the printing to the postage, direct mail of any kind can’t be done on the cheap. But the question for campaigns that raise money through the mail is how much is too much when it comes to cost?

“Somehow folks have gotten to the point where they think it should cost nothing to raise money,” says Michael Centanni, the chief operating officer of Base Connect, a direct mail fundraising firm that works for conservative candidates and causes. The firm, led by Centanni and President and CEO Kimberly Bellissimo, has taken plenty of heat recently over the cost of its fundraising services, but Base Connect’s leaders are ready to defend their practices.

Last year the firm, formerly known as BMW Direct, changed names after a threat of legal action from the similarly named car maker. Despite accusations to the contrary, the company’s leaders say the name change had nothing to do with some of the negative press surrounding it. Some of its clients—mostly long shot GOP candidates running in Democratic districts—were unhappy with the rate of return from their direct mail fundraising programs. In the spring of 2008, The Boston Globe ran a story about the campaign of Massachusetts Republican Chuck Morse, a BMW client who was challenging Rep. Barney Frank. What caught the paper’s attention were the fundraising program’s high costs and the fact that the campaign was still pumping its list of donors after the campaign had ended with a series of “debt reduction mailings.”

The campaign itself was a failure; Morse didn’t even qualify for the ballot. The fundraising program didn’t work either; it was an effort Centanni and Bellissimo call one of the few they have overseen that simply didn’t pan out. Morse raised a healthy $700,000 for the race, but almost all of it went to cover the costs associated with the mail program.

The left-leaning blog Talking Points Memo picked up on the Globe story and looked into the topic some more. In all, TPM wrote more than a dozen stories about the firm and other outlets started paying attention. It was enough for MSNBC’s Keith Olbermann to single out BMW Direct as his “worst person in the world” in July of 2008. The temperamental talk show host selected the company as “worser” than staffers in the psychiatric ward of a Brooklyn hospital and Karl Rove.

The flap over the Morse campaign was part of a wider online battle between liberals and conservatives over the efficacy of direct mail fundraising—in truth, it’s a longrunning debate in the political community. Republican candidates and causes are generally more successful raising money through the mail than Democrats. It’s one area where the GOP holds a pretty clear strategic edge. The National Review’s Mark Hemingway defended BMW in a blog post. GOP web strategists Soren Dayton and Patrick Ruffini accused TPM of trying generally to discredit direct mail fundraising—a medium that has meant millions upon millions of fundraising dollars for the right. On RedState, conservative blogger Mike Krempasky said the negative attention resulted from complete ignorance of how direct mail fundraising works.

A similar storyline resurfaced earlier this year after Republicans in Pennsylvania turned a critical eye on Base Connect client and congressional hopeful William Russell’s inordinately high “burn rate”—the rate at which money coming into the campaign was being spent. Much of that money was going to Base Connect along with printers and list vendors to support Russell’s direct mail fundraising program. In this latest round of sparring, some criticism also came from the right. Republican strategist Bill Pascoe penned a column accusing Base Connect of “subprime fundraising” given the program’s high costs. (In earlier columns, Pascoe had written favorably about Republican Tim Burns, who was battling Russell for the party’s nomination.) Russell lost out on the GOP nod in Pennsylvania’s 12th Congressional District—state party leaders eventually selected Burns to be the party’s candidate in the special election to fill the late Rep. John Murtha’s congressional seat.

In early March, RedState’s Erick Erickson tweeted this warning: “If you are a GOP candidate using BMW Direct a/k/a Base Connect, you might be denying yourself a RedState endorsement.” Then came Louisiana Republican Rep. Joseph Cao’s decision to drop the firm citing unhappiness over returns on its fundraising investment. Cao was still in the early stages of his fundraising program, but returns had taken a nosedive after he was the only House Republican to vote in favor of healthcare reform.

Base Connect’s leaders say their firm has done nothing wrong. Over the course of a two-hour sit-down with Politics, Centanni and Bellissimo said the negative stories have grown from a combination of resentment over the firm’s fundraising success, liberal media bias and a fundamental misunderstanding of the way direct mail fundraising works.

The company bristles at the way its fundraising numbers have been reported. Absent in the many stories about the firm’s clients, says Bellissimo, is a proper parsing of where the money raised has actually gone—there are large postage costs, as well as expenses for printing and data processing. She and Centanni are armed with charts and figures detailing several of the firm’s direct mail campaigns, information they have started posting on a section of the firm’s website they call “nuts and bolts.” Russell’s mail expenses for instance show that 34 percent of gross contributions alone went to pay for postage—that’s just shy of $1.1 million. Base Connect collected just over $329,000 in creative fees while nearly $350,000 went to printing costs and just over $326,000 for list rental expenses.

