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I think one of the ways to encourage people to participate is to make it possible for more people to "Win" something, even if there aren't any prizes.
At my store, there are a couple of simply fantastic painters who will win nearly any single model or unit challenge, but might not be interested in a speed painting competition. Or you can ask the top painter to serve as judge, rather than have him or her simply win every time.
Also, what sort of challenge do people want to engage in? Is it just one game system, or cross system? Do you want to have a "best" type prize, or are all people that finish considered winners? Is it open or themed?
If I were told to plan a hobby challenge right now, I would give everybody six weeks from now to paint one half of Dark Imperium (Death Guard or Primaris). I'd couple this with demos and games, and have a mini campaign at the end where you can only use the halves. For those that finish to basic tabletop, they get two command dice, while those that finish to a high tabletop standard (highlights and/or washes, bases done, all details painted) get four.
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