Defining a store’s trade area is one of the most critical tasks in evaluating the strength and composition of the customer base supporting a store. While perfection in trade area delineation is elusive on a case by case basis, there are some valuable elements that need to be understood to optimize effectiveness in the process of defining the geographic extent of a store’s trade area.
Geographic coverage is the most crucial and yet most often misunderstood and abused element of site location analysis. Yet a properly defined Trade Area is a critical factor for every business. Armed with good objective information and research there are a myriad number of uses, including but not limited to:
- Establishing a customer profile
- A foundation for sales forecasting
- Evaluating the impact of competitors
- Comparing locations
- Media selection
- Direct Marketing
- Identifying “holes” in store deployment
- Estimating sister store cannibalization
You are probably familiar with the “location-location-location” adage. Probably the most often repeated business phrase in use today. Positioning oneself as close as possible to the best customers, and out-position competition in doing so is a desirable goal. Cavemen probably used it: my cave, mammoths/buffalo, competing clans, etc..
But the trade area is really just a concept. Ask ten people for their opinion about what constitutes a trade area for a specific real estate location and you will get six or seven different geographic boundaries. For most people and most business, trade areas do not exist as hard and fixed territories like states or counties with neat little boundaries and signs saying “Welcome to Las Vegas” or “Welcome to Cleveland”.
So to help matters let’s first establish some lingo.
A trade area is simply the contiguous geographic area around a site that generates the majority of the customers for a business, shopping center or business district. Customer concentrations tend to decline rapidly beyond the bounds of the primary trade area.
A “base trade area” is the distance radius or drive-time that captures the fundamental drawing power of the site location.
A “dynamic trade area” is one whose geographic shape is responsive to the impact of market factors such as population density, competition and accessibility. A dynamic trade area is significantly better for analysis than a standardized trade area.
Generally when people speak of trade areas they mean the primary trade area. However, it is useful to evaluate the next layer of support for a store beyond the primary trade area; this is the “secondary trade area”. After the secondary trade area comes the “beyond” – all the world outside the defined primary and secondary trade area components.
There are some exceptions to this idea of fluid trade areas – pre-assigned sales territories based on operational constraints. An example comes to mind. There was one Seinfeld episode where Elaine is so enamored with the food from a particular delivery-out only Chinese restaurant and she is refused service where she lives, so she moves into broom closet in the delivery zone. This works until her ruse is discovered.
An extensive primer on trade areas is found in the presentation Scott Dewar made to the Cleveland chapter of the American Marketing Association in May 2007 [in two parts]