How to deal with rude comments and feedback?

1) The fact that you're getting a lot of people missing that information means that you need to look at how you are presenting that info. After a quick glance at your site it wasn't immediately obvious to me.

2) You're fighting against the fact that most writing competitions do reward authors. So people already have preconceptions of what the model is.

3) The model you have is one that the people I know who are writers often have... strong... opinions on. Free writing is like red rag to a bull to many people so you will get angry letters pretty much regardless on that front.

4) Your market is the people who cannot get published. One of the many reasons people don't get published is they don't submit things that publishers want to print, or in the way that the publishers want them to submit it. You've self-selected a market that will cause problems. They often have a limited idea of how publication works, how much work is involved, etc (e.g. I'm amazed at the number of people who think that the majority cost of a paper book is the paper).

I'd suggest getting a designer and professional writer involved to tidy up the copy and presentation to make your product offering clearer. I'd look at the kind of feedback you're getting and build out FAQs for the site that will answer some of the questions people have before they send off an email. I'd also use those to build template responses so that you have something easy to send when folk miss the FAQs.

If you are getting a lot of complaints, maybe you do need to look at your business model and tweak it.

What is behind your customers complaints? What need do they have that you aren't meeting? How can you meet that need?

For instance, if you think people are feeling that there should be some prize, you could look for advertising sponsors who donate a prize to the winning story in exchange for acknowledgement on your site.

Write a standard response to the letters, and just copy-paste it into your email program when people write to you complaining.

A couple things:

There will be people will disagree with your business and be critical about it. Note it, but don't get overly upset that you can't please everyone. Take feedback from users. If it's something you hear often, really consider whether it will work. Having really thought about it, you can either decide that it is in fact a good idea and you'll try to accommodate it, or you'll decide that it's not a good fit for your business and have a well thought-out explanation of why you don't wish to do it.

It looks like you have a FAQ already which is good. If there are questions that are frequently asked that aren't mentioned there, add them. Also consider adding some "why" questions. People often feel better when they know why a rule or policy is in place. The "why" can range from you just don't have time to do x, to it's just not something you feel fits the business.

Lastly, like Giles mentioned, also have standard responses to common questions/complaints and have then ready for copy/paste. Try to make them not sound too generic (a good way would be to take an existing reply and tweak it to remove the specifics of that recipient).