Russell netted $841,260 in 2008 with the program—total direct mail contributions exceeded $3.2 million.

So yes, given the production costs, the profit margins may not be quite as high as the gross numbers suggest, but the vendors are by no means going broke. Still, Bellissimo is convinced her company and her industry are unfairly getting a bad rap. “When you see these bad stories about us it’s always, ‘They own all these companies, and they’re all intermingled and it’s so incestuous,’” Bellissimo says. “Well, so does everyone else.”

Untangling the questions critics have raised specifically about Base Connect and generally about direct mail fundraising requires a closer look at how it really works. What are the standard costs of a direct mail fundrasing program and for which campaigns is it best suited?

Some direct mail fundraising practices regarding fees and commissions are industry standard—even some that might surprise outside observers. Getting a direct mail fundraising program off the ground often means losing money in the short run. But other practices differ across the industry. And it’s there that the details truly matter.

How It Really Works

Let’s start with some history. Before political direct mail fundraising was even an industry there were campaigns with success stories. In 1952, Dwight Eisenhower’s campaign raised money through the mail. Republican presidential candidate Barry Goldwater raised nearly $6 million through the mail for his 1964 campaign. In 1972, Democrat George McGovern raised a staggering $25 million through direct mail. During those years, the man largely credited with pioneering the direct mail fundraising industry—conservative Richard Viguerie—started building his lists.

Viguerie’s efforts picked up steam after Goldwater’s loss in ’64. The clerk’s office in the House of Representatives had a donor file that contained the names and addresses of those who had given more than $50 to any federal candidate, so Viguerie started copying them by hand. He ended up with most of Goldwater’s 15,000 donors before the clerk kicked him out. After founding his own direct marketing firm, Viguerie spent years growing his donor lists and by the late 1960’s he had more than 150,000 names. “I caught a lot of criticism at the start,” Viguerie says. “It takes a while to reap the benefits of direct mail and people didn’t understand that in the ‘60s and ‘70s.”

The biggest reason for the criticism: Viguerie’s costs were high. “He was criticized a lot mainly because other groups just couldn’t afford it,” says Roger Craver, a direct mail pioneer on the Democratic side of the aisle. “But he had a very transparent process. It’s not like there were hidden costs.” Viguerie’s mail programs weren’t run with efficiency in mind—they often created large debts that had to be recouped through continually mailing the client’s donor list.

In the mid-’70s, Viguerie’s firm launched a direct mail effort for the National Right to Work Committee. The group was fighting a legislative effort led by Democrats and organized labor to allow something known as “common situs picketing.” It would have made it easier for striking trade unions to disrupt construction projects. President Ford promised to sign the bill if it reached his desk, but a massive direct mail effort led by Viguerie was credited by many with changing the president’s mind and Ford vetoed the bill.

“A lot of unsophisticated people looked at it and said, ‘You spent a million dollars and only $750,000 came back? What a rip-off,’” Viguerie says. “But that’s not the point. Not only did we defeat the legislation, we picked up 80,000 donors for the organization. Over the past 30 or so years, that has meant $50, $60 million or more for them.”

Craver faced a similar problem raising money via direct mail for gay rights groups in the ‘70s. It was such a divisive issue at the time that response rates were exceedingly low. That meant Craver had to send a higher volume of mail in the search for responsive donors—a process known as prospecting. “The practice of spending what is raised or even more than what is raised in the early stage of the campaign is standard practice,” Craver says. “At the start, breaking even is great.”

As the direct mail fundraising industry has grown, that’s one thing that hasn’t changed much, and it’s the first hard reality of fundraising through the mail: The start-up costs can be enormous.

“There’s no question that building a base of new donors is a process that oftentimes requires you to invest much if not all of the proceeds for that initial prospecting,” says Chuck Pruitt, a partner at the Democratic firm A.B. Data. Pruitt’s firm raised some $103 million in direct mail contributions for President Obama’s 2008 campaign. “Once you’ve attracted new donors to the campaign, they are going to end up being highly profitable in terms of producing net dollars for the campaign’s purposes.”

