Jackpot Rewards: An Online “Economic Engine for the Common Good”

The idea of sponsoring a weekly $1 million sweepstakes isn’t exactly high-tech. Neither is the idea of giving consumers cash rewards for their purchases, or the concept of committing a portion of your company’s profits to kids’ charities. But mash these things together—and put the whole thing on the Internet, where viral marketing and other network effects can really kick in—and you’ve got an intriguing Web 2.0 business plan that just might end up generating a lot of money for children’s health and education.

That’s the hope at Jackpot Rewards, a Newton, MA-based startup launching today with backing from some of the region’s most notable business leaders and philanthropists, including former Fidelity Magellan fund manager Peter Lynch and Hill Holliday founder Jack Connors. The basic pitch to users is simple: In return for a $3-per-week membership fee, users get quarterly checks amounting to 12 percent of their purchases at more than 550 participating online retailers, such as Best Buy, Barnes & Noble, GAP, Land’s End, Nike, Overstock.com, and Target. As an enticement to join, members also get to pick Lotto-style numbers that are entered into a thrice-weekly drawing for a progressive jackpot worth $100 million to $150 million. If at least two of their six numbers come up in a Monday, Wednesday, or Friday drawing, members are also entered into a Sunday drawing where someone is guaranteed to win $1 million—a prize paid out in the form of an annuity financed by the aforementioned membership fees.

Those are the mechanics, anyway. If a Visa or a Publishers Clearinghouse came out with a similar cash-back/sweepstakes program, the world would probably yawn. But Jackpot Rewards has an intriguing backstory that may increase both its appeal to consumers and its chances of success. Frankly, it’s one of those sounds-to-good-to-be-true tales that activated all of my skeptical journalistic instincts when I first heard about the program—but after getting the whole story last week from CEO Jim Miller, a former telecom entrepreneur with a history of raising scholarship money for at-risk inner-city youth, I’ve adopted an attitude of watchful optimism.

It all centers around two facts: One, that Jackpot Rewards will donate half of its after-tax profits to children’s charities, and two, that everything about the company, from the structure of the rewards program to the rules of its sweepstakes, is designed to maximize the amount the company is able to give away. In that sense, Jackpot Rewards is part of a corporate-philanthropy and social-entrepreneurship movement that goes back decades. But few social entrepreneurs in history have hatched schemes as high-stakes or as brazenly consumer-oriented as the Jackpot Rewards program, which has been four years in the making.

“What we were looking for was a way to create an economic engine for the common good,” says Miller. “So we asked ourselves, what is something that can create a massive network effect that will drive large numbers of consumers to participate? Well, you will find that over 50 percent of consumers participate in some kind of rewards program, whether it’s a cash-back card like the Discover card or one of the frequent-flier-miles credit cards that a lot of people carry. And sweepstakes are considered one of the most effective marketing mechanisms in the world. So we took what we thought would be these two very compelling offers for consumers and pursued them on a new scale.”

To get the program off the ground, Jackpot Rewards has raised $16.7 million in Series A financing from a group of individual investors including Lynch, Connors, Chuck Clough (the CEO of Boston’s Clough Capital Partners and a former Merrill Lynch global investment strategist), and Tom McDonnell (the CEO of Kansas City, MO-based DST Systems).

“I do think we ended up with a particular type of investor,” says Miller. “Imagine going out to raise money and telling investors that you are going to give half of it away. You have to find an investor who is passionate about giving—and we’ve attracted people whose business acumen is only exceeded by their generosity.”

Indeed, Lynch, who is famous for driving the Fidelity Magellan mutual fund to unheard-of returns in the 1980s and 1990s, has long had a charitable foundation (worth a reported $74 million as of 2003) that funds Boston-area religious, educational, and recreational projects from Catholic-school scholarships to skateboarding parks. Miller says that when he went courting Lynch and the other investors, “To a man, their first question was ‘How can I help you?’ rather than ‘What’s in it for me?’ They’ve all made it in life, and they are all passionate about giving back.”

It was Lynch, in fact, who spearheaded the planning process four years ago that led to the company’s creation, Miller says. “Peter got leaders in the business community together to look for new and innovative ways to raise money for charities,” Miller recounts. “We had all these people around the table with incredible business acumen, but we all found it incredibly difficult to raise money, so I said, ‘Why don’t we built a company where 50 percent of the profit goes to charity.’ That was interesting to them.”

