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Which rent discount offer is more appealing?
August 15, 2011 3:05 PM   Subscribe

Behavioral economics: which rent discount option is more appealing?

Are there any studies on the effectiveness of rent discounts?

Say, a builder is building a property that will be ready in 1 to 2 years, and they want to attract renters to commit to a rental contract now. The rent price isn't known yet, but would be in-line with prices in the area. If the renter commits, they'd get a discount.

Which of these would be more effective, and why (studies?)
* first month free
* 50% off for 2 months
* 33% off for 3 months
* 16% off for 6 months

The monetary discount would the same, but I'm interested in the psychological appeal of one offer versus the others, having in mind the 1-2 years time frame in which it would apply, and the 1-6 months over which it would apply (which may make research on Hyperbolic discounting less relevant).
posted by harwons to Science & Nature (27 answers total) 2 users marked this as a favorite
 
of the options listed the best is:

*first month free

That said, it would be better to simply lower rents by 8% overall (or whatever) because in reality people search for rentals with hard caps on their total monthly rent. If I'm looking for $2,000/month, I'm not even seeing the $2,100 places no matter what the incentives may be.
posted by 2bucksplus at 3:10 PM on August 15, 2011 [5 favorites]


In advertising in general, the word "free" is very powerful. People are suckers for "free." With no studies to back me up, I'd bet on first month free.
posted by Mister Fabulous at 3:11 PM on August 15, 2011


*first month free

This seems to me the best option.
As previously stated, people are suckers for free.
At the very least it will get more attention than offering a % discount.
posted by nickthetourist at 3:31 PM on August 15, 2011


First month free. People like free. I bet you'd get more takers offering the first month free than offering a 10% discount.
posted by madcaptenor at 3:35 PM on August 15, 2011


Wouldn't you just advertise all those choices as "first month free" with the small print defining that to mean whatever schedule you desire?
posted by mullacc at 3:38 PM on August 15, 2011


I agree with the first answer about 8% off the first entire year.
posted by markhu at 3:41 PM on August 15, 2011


It might depend on the medium you're using for the marketing. On search sites there are often cutoffs at certain price points which would mean that the apartment with discounted rent would show up in a search for places under, say, $2000. In that case, the ad would get more views if the discount were spread out over multiple months.

Sorry to not be more specific or cite studies, and good luck with your research.
posted by the young rope-rider at 3:43 PM on August 15, 2011


First month free, because, yeah, people like free, but also, it sounds a lot more flexible than say 16% off 6 months.
posted by estlin at 3:45 PM on August 15, 2011


First month free is also the best financial deal - time value of money.
posted by yogalemon at 3:50 PM on August 15, 2011 [2 favorites]


First month free means I don't have to pay rent for one month and can instead pay the movers or wait to get my deposit back. It reads "move here for free."
posted by bensherman at 3:53 PM on August 15, 2011 [5 favorites]


First month free is also the best financial deal - time value of money.

True. Also, people have limited income and assets, and moving is always expensive, so the cash flow benefits of a free month are significant. Effectively what you're doing is giving them an 11-month interest free loan equal to a month's rent. That's pretty dang good compared to what, say, a credit card company would want for the same thing.
posted by jedicus at 3:56 PM on August 15, 2011 [5 favorites]


The OP is not asking what the most beneficial deal is, but what will seem like the most beneficial/attractive deal. They might be two different things, might not.
posted by the young rope-rider at 4:09 PM on August 15, 2011


I think that it depends on the pricepoint and the demographics of the potential renters.

1st month free = people with limited disposable income can stress less about paying the deposit and the cost of moving.

16% off 6 months/8% off 1 year = people looking at higher end apartments get a bit of a discount (the higher the monthly cost, the greater an impact the discount will have) and won't suddenly be stuck not being able to pay a "big rent increase" once the discount expires.

Also, I'm skeptical that pre-renting is going to be particularly popular. Lots of buildings do pre-sales, but I've never heard of pre-renting (except for waiting lists for subsized/socialized/co-op units).
posted by porpoise at 4:23 PM on August 15, 2011


I have pre-rented a unit in an un-finished building before. (It turned out to be a disaster, by the way, because the building was finished behind schedule and I had to live in a hotel for my first month of law school.)

But I cannot imagine anybody agreeing to pre-rent an apartment without knowing what the rental price is. (Nor can I imagine them being reassured by being told that the price I was committing to was "in line with prices in the area.") Yet it seems like that's what you're discussing here.

If so, that seems to me to point even more strongly in favor of "first month free." If I was told that I would get "half off" an as-yet-unknown rent, I would assume they were just going to artificially crank up the rent to make the discount meaningless.
posted by willbaude at 4:28 PM on August 15, 2011


I remember reading about a study to the effect that people place a higher value on immediate rewards over delayed rewards, even if the immediate reward is significantly lower (ie, a hypothetical person would prefer $20 now over $100 a year from now).

I Googled around and couldn't find the exact study, but there does seem to be a lot of reasearch to that same point - here's one example: "Delayed Reward and Cost Discounting."
posted by ella wren at 4:33 PM on August 15, 2011 [1 favorite]


I remember reading about a study to the effect that people place a higher value on immediate rewards over delayed rewards, even if the immediate reward is significantly lower

I recently read that as well and I'm thinking it was here, on the blue.
posted by TWinbrook8 at 4:43 PM on August 15, 2011


*first month free

Because people are bad at math, and especially bad at percentages. And for all of the other reasons.

