Archive for August, 2010

Product Licensing

Friday, August 27th, 2010

Every sweepstakes software company expects compensation when a business owner uses their sweepstakes promotional platform. Also, every sweepstakes software company charges an ongoing licensing cost. This payment will be a percentage of the revenue you, the business owner, make after paying out customer winnings. Sometimes this number (Gross Revenue minus Customer Winnings Payout) is called the Net Win. Thus the Net Win is the amount you have left after all “payouts” to customers. The companies that make Sweepstakes Products want a piece of the Net Win. Even though all sweepstakes companies charge a different percentage, those that are more reputable are usually in the mid 20 to high 30 percent range.

We have had some of people ask “Can’t I just buy the sweepstakes software outright and avoid any ongoing payment?” Unfortunately, the answer in all cases is “no”. Sweepstakes software companies don’t allow this. Although this rubbed us the wrong way as we were learning about the industry, we eventually learned to deal with it as we realized how much money our clients, distributors and business owners, were making in spite of licensing fees. Sweepstakes promotions can be an extremely profitable for nearly any business.

Furthermore, in time it became apparent that these sweepstakes software providers made money when the businesses that they supply made money. One would think that this would naturally result in all sweepstakes platform providers being exceptionally good at supporting their products. Although this is surprisingly not always the case, at least the smart companies provide good ongoing support.

Sweepstakes Companies use three different systems to collect. By far the most common is a billing system (or invoicing system), which works like this.

I’m the customer and you’re the business owner. I give you $20 to buy a product (usually Internet access time) and you give me the product and free sweepstakes entries to play the sweepstakes games. These entries are usually called sweepstakes credits, entries, or points. I then walk over to a sweepstakes terminal and play games (reveal my entries) using the credits. After a while I’ll decide I’m done playing and I want to “redeem” whatever I have won. This is sometimes called cashing out, but technically cashing out is a casino or gambling term so it’s not accurate. At this point I, the customer, still have all of the Internet access (time) that I have purchased. I can browse the Internet using that time if I want. Finally when I’m done I walk back up to you, the business owner, and tell you I’m done. You look at my account and realize that I have won $10, so you give me the cash and I walk out happy. In this scenario I, the customer, walked in, gave you $20, played games for a while, won $10 back, surfed the web for a while, and then left. You, the business owner, made $10.

Next week you, the business owner, will get a bill from the software company that says “You owe us $3 because we know you made $10 from the customer and you have to pay us 30% of your net win”.

A second way to handle billing is a Credit-based Accounting System, which works like this.

I’m the customer and you’re the business owner. I give you $20 to buy the product and you give it to me with 20 free sweepstakes credits to reveal by using the sweepstakes games. I then walk over to a sweepstakes terminal to reveal entries by “playing games”. Again, at any point I may decide I want to surf the Internet. After all, this is what I purchased, right? Eventually I may decide that I’m done and will want to “redeem” whatever I have won. I return to you, the business owner. You look at my account and realize that I have won 10 “prize credits”. You take my 10 credits and give me $10. In this scenario I, the customer, walked in, gave you $20, played games for a while, won $10 back, and then left. You, the business owner, made $10 and lost 10 sweepstakes credits.

To the customer this feels exactly the same as the invoicing model. To the business owner it is also very similar. However, this entire system is based on credits. Every time a dollar worth of product is sold (one dollar into your cash register), a free credit is given out. And if a customer redeems prize credits to get cash, credits are coming back in on 1 for 1 basis; 1 credit for 1 dollar. This relationship between dollars and credits makes this system very simple.

Customers will continue coming to your store purchase products and you will keep giving them free sweepstakes credits when they purchase a product (usually Internet time). As customers use sweepstakes credits to reveal entries, they will consume (lose) those credits or entries. As this keeps happening, your pool of credits will diminish and your cash register will fill up. Eventually you will need more credits so that you have credits to give your customers. At this point you will call us to buy more credits. You might call next week, or you might call in a month, or it might be tomorrow–but sooner or later you’ll need to purchase more credits to continue running your sweepstakes promotion. You, the business owner, decide when to buy credits and how many you want to purchase. While using a credit-based system you will never receive an invoice or a bill.

The credit system, explained in more detail in this article: , is completely automated in our Internet Kiosk system. This means that while using an Internet Kiosk (sweepstakes Totem), you don’t even need a point-of-sale computer or a sweepstakes game server!