But while the company’s giving—to be conducted through a separate, non-profit organization called the Jackpot Rewards Charitable Foundation—was always the keystone of the business plan, its most visible activity, the sweepstakes, isn’t just a marketing ploy. That, too, reflects the core philosophy of the founders and funders, Miller says.

The sweepstakes idea “grew in many ways out of the transformational experiences we had as young people, and how those inspired us,” he says. “Winning a million dollars would change just about everyone’s lives. It would allow you to pay off the mortgage, get completely out of debt, save money for the kids’ college, and set aside money for retirement—basically, to achieve the American dream. But what would you do with $100 million? That’s a very different question. Most people move very quickly from ‘How can I change my life?’ to ‘How can I change the world?’ We want to create an environment where people are thinking about those big dreams.”

“Dream Big,” in fact, is the Jackpot Rewards tag line. And it would be easy enough to write that off as advertising hokum, except for the programs Jackpot Rewards has created to encourage sweepstakes winners to become philanthropists in their own right. Members are allowed to create “Jackpot Groups” that split the jackpot equally if any member has the winning numbers for the progressive $100 million-plus jackpot or the weekly $1 million jackpot. If a jackpot group designates itself a Charity Group, Jackpot Rewards will give 50 percent of any jackpot that group wins to the charity of its choice, as long as it’s been screened by GuideStar, a clearinghouse for information about tax-exempt non-profits groups. “If you’re passionate about giving back, we help you make the same commitment to charity that we make,” says Miller. “We think there can be a profound social networking effect there.”

Social networking is actually one of the other keys to Jackpot Rewards’ business plan. Miller believes that membership in the rewards program will balloon quickly thanks to the company’s refer-a-friend policy. “If you refer one friend, you double your chances of making it to the weekly $1 million drawing for as long as your friend remains a member,” Miller explains. If you refer two friends, you triple your chances, and so forth. Miller expects referrals to spread virally via e-mail, at a speed that only the Internet could allow. “Ten years ago, you would not have been able to do this in a really substantive way,” Miller says. “The company lives in large measure online because consumers are migrating online in droves.”

Of course, most members will never win a jackpot, no matter how many friends they recruit—so the company’s real value proposition is the 12-percent cash-back program. And whether that’s a value for you depends entirely on how much money you spend online. At $3 per week, Jackpot Rewards membership will cost you roughly $156 per year. To make back that much in rewards, you’d need to spend $1,300 per year at participating e-retailers (most of which were selected as Jackpot Rewards partners because they already have affiliate programs that pay commissions to the owners of sites that send them customers).

“With one smart buy, membership pays for itself,” says Miller. Well, maybe—if your one buy is a 42-inch plasma HDTV. It seems likely that Jackpot Rewards will earn at least some money from members who fail to buy enough stuff at approved e-retailers to earn back their membership fee. (Or who accidentally start their shopping expeditions at a merchant’s website without going to the Jackpot Rewards site first. Says the company’s shopping FAQ: “In order to receive cash back from Jackpot Rewards, you must begin your shopping at Jackpot Shopping every time. It’s the only way we can track your purchases.”)

Whether $3 per week per member is enough to cover the weekly $1 million prizes, pay the company’s overhead, and leave enough after-tax profits to make a difference for needy kids depends on how many people sign up. But according to Miller, “The company is structured in a such a way, and has sufficient funding, so that even if we grow at a glacial pace that’s far below what any model of the marketplace would predict, we will still be able to fund the weekly $1 million jackpots for almost as far as the eye can see.” And regardless of the company’s bottom-line performance, Miller has already promised to donate at least $1 million in 2008.

As for the huge $100 million jackpots: if some member or group is fortunate enough to match all six numbers, Miller says the winnings will be covered at least initially through the insurance policies the company has purchased. Now, if someone would just start an insurance company that gives away half of its earnings—that would be real revolution in social entrepreneurship.

Addendum 9:20 a.m., February 20: Carolyn Johnson at The Boston Globe has a piece today about Jackpot Rewards that’s a good bit more skeptical than my take. She points out one thing I missed: to comply with laws against non-government lotteries, Jackpot Rewards does allow you to enter its sweepstakes without becoming a member or purchasing anything, by sending in a postcard. The sweepstakes rules are here.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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