For a candidate campaign with absolutely no direct mail donor base, here’s the basic process: It starts with the creative—determining what your candidate’s story is and structuring the appeal to donors. Next comes the costly part—prospecting. The goal is to build the campaign a “house file,” which is a list of donors who are proven responders to the campaign’s fundraising appeals and can be solicited again and again over the course of a campaign, or in the case of an incumbent politician, cycle after cycle.

Depending on the campaign’s message, the direct mail firm will decide which lists to prospect. There are thousands of political donor lists for rent on the open market. Before committing to large-scale mailings a firm will typically send a series of test mailings to segments of certain lists. Based on response rates, the vendor will decide which lists to include in a larger scale mailing, and the construction of a house file begins. Ideally, a campaign with no file and no base of direct mail donors will begin a program somewhere between 18 and 24 months out from Election Day. Starting a direct mail effort without enough time to properly prospect and test mailings is a disaster waiting to happen, say direct mail consultants. (Some often-repeated advice: If you’re not confident you can move the program from a net loser to a net winner by the time the campaign needs to spend some late cash on media and other expenses, you shouldn’t even begin the program.)

The players in the direct mail fundraising world are usually led by the creative agency, of which Base Connect is one. Then there are the list agencies and brokers and the data companies. The list agencies are the keepers of the donor lists—these firms rent lists to campaigns and organizations for prospecting purposes. Often, a creative firm will own a list company and/or a data firm. Base Connect owns Legacy Lists and Century Data. Another GOP direct mail fundraising firm, HSP Direct, owns Sunrise Data. Most people in the political fundraising world seem OK with the connections between firms, given that the client is fully aware of them. In the case of Base Connect, some previous clients have claimed they weren’t. The firm disputes that, noting that there’s no attempt to hide ownership of the companies—Base Connect, Legacy Lists and Century Data all share the same office address in downtown Washington, D.C.

The basic process for prospecting holds true for most direct mail fundraising consultants and programs—with some variations of degree. The most interesting differences come over the question of cost. Does the firm offer “no-risk prospecting,” where the creative firm and vendors essentially offer the campaign credit to get the program off the ground? Is there a per-piece fee or will the company work on a monthly retainer that covers the creative and the mailing?

”I’m always a little nervous about people who proclaim that there’s no upfront investment,” says Pruitt. “You might have long shot candidates who are so desperate for dollars that they sign anything. If you say, ‘We can get you $50,000,’ forget the fact that it may cost $950,000 to get it. We don’t work with any campaigns that start that way because we just don’t think it’s fair.”

Untangling The Costs

As a consumer of direct mail fundraising services, the decision on who to trust to build a list for your campaign is as important as how they do it. Republican Dan Hazelwood warns campaigns to resist the temptation to take the easy way out when it comes to building a program. “The strength and weakness of direct mail fundraising is that it does not require much candidate time,” says Hazelwood, who heads Targeted Creative Communications, a direct mail firm that does some fundraising work. “And the tools that make it successful are the same tools that can be abused.”

The biggest pricing difference is between firms that work on retainer or do direct billing and therefore require some upfront cost, and those that offer no-risk prospecting. On the one hand, extending credit to a client in order to get a program up and running means a higher level of risk on the part of the fundraising firm and vendors—if the program doesn’t return dollars, it’s the firm and vendors who have to eat the cost. On the other hand, it’s an arrangement with the potential to place most decision-making power with the firm and vendors rather than with the campaign.

“No risk prospecting,” is a term Richard Norman says he started using in the late ‘80s while working for the Republican direct marketing firm Eberle & Associates. In 1987, Norman left to form his own firm, The Richard Norman Company, and as soon as it was financially able to the company started offering no risk prospecting for campaigns. The conservative organization Citizens United—famous now for its Supreme Court case—got off the ground with a no risk direct mail fundraising program. Oliver North’s U.S. Senate campaign in ’94 was another example—Norman’s firm was one of several that were part of a record direct mail haul for a statewide race—$16 million—in what ended as a losing effort.

”The whole point is that the client cannot get left holding the bag,” says Norman. “The downside to no-risk is that the organization doesn’t have the controls they would or should have.”

The kicker is that the man who coined the term, no longer employs the no risk prospecting model in his own business. “We’ve done away with all of those programs with the exception of one that was grandfathered in,” Norman says. “There are just too many inherent problems with the no risk concept.” He says it became increasingly difficult to satisfy vendors to whom money was owed and “most clients don’t want their list out there these days.” With no risk agreements, the firm almost always has co-ownership of the campaign’s house file and is able to immediately start generating income to recoup its costs by renting that list.

