A “dynamic trade area” is one whose geographic shape is responsive to the impact of market factors such as population density, competition, site synergies and accessibility. It is from this “natural” geographic area that a store draws the majority of its customers. Dynamic trade areas are primary trade areas that do not necessarily conform to standard forms: distance radius or drive times. A dynamic trade area is significantly better for analysis than a standardized trade area.
Understanding trade area formation is essential to the proper use of demographics. The most common misuse of demographics is to order ring reports for concentric radii, e.g., a 3-mile radius around the site. This approach has three main flaws:
(1) Variability of draw. Why three miles? Is there empirical information that indicates the majority of your stores’ sales are drawn from this area? It is far more likely that some stores draw from 2 miles and others from 5 miles depending on the Area Type of the surrounding area and the Location Type of the site environment – for a Street location in a dense Urban Core area the appropriate radius may be 1.5 miles while a Power Center location in a Suburban setting the appropriate radius may be 6 miles.
(2) A radius is a very crude way to delineate a trade area. Real trade areas rarely form neat circles around a site. More frequently they form odd “amoeba shaped” areas where some portions of the trade area are relatively close to the site and others are more distant due to varying conditions: the location of competitors, access patterns, barriers, etc.
The following example shows the evolution from customer distribution to a base trade area radius and finally to a dynamic trade area.
By defining a more realistic trade area around the site, you begin to get a much more accurate reflection of the demographic and competitive elements impacting your location.