Ask YC: The Carrot or the Stick?

I'm getting close to a major update to my website. Right now I think it's okay or maybe good, but after the update I think it will be a great site. The kind that I hope people will pay for. I'm planning on introducing a paid membership, and as such, I need to figure out how to get my users to switch from free acounts to paid accounts.

I've been classifying my ideas as "carrots" or "sticks". By my definition, an effective stick should force a large percentage of users to pay or leave. For example, a 30-day free account. That's a very effective stick, at the end of 30 days every user will either pay or leave.

By contrast, an effective carrot will induce a smaller percentage of users to pay while not forcing any (or few) to leave. For example, I may be very happy with my free account, but when I see that I can have access to really cool bonus feature X if I sign-up for a paid membership, I just can't resist.

The trick is that the carrot can't be core to the application. If a free account is crippled because really important feature Y is only available to paying members, you're looking at a pay or leave situation and, thus, a stick.

If your users don't interact with each other -- that is, there's no network effect -- I think a strong stick is obviously best. There's no benefit to keeping users around in free accounts. Best for them to convert to a paid account or leave. But, if there is a network effect, then, I think, it becomes much more complicated. Should only carrots be used? Or, perhaps a gentle stick?

I'd love to hear examples of effective carrots or sticks. What works? What doesn't? Is it better to be nice and use only carrots? Or, is it better to force the issue with a stick?