When incentives should be used in marketing a new development

Over the past few weeks I have been taking a detailed look at the topic of stamp duty on property and how among other related issues, various state governments manipulate stamp duty in the housing market.

They do this to stimulate activity, however they are in effect adding an incentive to the market. Incentives in any free market are not new and in a project marketing setting they also have a function that extends beyond government to the development community.

The developer’s incentives

From a general marketing perspective the arrival of very big incentives, like the government incentives we saw in 2007, usually signal that the health of the market is not good. This usually results – and did at the time – in developers adding further incentives to the marketing mix, and not just incentives aimed at first-time buyers.

Depending upon prevailing conditions, such incentives in combination can add up to considerable value.

That could reach (as they did in 2007) as much as $40,000 or even $60,000, which is a valuable incentive to a buyer looking at homes in a middle price range. The total incentive on offer can be made up of a mix of grants, stamp duty concessions and developers rebates.

But an interesting question is: how do buyers react to such incentives? In particular when these incentives contain big contributions from the developer or with project homes from the builder.

A big topic of conversation is how should they be used in the promotional mix and what the pitfalls are when the incentives are either reduced or no longer available. It’s also worth considering if incentives are more or less always part of the “offer”, or do they simply retreat at different times and change form.

Or is it simply a reality that for the foreseeable future such incentives, both from the private sector and as a part of government policy, will be a fixture of the housing market?

A valid and long-term marketing tool

If we look at the impact of incentives and how “normal” they have become, in particular for first-time buyers, it does appear they are here to stay. But is this surprising? After all, buyer incentives are a part of almost all free-markets. Coupons (a way of life in the US), two-for-one offers, petrol savings, frequent flyer points, sales and discounts – the list is endless.

For some major parts of the residential property market, incentives have to some industry observers usually been associated with tough times. But is this the reality?  It could be more constructive to consider incentives as a valid part of a normal promotional mix, as it appears they become more common.

Many do not involve any sort of direct price discounting. This is in contrast to the private treaty market, where price alone is the only real mechanism to influence buyers.

I also suggest that it could be reasonably argued that being on an early release VIP list with a project is in fact a form of incentive, as it implies an advantage of time and possibly price. We can appreciate this is a logical goal from the perspective of many buyers.

The use of incentives can and does play a positive part of the project marketing arsenal. If incentives are well considered sales can be encouraged and the time scale of projects and holding costs reduced, possibly boosting the eventual return.

Just as with a major department store, any retailer or car manufacturer, holding unsold stock is an expensive thing and the cash tied up can delay other development opportunities. In a full sales path incentives should be seen as valid marketing tools, not an emergency Band-Aid or quick fix, and so they need to be deliberately and carefully managed.

Buyer incentives

If incentives are used there will be some core points to consider. When should buyer incentives be used in project marketing matrix? What impact do incentives have on core brand values? Has the market grown tired of incentives or are they so much a part of the marketing offer that they are now a must? Or despite the wide spread use of incentives are they viewed with distrust among buyers?

There is little doubt that big-ticket incentive like the various state and federal government first-home buyer grants do work and can work fast, and they are more or less seen as permanent fixtures. Buyers like them and do not appear to consider them as panic tactics, and they are seen as a valid financial boost.

Some people in the industry will always comment that incentives are a waste of time, a negative. They say things like “any buyer will know that the free car or some other offer has been factored into the price”.

Or “do you want to live in a community where every second person drives the same free car or has the same free appliance package?”

Despite this type of feedback incentives are used and will continue to be used. Comments like the examples quoted are more likely to be associated with a now out-dated approach to incentives, when they were used in a much less focused and strategic way.

Incentives can be used in a very positive way and they can have a major financial value. Marketing budgets and the impact on the true net sales price are factors that have to be taken into full account. They will impact the cost of each sale as a valid marketing cost.

Positive incentives also help to foster a happy customer. Long after a sale is complete it might be the high-end new barbecue that buyers boast about to their family and friends, while the house itself fades into everyday life.

Many major project home developers now use upgrade packages, priced as incentives as a key part of their brand offer.

I have already pointed to the need to plan and manage incentives with care, because despite the spread of incentives in some markets they may need to be avoided and other ways found to encourage sales.

There is also some observation that in particular markets, some financial institutions have been discounting values by the worth of incentives and this can have a flow-on impact and so reduce the buyers’ borrowing capacity.

Nevertheless there needs to be a full appreciation of how incentives impact the market and how best they should be used in building a strong sales path for individual projects.