3 decisions you need to make before starting a prize competition business

3 decisions to make before starting a prize competition business

You want to start a prize competition business?

That’s great!

But, as with any new business idea, it’s important not to rush in. I’ve seen too many prize competition promoters inadvertently break the law, run illegal gambling businesses and lose money simply because they made the wrong choices from the outset.

So, before investing too much time, effort and money into your venture, here are three essential points to consider and decisions you need to make.

1. What prizes are you going to give away?

The prizes on offer will give your customers their first impression of your business. This means they need to be desirable and eye catching.

But, don’t go overboard.

A mistake that promoters often make is giving away too much. They add too many items to a prize bundle or choose the highest spec technology thinking that this will increase sales.

In reality, many players don’t perceive the same amount of value as you do. They don’t know the different prize options you were considering so, for example, they would be just as happy winning a new TV worth £3,500 as they would winning a TV worth £5,000.

From your perspective, as the promoter, that £1,500 saving in prize value can mean the difference between making a profit or a loss on your competition.

What are you going to give away?

There are two schools of thought here. Either you can give away prizes that you believe will appeal to as many people as possible, for example new phones, cash, TV’s etc. Or, you can be very specific and aim your competitions towards a particular sport, hobby or demographic.

There’s no right or wrong approach to choosing prizes, but in my experience, businesses that start with a specific target market do better than those that take a more general approach.

Having said that, if your target market is too specialised, there will be fewer potential customers. You need to make sure that any niche you target is still big enough for you to sell sufficient entries to make a healthy profit.

If you take a more generalised approach and have prizes similar to those offered by other promoters, you can still be very successful. Just remember, you will be competing with them on the price of entries, odds of winning and the effectiveness of your advertising.

Advertising is where many promoters go wrong.  

They try to run adverts that appeal to everyone, but this isn’t the best approach. You can gain a clear advantage by ensuring your advertising is very focused, even if the actual prizes have a general appeal.

For example, if you’re giving away a £1,000 cash prize, winning will mean different things to different people. Therefore, your advertising should focus on this. Adverts aimed at university students should look very different to adverts aimed at the parents of a young family.

When you understand how to connect with your target audience, you can give yourself a huge advantage over other promoters running generalised adverts. By doing this, you can also significantly reduce your advertising budget!

2. How are you going to ensure that this isn’t an illegal gambling business?

Prize competitions are not gambling. However, if you don’t follow the law, you may find yourself inadvertently running an illegal gambling business.

If this happens then, at best, Facebook will suspend your advertising account which means you cannot promote your competitions and you will likely lose money on them. But, at worst, your whole business could be shut down.

There’s no need for this to happen as there are two routes to legal compliance.

The Gambling Act 2005 says that to avoid being an illegal lottery, entrants to a prize competition must demonstrate “sufficient” skill knowledge or judgement to be in with a chance of winning.

This means you need to ask a difficult question or set a problem which a “significant” number of people will get wrong.

The alternative option is to rely on the exemption within the Gambling Act that says you can ask an easy or multiple-choice type question if you have a free entry route to the competition.

Which option are you going to choose?

Again, there are no right or wrong answers here and you could have a successful business with either option. You may even try both options to see which your customers prefer.

3. Do you have the resources to launch your business?

Many of my clients start their prize competition business with grand ambitions. This is great, and I fully support them with this. However, in most cases, they don’t have the start-up capital to achieve their goals and as a result, they fall short of their targets.

So, how much money do you need to start a prize competition business?

Unfortunately, this is an impossible question for me to answer in a blog such as this. There are just too many variables. It depends on the value of your prizes, the entry price to your competitions, how many entries you accept to each competition and so many other factors.

However, it is an easy question for you to work out the answer to.

All you need to do is prepare a business plan and a cash flow forecast and I explain exactly how you can do this, in this free video (click here for more details – no sign up required).

In the video I explain how to calculate your start-up costs, your regular expenses and overheads, and when this expenditure is likely to be incurred. (I also explain how you can legitimately delay this without paying your suppliers late and damaging your relationship with them).

Then, when you know your expenses, you can calculate your potential income and think about how to start generating this as soon as possible.

From this, you can calculate the amount of start-up capital you will need. It will be the amount of money you need to launch your business and see you through your first few competitions, before you are generating sufficient income to make your business self-sustaining.

If you are still excited about starting a prize competition business and want to know more, please take a look another article I have written  – How to start a prize competition business in 9 easy steps. This will give you a good overview of what you should be doing next.

If you have any questions about anything in this article, please email me at dwalker@gridlaw.com and I will happily answer them for you.