How to use Trade Areas strategically?
In your brand success toolbox, the trade area remains a benchmark to identify a commercial location’s geographic potential. This visual tool helps to understand how the geographical origin of your customers influences your business results. Mastering the trade area concept could help you find your next ideal location, but also, attract and retain your local customers.
DEFINING A TRADE AREA
The trade area represents all the geographical origins of a store’s customers. Centered at the point of sale, a 3-level map is then created to identify the primary, secondary and tertiary areas.
At POTLOC, the trade area can be built in two ways: according to each customer’s spending, or according to the number of individual visits.
In the first case, each customer is weighted according to the price of their average shopping basket: the more they spend in store, the more weight they will have in the sample. Once all the addresses have been collected, their geographical origins are distributed among the 3 levels (primary, secondary and tertiary) according to their weight amongst the total sample expenditures.
The second, a very similar method, looks at the number of visits rather than the average shopping basket. Customers are weighted according to their number of visits. If they make less than one visit per year, the customer will be removed from the analysis.
The primary zone includes customers who make up 50% of your business profits (or visits): they are your most profitable customers. The secondary zone has 30%. At this level, your business remains attractive, but the weight of your competition is already more noticeable. The third zone includes the remaining 20%; this area, although profitable, is more difficult to reach.
The King Street West commercial trade area, a popular avenue in Toronto
In general, the closer your customers’ area of origin is to your business, the more profitable it is. However, the map obtained is not necessarily concentric; the location’s typology (transportation, roads, the local terrain) and the growth of surrounding neighbourhoods often create a star-shaped development around the epicenter.
There are several methods available to collect your customers’ geographic origins, the average price of their shopping baskets and the frequency of store visits. You can ask your customers for their postal code or other information when they checkout or order a POTLOC survey. For trade area forecast, which is part of the study for a new point of sale location, only an external firm like POTLOC will be able to accurately harvest the address and purchase intentions of the local population.
USE TRADE AREAS STRATEGICALLY
There are two main scenarios that require using the trade area. When creating a new business or opening of a new point of sale, the challenge is to understand where your future customers will come from. This first estimate makes it possible to understand the potential of a commercial area, to estimate the competition and the potential for growth, and the attraction of new business.
For an existing business, understanding the trade area helps you ask the right questions in order to help it reach its full potential. How far will my customers go to visit my store? How far does my reputation reach? Where do my most loyal customers live? Will a neighbourhood that is farther away spend more in your store because of its higher purchasing power? This analysis phase will then help you take the necessary actions to acquire and retain new customers.
As is often the case, the trade area is all the more relevant when it is considered along with other indicators. The isochronous area, not to be confused with the trade area, maps all the geographical areas that are the same travel time away as a trip to your store. For example, a 10-minute isochronous area will result in a line drawn around your store for any point that can be reached within 10 minutes from it. This additional map provides a better understanding of the access routes to your business. This is an indicator to consider in the predictive analysis for a new point of sale.
Another measure is the NPS (net promoter score) in the targeted areas so that you can prioritize the geographical areas in which you have to make the biggest improvement. Would you like to know more about your customers’ behaviour? Conduct a socio-demographic study to find out what keeps some consumers from visiting your store. If an adjacent neighbourhood seems less interested than the average, perhaps the population is older than your reference target. You could develop a commercial offering to target them, or you may decide to focus your marketing operations on other, more profitable neighbourhoods.
In the end, the essential information that will help you take action is often gleaned from subtle cross-referencing between your different indicators. The trade area is a particularly effective tool because it measures the empirical reality, beyond your intuition, to understand the complex issues your customers’ face when making their commercial choices.
By Jérémie Caussin