Throughout our many years in retail real estate research, we’ve heard businesses of all types simplify the assessment of their business’s trade area. So often, we hear economic developers and retailers describe their trade area as a certain-mile radius around a site, but in reality, there are many different ways to delineate a trade area.
First, let’s define what a trade area actually is: the geographic region from which a business draws its customers. The size and shape of that trade area is impacted by many things, including:
- The type of product or service you offer (local convenience items such as groceries and gasoline vs. comparison shopping items such as furniture or appliances)
- Competitors in the area (new and existing)
- The availability of goods and services offered in the community
- The proximity of the store/business to other similar stores/businesses
- Physical barriers between your site and your customers, such as lakes, railway tracks, or forests
- Psychological barriers between your site and your customers, such as a border (perceived or tangible) between an upscale and a depressed part of town
Five Common Types of Trade Areas
There are a variety of methods to calculate a trade area, but here are five of the most common:
- Mile rings or radii – A ring is exactly what it sounds like: a circle around a site to represent its trade area. Radii offer several advantages, including simplicity and ease of comparison – as a 3-mile ring in one market is the same size as a 3-mile ring in another market. However, this type of trade area does not accurately represent consumer’s actual travel patterns.
- Drive time or isochrones – We’ve written about drive time trade areas on the blog before, but the basic definition is a trade area that follows the road network around your site and uses typical drive times and speeds to accurately represent travel patterns. The downside of the drive time trade area is that it can be difficult to explain. In SiteSeer, we have trade area rules that calculate different drive times for different areas (e.g. a six-minute drive time might be more appropriate in an urban area whereas a 15-minute drive time might be appropriate for a low-density suburb). Variable trade areas adjust automatically based on the environment.
- Gravity or “Huff” model – A gravity technique examines the demand in a market and allocates that demand to different locations based on distance and appeal. Each geographic unit within a trade area receives a calculated probability score based on distance between your site and other competing options near your site. This method can produce a very accurate trade area as far as understanding where you’ll attract your customers from, but it isn’t as easy to visualize or calculate statistics such as demographics.
- Customer penetration or capture – In this method, your boundary “captures” a certain percentage of the customer base (e.g. 75%). Because this approach is based on actual customer data, it offers accuracy. However, it requires that the business has customer data or third-party consumer data (e.g. mobile phone activity) and isn’t always practical for new sites.
- Manual trade area – Lastly, many companies choose to create their own trade area, drawing boundaries based on their own experience. Using your own experience as a guide can produce accurate results, of course, but the downside of this method is that it is less objective. A company might draw a trade area that is based more on wishful thinking than fact, which might not produce an accurate representation of consumer travel patterns.
Primary Trade Area vs. Secondary Trade Area
When determining your trade area for a location, you’ll want to consider both the primary trade area and the secondary trade area.
A primary trade area is the geographic area from which you’ll draw the majority of your customers (varies, but expect 50-80% or more) and garner the majority of your revenue. The secondary trade area represents a larger geographic area from which you draw customers (15-30% of customers). When you combine these trade areas, you get the main trade area. The tertiary trade area (usually less than 10%, but can be much higher for destination concepts and those that attract tourists or business travelers) accounts for additional customers, but this is typically only something you’ll take into consideration in larger metropolitan areas.
How to Choose the Right Trade Area
As you can see, there are several ways to draw trade areas that use different algorithms to create boundaries and different methodologies to represent markets. Determining your trade area is a critical step in the site selection process, and creating a trade area depends on your goals:
- Is explainability important?
- Will you have a visual (map) with your trade area analysis so others can visualize the trade area?
- How important is precision? If you need this data to compare two areas, simple trade areas can be very appropriate. If you are running a sales forecasting model, you will likely want to use more sophisticated trade area definitions.
It’s important that you approach the trade area analysis process carefully, but remember: it’s just a way to summarize data. As long as your trade area is a good representation of the area where your customers live, work and shop and includes locations of competitors and traffic generators, you’re on the right track.
You might find what you perceive to be the “perfect” site for your business concept, but it is time well spent to make sure it will work for the customers you’re trying to serve.
If you need help with this process, contact SiteSeer. Our software helps you understand where your customers are travelling from and how they reach you. You can create trade area rules that help you make site decisions that match your growth strategy. Contact us for a demo today.