Archive for May, 2011

“Matching” – Bad Math!

Tuesday, May 31st, 2011

Once your Internet cafe sweepstakes business is launched you’ll want to promote it. How do you get people through the doors to buy your products and play your sweepstakes games?

There are lots of ways to attract customers to your business. Many of them have great results–but some of them do not work well. A few can even damage your business. The purpose of this article is to focus on one particularly destructive marketing technique known as “matching”.

“Matching” is a marketing ploy devised in mid 2010. Nobody can be absolutely certain where it first started because a few general regions began using it at about the same time. We began to hear reports of this technique coming from Columbus and Cleveland Ohio and also Spring Hill, Florida. Here’s how it works. Generally when customers purchase $20 worth of product (let’s say workstation time, or Internet time), they are given 20 free sweepstakes credits (or 2,000 “entries). Well, what “matching” does is gives the customer an additional 5 credits (5,000 free entries) for each $20 worth of product purchased.

Thus, if a customer purchases $15 of product, the customer gets 15 free credits. But if the customer purchases $20, he receives 20 free credits PLUS 5 additional free “bonus” credits.

At face value this sounds clever. What could possibly be wrong with this promotional technique? In areas with lots of competition–several competing sweepstakes Internet cafes–this could truly give an edge to the store implementing this giveaway promotion. When the competition is merely giving customers 20 credits for a $20 purchase, giving 25 credits for a $20 purchase sounds very attractive to customers!

Now let’s pick it apart.

The first problem with this tactic is one of legality. Without getting into a boring rant about technicalities of sweepstakes law, suffice it to say you cannot offer 1 credit for each dollar spent unless you spend MORE dollars, at which point you get “bonus” free entries. Our attorneys have advised us that even though this is a common practice in some areas it breaks sweepstakes laws.

The second problem with “matching” breaks down to simple math. Whoever came up with this technique either wasn’t very handy with a calculator or underestimated the intelligence of customers. Every significant internet sweepstakes software pays out around 90% (most in the 91-94% range). This is the “prizing percentage”. It’s simple math–and if you lower the percentage below about 90 your customers will leave. For an excellent article explaining the concept of prizing percentage (or payout ratio), read this article.

This article explains that the prizing percentage is the amount you would expect to pay out to a customer if that customer played through every entry ONLY one time. As an example; if a customer spent $10 for products she would receive 10 free sweepstakes credits. Then, if she played (or “revealed”) those credits only one time and did not purchase any additional products to get more credits, she would (statistically) end up with $9–or 90%. However; very few customers will every play ONLY one time. Most customers continue to purchase additional product–ending up keeping closer to 50%. This customer would likely continue buying product and revealing entries (or playing sweepstakes games) until she had about $5 in prizes left. Thus, your “hold” is about 50% and your payout ratio is 90%.

Back to our example. What happens with the payout ratio is 90% and you give customers 25 credits after they spend $20? It doesn’t take a rocket scientist to figure out that 90% of 25 is $22.50. Thus, if a customer comes into your store, spends $20, and gets 25 credits, you are in an extremely precarious situation. If that customer plays the sweepstakes games ONE time (reveals entries once) and then immediately redeems all prizes, you will be giving away $2.25. Matching follows the same logic as the business owner who says; We’re going to lower the price of our product to below OUR cost–we’ll lose some money in the short run but make up for it with volume!

Now; this was not a big problem a year ago when the tactic first hit the streets. Most customers didn’t figure out that they had “the upper hand” if they played only one time and then redeemed (cashed out). But customers are smarter than that. They caught on. What’s worse–the regions where this ploy is the most common are also the areas with a lot of competition. To meet competitors’ marketing promotions, most businesses copied this “matching” concept from each other until it was extremely common in some areas. Everyone is doing it!

The stage is now set for the perfect storm! Groups of sweepstakes-savvy customers rove like parasites from one unwitting internet sweepstakes store to another sponging freebies. Customers spend $20 to get 25 credits at one store–often getting free food and drinks while they do it (because many sweepstakes Internet cafes offer complimentary food). The customers slowly play through their entries ONE time, knowing they have math on their side. While revealing entries (playing sweepstakes games), they enjoy free drinks and a hot dog. When they are done they should mathematically be up about $2.25. They finish their drink, cash out to get their free $2, and hop in their car to scoot off to the next sweepstakes Internet parlor. In areas with many competing internet cafes they will have a very short drive to “target number two”.

Lather, rinse, repeat. Groups of customers who have figured out how to “beat the system” are flitting around gathering up free food, free drinks, and a few bucks at every stop at the expense of business owners. YIKES!

Let’s finish by examining a success story. Recently one of our clients was using this matching concept. He called us complaining about revenue and payouts. We checked his payout ratio, which was at about 90% (just right). Then we realized he was using matching promotions. We quickly educated him on the folly of this marketing practice. At first he was concerned about losing customers if he discontinued the matching. “All of my competition is doing it!”

Eventually he followed our advice. A few weeks later he called us back. He reported that his overall business had slightly decreased. Some customers left, never to return. But guess which customers left? That’s right… the first customers to head for the door were those opportunists who had been bleeding him dry! Although overall revenue slightly declined, PROFITS increased significantly. So what about those customers he lost? GIVE THEM TO THE COMPETITION! We didn’t want them anyway.

We have received more than one phone call from less-experienced business owners with Internet sweepstakes games. They lament their losses and usually, in their ignorance, erroneously blame the payout ratio. Over time, more and more of their customers catch on to this “easy money” scheme. Our answer is always the same–DO NOT GIVE AWAY EXTRA FREE ENTRIES! Matching is a BAD idea. Our attorneys tell us it’s breaking the law, and our calculators tell us it’s breaking your bank. Can we possibly be more clear? “Matching” is a LOSING PROPOSITION!