Overjustification Effect and Web 2.0
In a wild rush to start and fund Web 2.0 companies, many entrepreneurs and investors are falling into a trap from which there is little likelihood of escape. The trap is called the "overjustification effect."
In the 1970s researchers started doing studies with school children and other subjects to better understand this. One study went like this: researchers played math games with 5th and 6th grade students. The students appeared to enjoy playing the games and did so regularly and with great enthusiasm. After a while, the researches introduced rewards for playing the games and, in fact, the amount of play increased. However, after withdrawing the rewards, the students played even less than they did before the rewards were introduced!
The basic problem is that rewards have the effect of overwhelming the intrinsic value of doing something that is otherwise enjoyable. What used to be "play" becomes "work" required to get a reward.
So as Web 2.0 startups buy traffic and pay users for UGC, they are setting a trap from which they cannot escape. Smart entrepreneurs and investors will shun using monetary incentives (including the ubiquitous "free iPod") and instead strive to get users to come to and use their sites for the right reasons, i.e. for its intrinsic value be it socializing, knowledge, pride-of-craftsmanship, recognition, etc. The common wisdom I hear is that "we’re just buying traffic now to get some proof points for our next round of funding," but the problem with this "logic" is that the company will be worse off after withdrawing the incentives than had they not used them at all.
If "bought" traffic or UGC accounts for more than half of your site’s total, that spells trouble. It means that, at least in the current incarnation, your site doesn’t offer intrinsic value to users. Scaling the business means continuing to pay the $40 or $50 per user you have been paying and should you ever step off the treadmill, usage and traffic will collapse.
So if you’re running or invested in a Web 2.0 company, do yourself a favor and avoid the overjustification effect trap. Focus on intrinsic value.