If you’re thinking about running a prize competition, either to promote your existing business, or perhaps running multiple competitions as a business in itself, you need to go about it in the right way.
If you don’t you will end up losing money and wasting a great deal of time and effort.
You may also find yourself breaking the law and inadvertently running a gambling business or an illegal lottery! If you are, you run the risk of being shut down.
As a solicitor, I’ve worked with a huge number of promoters helping them set up and run their prize competition businesses. The most successful ones follow a process similar to the one I have set out below.
The unsuccessful ones don’t.
In particular, they skip stage one and have completely unrealistic expectations of what they are going to achieve.
So, if you’re reading this I’m guessing you’re at least considering setting up a prize competition business. If you are, you need to follow these nine stages to give your business the best chance of success.
If you have any questions about them, please feel free to get in touch.
Stage 1: Create a business plan and cash flow forecast
Before starting a business, you will want to know that it’s going to be a success. Obviously, you can’t predict the future and know for sure, but by preparing a comprehensive business plan you can give yourself the best chance of knowing, in advance, whether you are likely to have a financially viable business.
The most important part of your business plan will be the financial plan – working out what your estimated income and expenses will be and from these, calculating your expected profits.
Expenses are usually easier to predict than income (at least in the early days) so even if you don’t know how many sales you will make, you will at least be able to set a realistic target to aim for.
If you need some help preparing a business plan, you can watch this free video which will guide you through the process.
Alongside your business plan, you should prepare a cash flow forecast. This will help you predict when your expenses will be incurred and when your income will be received. You can then use this information to calculate how much start-up capital you will need to launch your business.
If you need some assistance preparing a cash flow forecast, you can read this article “How to prepare a cash flow forecast for your small business.”
Stage 2: Make your prize as desirable as possible for a specific target market
Your prize will be the first thing that catches the attention of entrants to your competition so it needs to be as desirable as possible. However, it could also be your biggest expense and if you’re not careful, the very thing that prevents you from making a profit in your business.
You therefore need to choose a prize that is highly desirable to a very specific target audience and by carefully choosing that audience, you could drastically reduce the cost of the prize.
For example, say you were giving away a luxury holiday as a prize. “Luxury” will mean different things to different people. If your target market was a family, the prize would have to be available during school holidays. However, if your ideal target market was a professional couple with no kids, you could make considerable savings by ensuring the holiday was taken during school term times when the cost to you will be much lower.
Stage 3: Decide what entrants need to do to have a chance of winning your competitions
To be a true prize competition, where entrants pay to enter, the law says they have to demonstrate a sufficient level of skill, knowledge or judgement to be in with a chance of winning. If they don’t and the winner is chosen at random, the competition could be classed as gambling or an illegal lottery and then you run the risk of being shut down.
However, there are loopholes in this law which some promoters try to take advantage of. For example, if you offer a free entry route to your competition you can get away with making the competition question very easy.
The trouble is, offering a free entry route to your competition also raises issues for you to consider.
First, it will obviously have an impact on the profitability of your business, especially if you are selling a fixed number of entries to each competition.
Second, there are specific requirements as to how you must promote the free entry route to your competition. If you don’t follow these, you will again be breaking the law. For example, you mustn’t hide this option in the small print of your terms and conditions. It must be clearly promoted so that all entrants are aware of it.
Stage 4: Maximise the profits in your business
When you know that you have a financially viable business, you can then focus on maximising profits. To do this, you need to review your business plan and see where you can increase income and decrease expenses.
There are two ways to increase income – either sell more entries or increase the price so you make more money from each sale.
Ideally, you will try to do both.
Some promoters decide to set fixed odds on the chances of winning by capping entries at a certain level. Initially, it may seem counter-intuitive to do this and limit your sales, but if entrants have a better chance of winning they may be prepared to pay more for entries.
As well as increasing income, you should look at ways of decreasing expenses. For example, if you’re giving away a luxury holiday as a prize, could you get a discount on the price (or even a free holiday) in exchange for promoting the holiday company providing it?
There are many ways to boost the profits of a prize competition business, you just have to be creative in your thinking!
Stage 5: Set realistic opening and closing date for your competition
Setting opening and closing dates sounds like it should be a relatively straight forward exercise. But, it’s another area of the business that promoters often get wrong and can lead to them breaking the law.
