"Gamification is the use of game mechanics and game design techniques in non-game contexts."
Sources worth Noting:
Reality is Broken: Why Games Make Us Better and How They Can Change the World - Jane McGonigal
The Art of Games Design: A Book of Lenses - Jesse Schell
Gamification typically involves applying game design thinking to non-game applications to make them more fun and engaging. Gamification has been called one of the most important trends in technology by several industry experts. Gamification can potentially be applied to any industry and almost anything to create fun and engaging experiences, converting users into players.
Things like loyalty schemes are simple implementations of gamification. As are achievement based awards like Scouts badges or swimming certificates. Other techniques include:
achievement "badges"
achievement levels
"leader boards"
a progress bar or other visual meter to indicate how close people are to completing a task a company is trying to encourage, such as completing a social networking profile or earning a frequent shopper loyalty award.
virtual currency
systems for awarding, redeeming, trading, gifting, and otherwise exchanging points
challenges between users
embedding small casual games within other activities.
These have been proven to improve people's effort and efficiency when applied to real life scenarios. Especially amongst children.