Another question is who really benefits from a per-piece fee. A program based on volume, warns Craver, incentivizes mail firms to mail more and it isn’t all that tough for the firm to justify it. In very basic terms the more you mail, the more responses you’re likely to get, but it’s not the best way to increase efficiency or net more for the campaign. “Anytime you see unit pricing, the incentive runs to the fundraiser to mail as much mail as possible,” Craver says. “Early on in my business, I put in a graduated scale. So if I were charging $50 per thousand, I would only do that up to a certain point. Once I reached a certain threshold, I would drop that rate.”

For a campaign thinking about embarking on a direct mail fundraising program, Hazelwood offers some questions about cost that should be answered first. For starters, he says, ensure you know who approves the cost of a mailing and who picks the vendors. Then:

• Do the production vendors have any other financial ties to the firm that selects them?

• Who decides when money generated by the mail is transferred to the control of the candidate’s campaign?

• How does the mail effort ensure it maximizes net return, rather than just total return?

• Is the caging firm (the company that processes the donations) independent from the fundraising firm?

• And who owns the names acquired in the prospecting mail?

With the caveat that he doesn’t have direct knowledge of any other firm’s practices, nor is he aiming his comments at any firm in particular, Hazelwood notes that his own firm Targeted Creative doesn’t own or receive compensation from any sub-vendors used by the company. “A direct mail fundraising firm has a giant economic incentive to own and control all its sub-vendors,” he says. “That incentive is jacked-up prices that cost the client huge amounts, while the client is led to believe they are getting some kind of competitive pricing.”

Another topic that needs to be settled between vendor and client is ownership of the list—and here there is a clear dividing line between the campaign world and the charity or nonprofit world. A Politics review of more than a dozen contracts between direct mail fundraising firms and their clients shows that some firms mandate a permanent ownership interest in the lists they build, while others allow their ownership of the list to vest once the client is no longer employing the firm and all the bills are paid.

Roger Craver says co-ownership of the list is an arrangement that makes sense for firms that do political fundraising, and it’s standard practice as far as he’s concerned. “Congressional campaigns, particularly challenger campaigns, tend to go out of business if they lose,” he says. “That means those lists are lost, too. There’s an immense investment made by the firm in building that list. So a firm that’s putting up that kind of money and taking that risk will want a property interest in that list.”

To Victoria Lester, president of Huntsinger-Jeffer, which works for a range of nonprofits including The Red Cross, co-ownership of donor lists and no-risk prospecting translates to a bum deal for the clients and the donors. For a firm with a permanent ownership interest in the list, it means a continual ability to earn income from that list by renting it to other campaigns for prospecting purposes. In the nonprofit world, she says, it’s generally an arrangement that’s frowned upon.

“In the Viguerie days, that’s how it worked,” says Lester. “I call it the golden handcuffs. The firm invests all the money upfront and it’s tough for the client to leave because they own the list.”

Can It Work for You?

Way back in 1985, Roger Craver penned a series of articles in this magazine detailing the elements of a successful direct mail fundraising effort. Under the heading ‘Is direct mail for me?’ Craver wrote, “Probably not!” That’s something that hasn’t really changed. For most campaigns direct mail fundraising isn’t the most efficient way to raise money. And for many, it may not work at all.

First and foremost, the creative potential has to be there. Without an opponent to demonize, a wedge issue to exploit or a campaign that can be successfully nationalized, the average Senate or congressional race won’t be able to agitate enough activists to justify the cost of a direct mail fundraising effort. The scores of donor lists direct mail consultants rely on are mostly national lists of what you might call activist-donors. They are proven givers to conservative or liberal interests, usually segmented by issue or cause.

A conservative donor in South Dakota, for example, couldn’t care less about the parochial issues that may motivate voters in Pennsylvania’s 12th Congressional District. But paint a picture of a Pelosi-led effort, backed by the country’s villainous liberal establishment, to discredit a war hero and prevent him from capturing the late John Murtha’s congressional seat and you could have that conservative donor thinking about writing a check.

