Play to win: The game-based economy

Companies are realizing that “gamification” — using the same mechanics that hook gamers — is an effective way to generate business.

Since the advent of videogames, skeptics have questioned their inherent value: why do players spend hours accruing virtual points working towards intangible rewards?

Chalk it up to basic human behavior, which game makers have been trying to understand and appeal to for decades. The more effective a game resonates with users, the better its sales. The developer’s goal is to design a structure and system of rules in which players will a) enjoy the process or journey, and b) create a sense of added value. As gamers and developers have found, a fun process coupled with a system for incentives or rewards for a job well done can become downright addictive.

So it’s no surprise to some gamers — including yours truly — that the very same game-play mechanics that hook players are slowly wending their way into other parts of the economy, too.

With “gamification,” companies study and identify natural human tendencies and employ game-like mechanisms to give customers a sense that they’re having fun while working towards a rewards-based goal. In doing so, they hope the added value will enable and reinforce positive behavioral change across a wide spectrum of non-game-related issues — healthcare, finance, philanthropy, general lifestyle.

Proponents of “gamification” consider conventional incentive-based mechanics to be flawed, broken, or skewed. In healthcare, some employers and health plans have tried to drive down prescription drug costs by raising copayment fees and thereby “encouraging” members to use cheaper drugs. Certainly these companies are incentivizing, but for all the wrong reasons. They’re about cost efficiency instead of making people healthier and addressing problems like obesity.

“It’s a paradigm that needs to be shifted,” says Adam Dole, a researcher for Method, a design firm. “I think looking at gaming in order to re-frame the incentive structure and getting people to change their behavior to support the desired change is something we need in order for the system to be healthier.”

Change has been slow in coming, but it’s happening nonetheless across industries with a variety of approaches. Here are a few examples:

Personal finance rewards
. Launched in 2007, transformed personal finance into a game, making managing one’s money more fun with a unique approach and attractive interface. Saving towards a trip to Hawaii? Choose that option from a menu, and as you deposit more funds towards toward it, a gauge fills, showing you how close you are financially to hopping that plane. Mint also gives each user a total financial score that encourages financially responsible behavior. Scores spike if users perform financially responsible acts — save money, avoid bank fees, come under budget — and drop if they do the opposite. Users also have the option of competing with other members who have similar goals. To date, the site claims more than 1.5 million active users, and last year, Intuit, maker of TurboTax, acquired it for $170 million.

Profiting from workout goals. When Nike released Nike + in 2008, it “gamified” exercise. Place the pedometer in a pair of (Nike) sneaks and it monitors distance, pace and calories burned, transmitting that data to the user’s iPod. The Nike software loaded on the iPod will then “reward” users if they reach a milestone. If a runner beats his 5-mile distance record, an audio clip from Tour de France cycling champ Lance Armstrong congratulates him. Users can also upload their information online, discuss achievements with other users, and challenge them to distance or speed competitions. To date, Nike has moved well over 1.3 million Nike + units.

A new kind of customer reward.
In March of 2009, creators Dennis Crowley and Naveen Selvadurai released the free, location-based social network, Foursquare. The mobile app encourages people to report in wherever they are. As incentives, Crowley and Selvadurai originally created 16 virtual badges awarded to users based on the number of points they accrue. Frequent the same shop four times in a row and get a “Bender” badge; send 5 birthday shout-outs to other Foursquare members and receive the “16 Candles” crest. And if a particular user happens to be the member who checks into a location the most, they become that spot’s “Mayor.” To entice the social network’s 2-million-plus user base, some businesses now award those who check in from their venue with discounts and promotions. Case in point: the Gap retail chain held a one-day “BlackMagic Event,” which gave Foursquare users a 25% discount off all clothes.

The ultimate education contest. In July of 2009, President Obama and Secretary of Education Arne Duncan announced Race to the Top, a $4.35 billion points-based grant program from the Department of Education designed to encourage education reform on state and local levels. Each state application is worth a maximum total of 500 points, based on criteria like teacher effectiveness, turnaround of lowest-achieving schools and the use of data to improve instruction. States with the highest points are eligible for portions of the $4.35 billion funding. During the first round of winners in March, Tennessee and Delaware won the first round: Tennessee walked away with $500 million and Delaware won $100 million. Last week, ten states won the second round, including Ohio, Maryland, New York and Hawaii. New York, which was awarded $700 million, promised in its grant application it would increase the total number of charter schools from 200 to 460.

Once effectively implemented, “gamified” businesses, programs and products prove that people respond positively to this new level of engagement. Unlike in most games where there’s only one winner, successfully gamified programs will result in a win-win situation, both for the company and the consumer.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.