The credit system simplifies the accounting process because there can never be any confusion about how much you owe or when to pay. As a business owner you buy as many credits as you want whenever you want and you know that every time a dollar shows up in your cash register, one credit will be consumed by your customers from your available pool of credits.

Another big advantage of the credit system is the way that it compensates for the rare, but occasional loss day. As new businesses are starting out with any sweepstakes solution, it is not uncommon to experience a day when the combination of a low volume of customers (because the store is new) and a few big winners (which is normal in any sweepstakes) results in a day with an overall LOSS–when you pay out more in winnings than you make. In a billing/invoicing system this is considered a wash. Unfortunately, the sweepstakes company is not going to send you a check for 25% of your loss. You just lose it.

However, with a credit-based system you actually EARN credits if you have a loss day. If you LOSE $500 on a “big payout” day with a billing/invoicing system all you have to show for it is an empty cash drawer. With a credit-based system you would have 500 extra credits that you did not have before the day started. These will be given out as dollars come in, and the net result will ultimately be $500 back in your cash drawer. Although this concept may be a little tricky to get your head around, it is a significant advantage of a credit-based system (especially as your new business is getting off the ground).

For distributors the credit system is a godsend. Instead of billing, invoicing, and chasing store owners to pay their bills, the store owners will call you when they need more credits. Instead of being a bill collector, you’re an order taker.

A third and final way to bill customers is a Flat, Monthly Rate. This system has recently been introduced to the market and is very simple.

The software company bills you, the customer, based on the number of terminals you have rather than volume or the amount of money you make. At first pass this sounds like a fantastic plan. As a matter of fact, if you could get this deal from any significant sweepstakes solution you would truly be getting a bargain. Unfortunately, there is always free cheese in a mousetrap!

We have only seen this billing method implemented by one or two very new companies with sweepstakes platforms that have not been able to compete with any of the legitimate sweepstakes games. Since their product is not in high demand, the sweepstakes companies have attempted to lure novice investors into selecting their seemingly low-priced software. Of course, VALUE is more important than PRICE. Is it a good deal to buy a CAR for $1,000? Sure it is; especially if that car is a Ferrari! Unfortunately, companies that offer this pricing scheme are selling broken down Pintos.

More than one rookie who aspires to build a successful business with sweepstakes promotions has fallen prey to this “easy money” mirage. Ultimately what happens is the seemingly clever plan backfires utterly. This software is usually so bad that the business owners make extremely little money from customers. Thus the “low, flat fee” becomes a millstone around their necks when the total income generated is miniscule.

NOTE/UPDATE: This update was added years after the original article was written. To this day we have seen a total of FOUR sweepstakes software companies try this method–usually as a “last ditch effort” to compete with more successful sweepstakes companies by undercutting price. We have never–not once–seen an Internet cafe using software with a “flat fee” payment program succeed. Never, ever. Hence a “flat fee” is certainly a warning sign of a sweepstakes platform that simply does not work.

All three systems work perfectly well and all accomplish the same thing–paying the software company to use their sweepstakes platform. If the “flat rate” plan were ever offered by a decent software provider this would be our preferred choice. But since this is not the case, we are only left with the billing/invoicing model and the credit-based system. In our professional opinion the credit-based system emerges as the intelligent solution. It enables simple reconciliation and accounting and offers the most benefits for business owners.

Swipe Cards & Logins

Tuesday, August 24th, 2010

Tracking Customer Accounts–Swipe Cards and Logins

Every promotional sweepstakes product requires that all customers have unique accounts. When sweepstakes entries (points or credits) are added to a customer’s account, the server records it. When a customer accesses his account to participate in the promotional sweepstakes, the entries are reduced as he “reveals” whether or not he has won–which uses credits. The account continues to track how many credits he has. If the customer exits the business leaving credits on his account and returns later, the server will keep track of important information, including how many credits are left on his account.

Two prevailing systems exist for identifying Sweepstakes Internet Cafe customer accounts. The older system tracks customers by using a Swipe Card. A common misconception is that this card actually has “money” or “credits” on it. The truth is that the card is merely an identification card. When the customer swipes the card, the computer associates the card with the appropriate account. If the account has a balance of credits left on it, those will stay in the account until the customer removes them.

