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.