Inside the gamification gold rush

October 17, 2011: 1:03 PM ET

Companies have flocked to a new product development theory that liberally borrows elements from popular video games. Now, a cottage industry is teaching businesses from high fashion to personal finance how to make it work for them.

By Alex Konrad, reporter

bunchballFORTUNE -- "It's very much like the Wild West," Brayden Olson, founder of Novel Inc., says emphatically. "There's gold out there, gold for anyone, but a lot of companies are not going to find it." Olson's describing the burgeoning field of gamification. The term was barely known eighteen months ago, and you're not likely to find it in any dictionary. But, suddenly, gamification is the hot new business concept, with many of the world's most admired companies signing on.

So what is it? Gamification -- pronounced "game-if-ication" -- is an attempt to engage customers using techniques glommed from video games. Think the levels and coins in Super Mario, which create a building sense of progress and reward. Applied to business, gamification promises to make more people buy more products and services, on a repeat basis. At the second annual Gamification Summit in New York City last month, 400 guests representing companies such as Microsoft (MSFT), American Express (AXP) and Home Depot (HD), rubbed shoulders with early adopters like personal finance site Mint.com's Aaron Forth and Alexandra Wilkis Wilson of flash-sale e-commerce site Gilt Groupe. Big business wants in on what Forth and Wilson know. They both help run popular and rapidly growing services that rely, in part, on game mechanics to drive their success.

Since 2007 Gilt Groupe, for example, has offered short-term online sales of designer clothes to its members. Its discounts can be as much as 60% off list price. While Gilt's profitability is largely derived from its low cost structure, its real success has been deeply engaging customers through a series of game-like elements that keep users coming back. The short-term nature of the sales, for one, creates an incentive to snap up deals quickly. And because new sales are launched daily, many customers develop a routine around Gilt. At noon every weekday, thousands of urbane customers around the country momentarily put aside their lunch plans to browse the site's newly available wares. Big spenders may be invited to Gilt Noir, with access to previews, special events and sales, and a concierge-like customer service number. (Read more about Gilt boss Susan Lyne here.)

Gilt's secret sauce is to make consumers feel like they are "almost winning," says Kris Duggan, CEO of Badgeville, a company that provides game mechanics to clients such as Bluefly, Universal Music Group, Beat the GMAT and Deloitte. The key, according to Duggan, is to influence behavior, not to simply make a game sporting a client's brand. Many target consumers have now grown up with gaming as a central experience, says author Gabe Zichermann, who as head of Gamification.co chaired the September summit. That's helped not only adoption, but also understanding of the difference between game mechanics and games full-stop. The success of FourSquare and Zynga, meanwhile, helped convince the C-suite that there was money to be made adopting game-like tactics.

A wide variety of companies are testing out the concepts. Pearson (PSO), for example, is building an interactive network that add incentives such as progress and long-term goals. These skills and obstacles are similar to the fundamentals of traditional role-playing games -- only now with skills such as algebra instead of sword-wielding -- according to project head and marketing vice president Gerard LaFond. Companies like Hasbro (HAS) and Samsung, meanwhile, have contracted with specialized firms BunchBall and Badgeville that offer tools to help test out the concepts. The two leading firms count USA Network, SAP (SAP) and the Discovery Channel (DISCA) among their clients. Last week, PayPal and eBay (EBAY) jumped into the fray, creating a program for developers on its X.commerce site using game mechanics tools from its new partner, Badgeville.

The industry is still very much in its early stages, though. Some, like Badgeville, face a perception problem of being too reliant on superficial interaction with consumers -- some digital levels and badges lose their meaning quickly. Others failed to deliver on their promises. Gowalla, a once much-hyped, location-based service with a heavy dose of gamification was ultimately forced to retool itself and now focuses on travel guides. (For more on location-based platforms tapping into gamification, click here.) Despite the millions in venture capital flowing into the concept, some firms have simply disappeared.

Still, Olson's gold appears to be out there. At least for companies providing gamification expertise for sale. According to a fall 2011 industry survey by M2 Research, game mechanics vendors project average growth of 197% for 2012, up from 155% expected this year. The survey results also project industry-wide revenue growth to accelerate over the next several years, from a projected $97 million this year to $247 million in 2012, $494 million in 2013, $938 million in 2014, and $1.5 billion in 2015 -- a 1,546% increase over the five years. Getting at it may boil down to strategy. Says Badgeville's Duggan, "There's a difference between the people going after the gold and the people who provide the picks and the shovels."

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