I don't have a study to back up my hypothesis that people are bad at math, just life. There was definitely a recent NPR story on the immediate reward psychology.
posted by rainydayfilms at 4:45 PM on August 15, 2011


Dan Ariely, in Predictably Irrational, talks a lot about the power of free.

Studies show that people respond to free much more than even a one cent charge, despite the difference being essentially nothing. There's something hardwired in our brains.
posted by Georgina at 5:01 PM on August 15, 2011 [2 favorites]


@ella wren: the fact that people place higher value on immediate rewards is Hyperbolic Discounting, but in this case it wouldn't quite apply, because the reward would happen after the property is finished, 1-2 years from now.
posted by harwons at 5:16 PM on August 15, 2011


Wait a minute - who's going to commit now to rent a place one to two years from now? I can see someone committing to buy that far ahead of time, but almost by definition renters have shorter time horizons than buyers.
posted by madcaptenor at 5:43 PM on August 15, 2011 [1 favorite]


@madcaptor: well, let's say the property's location is rather unique.
posted by harwons at 5:58 PM on August 15, 2011


A person who is not risk averse won't care either way. A person who is even slightly risk averse will want the discount up front (because a delayed payment might never show up). Most people are risk averse, so first month free is best.
posted by miyabo at 6:05 PM on August 15, 2011 [1 favorite]


the problem with first month free is that it means you are locked into a X dollar a month contract.

I'd prefer the 8% off the rent, because then it means I'll be paying less up until I move out. At least in places with rent control
posted by mulligan at 6:21 PM on August 15, 2011


harwons - hyperbolic discounting still applies even though the delay is 1-2 years. Granted, the way most studies are set up they compare a future payoff in terms of an equivalent immediate amount, but you can still compare the immediate equivalents for different payoff structures (e.g., your 1 month free or 16% for 6 months) to get an idea of what choice preferences would be.

There hasn't been a ton of research on sequences of payoffs as your question specifies - Brunner did some stuff with rats, and Loewenstein & Prelec were looking at this a bit in the early 90s. Googling around for Brunner & "hyperbolic discounting" should get you at least the NIH abstract for the Brunner article (and, heh, apparently the first hit is one of my articles), and Loewenstein & Prelec are pretty well known, so you can find PDFs of those articles pretty easily.

Those are kind of moot, since the sequences you suggest are pretty tractable anyhow. The basic hyperbolic discounting equation (which you probably noticed at your wikipedia link) is Amount/(1+Time). So for the 1 month free situation, that's fairly easy since it's just rent/(1+24 months) give or take. For two months at 50% off, you could write this as (.5*rent)/(1+24 months) + (.5*rent)/(1+25 months) to get the immediate value of the offer to prospective tenants. (That combination for the sequence comes from Brunner's stuff).

Ultimately what this amounts to is that the immediate value of the 1 Month free offer is going to win, since it has the largest payoff in the smallest time. This would be true if the offer went into effect 10 years from now or tomorrow, since under all the payoff schedules you're offering the same amount, but your increasing the time it takes to get it with the longer schedules. What would change as you increase the amount of time prior to the first month of rent is that the immediate equivalent value of all the offers would get closer together - they'd all start going to zero. Probably the most effective tactic would be to offer potential tenants the total amount of 1 month's rent immediately, in cash, and charge them full rent from the beginning.


Sorry for the length - I've been thinking about this stuff for, um, way too long
posted by logicpunk at 8:29 PM on August 15, 2011 [1 favorite]


I also would want either the first month free or 8% off the rent for a year. The other options would wreak havoc on my ability to really plan my finances month to month - 3 months of 33% lower rent would mean that the 4th month would be suddenly tighter than the previous three, even if I happened to know it long in advance.
posted by pazazygeek at 6:55 AM on August 16, 2011


If the location is so unique that people will sign up to rent the *unfinished* property at an *undetermined* price 2 years in advance, I'm assuming they want to live there enough that it doesn't matter that much and/or there's enough demand that it will be filled regardless.

I'd check out SSRN and direct some inquiries to universities doing behavioral econ research (Stanford and Yale pop into my mind) to see if they can point you in a general direction.

I'd also look into what effect discounting the rent will have on the perceived value of the property - why am I committing two years out if this is not an amazing opportunity? If it's an amazing opportunity, why is there a discount?
posted by mrs. taters at 9:16 AM on August 16, 2011


The problem with trying to take advantage of hyperbolic discounting is that the effect weakens the further out you go.

The traditional example is that when getting something today instead of tomorrow there is a huge difference in perceived value, whereas getting it (a year) from now vs. (a year + 1 day) the value is pretty much the same.

You should read "Predictably irrational" in it's entirety, but one example stood out as potentially useful. We value something we already have more than when you don't. For example if I give you a mug, the amount you would want before you'd sell it would be higher than the most you would have been willing to pay for it, before it had been given to you.

Another strong force that acts on our irrationality is the power of imagining things. Maybe you could offer up to $X towards the purchase of new furniture/grill/flatscreen tv when they move in, but they have to choose the items in advance. This allows/forces them to visualize the cool things they are going to get to enjoy in their new apartment
posted by vegetableagony at 12:46 PM on August 25, 2011 [1 favorite]


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