That was exactly the fundraising pitch for William Russell, a 28-year Army veteran who was gearing up for his second campaign for Murtha’s seat. If the ideal direct mail fundraising campaign needs a villain to demonize and a hero with a story to tell, PA-12 was the picture perfect district. A look at some of those mailers offers a pretty good window into what direct mail fundraising is all about. One mailer was structured as an appeal from the candidate’s wife. The outside of the envelope read, “My husband is running to replace the recently deceased John Murtha. A few hours ago I spoke to his campaign manager. I was shocked at what the liberals are planning.” Another mailer to support Russell, sent on behalf of the political action committee Freedom’s Defense Fund, came with a priority mail envelope to reinforce the urgency of the fundraising need in an attempt to up the response rate.

The reality is that the average campaign can’t make those types of appeals to donors. For your run of the mill Congressional campaign, says former DCCC Executive Director Brian Wolff, a direct mail fundraising effort is something he cautions against. “Unless you have some unique appeal, it’s very risky,” says Wolff. “Maybe if you’re running against Michele Bachmann and she says something really stupid again, it works. Or you’re an Al Franken. In that case, sure.”

It’s a different story for the national parties and committees for which direct mail is a major source of recurring cash. The advantage there is that the committees have years to test and develop their programs, which are large in scope. And with that time they’re able to get the full benefit of direct mail fundraising. A typical test mailer from a major party committee is in the 75,000 to 100,000-piece range and direct mail costs, particularly among Republican Party committees, are typically the largest single expenditure in a given year. The various party committees also have the resources and know-how to handle much of the interaction with vendors on their own, something most congressional campaigns lack. Rather than having their direct mail firm bid to printers, the committees pre-bid the process themselves.

“The real problem I found is that too many of the firms seem to take a cookie-cutter approach to every client,” Wolff says. “We wanted to be able to model our database, rather than just send more and more mail.”

To Wolff, that’s the single biggest mistake campaigns make with direct mail fundraising: thinking that a higher volume of mail is the best way to net more. When he came to the DCCC as finance director, Wolff was unhappy with the committee’s direct mail fundraising effort. He wanted a more targeted approach—one that was capable of making accurate projections of direct mail fundraising revenue. In short, Wolff wanted more science behind the program and less blind prospecting. “I went through two direct mail vendors—fired them,” he says. “The technique just wasn’t there. I said, ‘If we’re going to spend all this money on direct mail, we have to net more.’”

So back to Base Connect, the company at the center of what they call a completely manufactured storm and the impetus for this article. Despite insinuations to the contrary, there’s no evidence the firm has engaged in any wrongdoing. Base Connect forcefully defends all of its business practices and the company maintains a healthy roster of clients who say they are satisfied with its services. In Florida, Tea Party favorite and Base Connect client Allen West raised some $843,000 in the first quarter of this year. So far he has spent more than $500,000 on direct mail expenses, but told The Palm Beach Post last month that he’s confident the fundraising strategy will net big dividends in the long run. What is clear is that the no risk model employed by Base Connect and some other firms, is one many people in the business object to, insisting that it doesn’t have the best interests of the client at heart.

“Sometimes folks say, ‘You take all these candidates in races where they have no real shot at winning,’” Centanni says. “Well, this is America. I don’t like when Democrats don’t have challengers and I don’t like when Republicans don’t have challengers.” Enter candidates like Brian Chavez-Ochoa whose 2006 campaign against House Speaker Nancy Pelosi Base Connect raised money for, and Chuck Morse, the Massachusetts talk radio host whose campaign against Barney Frank began much of the criticism heaped on the firm.

“It’s not that we thought he could beat Frank,” explains Centanni. “But Frank should have a challenger and he spends a lot of money around the country helping other Democrats.” In other words: forcing Frank to spend some of that money defending his own seat might help other Republicans.

In the end, there’s a certain sense of buyer-beware that consumers of direct mail services, or any campaign service for that matter, have to possess. The campaign itself has to take some level of responsibility when it comes to understanding the arrangements it enters into. The reality, says Victoria Lester, is that it’s nearly impossible to tell if firms or associated vendors are marking up certain services. When it comes to postage, for instance, she offers this warning: If a firm is fronting the costs for postage, the campaign should ask for a postal receipt from the company so they know the precise postal cost.

On the part of the consultants, says Roger Craver, it’s about openness and transparency. He warns firms to take it upon themselves to avoid even the appearance of conflict of interest. “There are certain things that just create a very clouded appearance,” says Craver. “And politics having the reputation it does, we should be avoiding that where we can.”

Shane D’Aprile is the senior editor of Politics magazine.