A few disadvantages of this older system are:

1) Swipe Cards are expensive. Business owners are frequently charged as much as $1.00 per card to purchase the cards for their customers.
2) Card readers are expensive. If you decide to use a sweepstakes promotional system that requires card readers, you’ll pay about $50 more per station–which is how much the card readers cost.
3) Customers lose cards. Most sweepstakes businesses simply say “if you lose it, it’s gone.” Of course, this is never a fun thing to tell a customer. On the other hand, a customer will never lose his name, which is frequently used for a login system.

The more modern approach for identifying Sweepstakes Internet Cafe customer accounts is to use a Login System. The login system is simply an easier way to identify the customer instead of using a swipe card. When the customer enters the store for the first time, the employee creates the customer account by using some sort of a unique identifier. Anything can be used as an account name, but most businesses use a driver’s license number or the customer’s name. The customer is then asked to select a password that he can remember. Once this has been done the employee adds the appropriate amount of credits to the account, just like with a card-based system. Now instead of swiping a card, the customer merely types in his user name and password. Again, just like the swipe card system, if the account has a balance of credits on it when the customer leaves, the credits stay on the account until the customer removes them.

Most pundits agree that the login system is more efficient, and is obviously less expensive, than the swipe card system. However, in the end both accomplish exactly the same thing–allowing the system to match a customer with his sweepstakes account.

Prize Percentage, Hold, and Volume: Explained

Thursday, August 19th, 2010

Three key factors can be used to determine the health of a sweepstakes Internet cafe business: Prize Percentage, Hold, and Volume.

A good sweepstakes product will have an appropriate Prize Percentage. This is a fixed, finite, or predetermined ratio that has been programmed in advance by the sweepstakes software company. It is not determined randomly each time the player plays a game. Sometimes this is called payout or payout rate, and it can be defined as follows. Each unique “turn” or “spin” will “win” or return a certain amount. That amount is the prize percentage. Thus, if the AVERAGE return for EACH play over time is 90%, the prize percentage, or payout rate, is 90%.

EXAMPLE: If you made 1,000 plays (or spins) each with a $1 value, and then averaged the win amount for each one, and the average return was 90 cents, then the prize percentage is 90%.

Note: In the example above many spins that pay out higher than 90 cents. But for each payout that is higher than 90 cents you will have an equal number of payouts that are lower than 90 cents. Thus the average payout is 90 cents on the dollar, or 90%.

Note: The prize percentage can be too high–which means that the customers win back almost 100% (or sometimes even more than 100%). In this scenario the customers are very happy with the games because they win a lot, but the business owner doesn’t make much money (or sometimes even loses money). Prize percentages can also be too low–which means that the customers don’t win back enough to continue enjoying themselves.

Another key indicator of a healthy sweepstakes Internet cafe business is the Hold. The overall percentage of the customers’ money that the business owner keeps is called the HOLD. If the average customer walks in with $10 and walks out with $7, the business owner keeps the $3, which is 30% of $10. In this case the hold is 30%. Even though most sweepstakes games have a prize percentage of around 90%, the customers usually end up keeping a lot less than 90%. This is because when a customer has won back 90% he will usually keep playing games.

So, if the customer brings in $10 and plays one time through (ie. ten $1 bets), he will have about $9 left. Then he’ll play again and keep 90% of $9, or $8.10. If he plays again and keep 90% of $8.10, or $7.29. One more round will put him at 90% of $7.29, which is $6.56. As you can see, the longer the customer continues to play, the greater the HOLD is.

Good games with a good prize percentage encourage customers to play more, thus increasing the hold.

Note: Although you can have a prize percentage that is too high or too low, you always want the hold to be high. If every customer that enters your store always plays until all his money is gone, you will have a 100% hold. Good games usually have a hold that is between 30-50%.

The final indicator of a healthy sweepstakes Internet cafe is the Volume. Simply put, the volume is how many dollars are being played. If one customer comes into the store in a day and plays $1, you could have a great prize percentage (around 90%) and a great hold (100%) and still only make a dollar. Good games with a good payout ratio help increase the volume.

When evaluating any sweepstakes product, always consider the Prize Percentage, the Hold, and the Volume. A healthy, profitable business has a prize percentage around 90%, a hold in the 30% – 50% range, and a very high volume.