When considering your closing date, you need to give yourself sufficient time to sell enough entries for your competition to be a success. However, you don’t want the competition open for too long or people will be put off entering.
Many promoters break the law by extending closing dates to give themselves more time to sell more entries.
You mustn’t do this.
You need to be prepared to give the prize away on the original closing date, regardless of how many entries you have sold.
Stage 6: Prepare all of the legal documents you will need to launch your business
Properly prepared legal documents are essential to protect your business.
When someone buys an entry to your competition, they are agreeing to play by your rules. To enforce these rules, you and the entrant need to be bound together by a legally binding contract. This contract is the terms and conditions that entrants accept when they pay for an entry.
However, your rules must be clear and they must be consistent with the law relating to prize competitions so you may need to speak to a solicitor, such as me, to help you prepare them.
Copying the terms and conditions from another competition is a very bad idea. I have looked at many examples of terms and conditions online and very few of them are actually legal!
As with all businesses operating online, you must comply with various laws requiring you to give certain pieces of information about your business. You will also want to protect your intellectual property rights and limit your potential liability in the event of a dispute.
Stage 7: Build the infrastructure you need to run and administer your competitions
There are four key pieces of infrastructure you will need to run and administer your prize competition business. These are:
- Your website;
- A customer relationship management (CRM) system;
- A payment provider; and
- A bank account.
You may think that it’s late in the process to start building a website, but there’s no point doing this until you know you have a viable business.
Your website will be the central hub to your business. This will be where entrants find out details of your competition, your prizes and how to enter. It will also be key to your legal compliance as the documents and policies you prepared in stage 6 will be added to it.
You will then need a CRM system to collect entries and record who has correctly answered your competition question.
The ability to collect payments is crucial so a payment provider and bank account will be needed. The trouble is, prize competition businesses can be seen as high risk.
Some of my clients have struggled to agree terms with payment providers and open bank accounts until they can show they have a solid business plan and their business is legally compliant. When they can do this, their business is perceived as less risky. So, you need to ensure that you pay close attention to stages 1 and 6 of this process.
Stage 8: Ensure the advertising and promotion of your prize competitions is legal
All advertising must be legal, honest, decent and truthful. There are also specific regulations that apply to the promotion of prize competitions. For example, you mustn’t overstate someone’s chances of winning.
For most promoters, social media will be their primary source of advertising and promotion. However, prize competitions are likely to fall within “restricted content” categories and so adverts may not be approved straight away.
This means that you need to be extra careful that your advertising copy is fully compliant with laws such as the Advertising Standards Authority’s (ASA’s) CAP Code.
Also, if you are giving away branded products as prizes you have to be very careful not to infringe someone else’s trade marks or intellectual property rights. If you do, you run the risk of being sued and having to pay them compensation.
Stage 9: Ensure the process of choosing the winner and giving away the prize is fair and fully transparent
When you are ready to choose the winner, make sure the process is fair and fully transparent. If it’s not, you may receive complaints from anyone who didn’t win.
Sometimes, you may not be able to contact the original winner and have to choose an alternative winner. If you do, there is obviously a risk that the original winner will come forward later. This is something you can cover in your terms and conditions but again, the process of how and when to choose an alternative winner must be fair and transparent.
Likewise, there may be circumstances when you can’t give away the advertised prize. If you need to offer an alternative prize you need to be clear about what it will be and when this may happen.
Giving away an alternative cash prize that is a percentage of the entry fees you have collected is not legal. Although many promoters do this, the ASA has made it absolutely clear that this is a breach of their CAP Code.
If you follow these 9 stages, you will give yourself the best chance of running a successful and profitable prize competition business. You will also be able to rest easy knowing that it’s all legal, above board and the authorities are not going to try to shut you down for running a gambling business or illegal lottery.
However, as you can imagine, there is a lot more to these nine-stages than I can include in an article such as this.
If you would like to find out more, please take a look at my Prize Competition Toolkit. In it, I explain each of these stages in far more detail and guide you through the process of setting up and running a prize competition business.
If you have any questions about any of the points I have raised in this article, please feel free to email me and I will happily answer them for you.