Why You Need to Rethink Leasing Incentives 

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In their book Freakonomics the economists Steven Levitt and Stephen Dubner ask (and answer) a number of provocative questions about economics. And if you're in the apartment marketing world, the book is well worth your time.

The reason that the book is so helpful for marketers to read is that it helps us to understand incentive. And at the end of the day, all marketing boils down to incentive.

Every time we do marketing, we work to incentivize a prospective customer to take the next step. We build ads that entice apartment shoppers to click, so that they visit our website. Once on our website, we incentivize the most valuable calls to action—visiting one of our floorplan pages, watching a video tour, or especially contacting our leasing staff with a phone call or an email.

But here's the funny thing: Even though all of marketing is about incentives, we automatically think exclusively of price discounts whenever we start talking about "leasing incentives." This is a really bad habit that can cripple our businesses—and Freakonomics has the data to prove it.

Listen to this case study from the book:

Imagine for a moment that you are a manager of a day-care center. You have a clearly stated policy that children are supposed to be picked up by 4 p.m. But very often parents are late. The result: at day's end, you have some anxious children and at least one teacher who must wait around for the parents to arrive. What to do?

A pair of economists who heard of this dilemma—it turned out to be a rather common one—offered a solution: fine the tardy parents. Why, after all, should the day-care center take care of these kids for free? (p. 21-22)

The obvious suggestion to correct this problem was to implement an economic disincentive, by fining parents $3/child for each incident.

How did this solution work out for the day-care center?

After the fine was enacted, the number of late pickups promptly went...up. Before long there were twenty late pickups per week, more than double the original average. The incentive had plainly backfired. (p. 22)

Why would that happen? Who wants to pay extra fees? Levitt and Dubner explain:

Economics is, at root, the study of incentives: how people get what they want, or need, especially when other people want or need the same thing. Economists love incentives. They love to dream them up and enact them, study them and tinker with them. The typical economist believes the world has not yet invented a problem that he cannot fix if given a free hand to design the proper incentive scheme....

An incentive is simply a means of urging people to do more of a good thing and less of a bad thing...

(p. 22, 23)

Why didn't this experiment work? Two main reasons: the fine of $3/day was too small to offer all that much of a disincentive to keep parents from picking up their kids. But additionally, this solution

substituted an economic incentive (the $3 penalty) for a moral incentive (the guilt that parents were supposed to feel when they came late). For just a few dollars each day, parents could buy off their guilt. (p. 27)

But something else happened that was far worse:

Furthermore, the small size of the fine sent a signal to the parents that late pickups weren't such a big problem. If the day-care center suffers only $3 worth of pain for each late pickup, why bother to cut short your tennis game? Indeed, when the economists eliminated the $3 fine in the seventeenth week of their study, the number of late-arriving parents didn't change. Now they could arrive late, pay no fine, and feel no guilt. (p. 27-28, original emphasis)

Why Economic Leasing Incentives Backfire

The same kind of problems crop up when we resort to economic incentives every time we need to generate more business. When we offer free rent as an incentive to entice new residents, we send a very clear message about our property: The value of this apartment is lower than the price we are charging for rent. Whether we intend to or not, when we offer a rent concession, we are teaching new residents to devalue our property.

This means that rent incentives might actually make it more difficult for you to rent your apartments. Remember that the number of late-arriving parents actually increased when the day-care center introduced an economic disincentive (a $3 fine), because the economic disincentive removed other, more powerful incentives (the moral incentive of following the rules and picking up your child on time). In the same way, if a rent incentive reduces the perceived value of your property, you may have a more difficult time closing deals, even with the rent incentives you are offering.

But that's not all. Later on, when your new residents actually do begin paying full price for their rent, they will perceive that they are overpaying, a mindset that will be difficult to shed every time they write their rent check. Just as removing the $3 fine at the day-care center had no effect on the increased numbers of late-arrivals, suddenly paying the full amount of the rent price won't help residents suddenly feel the full value of their apartment. Instead, they will probably feel cheated month after month, making it an uphill battle for you to retain that resident at lease renewal time.

How to Rethink Leasing Incentives

Instead of relying exclusively on rent incentives (value-degrading incentives), your marketing needs to focus on all the other, value-adding incentives your community has to offer. Obviously, you should spend time highlighting the economic incentives your community has to offer, such as the included amenities (pool, fitness center, cable television, wifi internet, etc.) that puts money directly back in their pocket from saved gym memberships and cable/internet bills.

But there are other ways to offer incentives. Just as a moral incentive had actually done a pretty good job of limiting late-arriving parents at the day-care, so also your community probably has a range of incentives that you don't realize are incentives.

For example, is your community close to the university or an employer? Do you offer a fantastic playground that kids love? Do your floorplans lend themselves well to hosting other people? These are examples of social incentives that you need to weave into the narrative that you tell about your community.

Or, your community might even offer some moral incentives that you should highlight. Does your community do service projects together? Do you sponsor a blood drive on-site? For people who value giving back to their community, those kinds of activities are powerful moral incentives.

At the end of the day, your marketing can devalue your community by pleading for people to live in your apartments through rent incentives, or your marketing can increase the value of your community by laying out all the great incentives (of all kinds) that would encourage people to live at your community.

Instead of taking the low-effort, high-cost road of rent incentives, let's spend just a little more time improving our marketing to build up the compelling value of our property in the eyes of the people we are trying to reach.


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