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Trading Area A trading area is a geographic area containing the customers of a retailer for specific goods or services. Or The geographic region in which a good or service is available and from which a company generates most of its sales. For example, a local retail store may have a trade area with a 50-mile radius.

Trade Area

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Trading AreaA trading area is a geographicarea containing the customersof a retailer for specific goods

or services.Or

The geographic region in which a good or service is available and from which a company generates most of its sales. For example, a local retail store

may have a trade area with a 50-mile radius.

Trading Area

Trading Area

Size and Shape are dependent on:• Size of Store• Neighbouring stores• Transportation network• Population density• Physical, social, and political barriers• Location of Competition• Merchandise uniqueness, low prices, superior

service

Fragments of Trading Area

• Primary- 50-80% of customers (less than 10 min.)• Secondary- 15-25% of customers (less than 20 min.)• Fringe/Tertiary- Remainder of customers (15-50 min.

away)

Fragments of Trading Area

Trading Areas and Store TypeLargest

TRADINGAREAS

Smallest

Department stores

Supermarkets

Apparel stores

Gift stores

Convenience stores

Techniques for IdentifyingTrading Areas

• Customer Spotting

• License plates or traffic flow• Customer records (credit cards, delivery

records , service)• Promotions (sweepstakes, contests, coupons)• Customer surveys

Techniques for IdentifyingTrading Areas

• Traffic Flow….or license plate survey-• Is the random canvassing of parking lots at major

locations in town at different times on different days and over several weeks.

The locations might include The downtown area, Major shopping destinations such as

shopping malls and centers, Other popular establishments in town.

Techniques for IdentifyingTrading Areas

• One should combined the results of vehicle license plates from the different locations to obtain a composite count of vehicles from surrounding areas and compare them to regional commuting data.

• Results from a traffic study will usually reveal the major areas that comprise the local trade

area or market

Techniques for IdentifyingTrading Areas

• Gravity Models

– Huff’s Law of Shopper Attraction– Attraction of a store in a metropolitan area depends on the size of

the store (product assortment) distance, and sensitivity to time– Bigger and closer are more attractive

–Reilly’s Law of Retail Gravitation

Techniques for IdentifyingTrading Areas

• Reilly’s Law

Reilly’s law is a rule-of-thumb used to ESTIMATE the distance customers will travel to PURCHASE goods and SERVICES after comparing price, quality, and style.

Techniques for IdentifyingTrading Areas

• The law assumes that people desire to shop in larger towns, but their desire declines the farther the distance and time they must travel to get there. Thus, LARGER TOWNS DRAW CUSTOMERS FROM FARTHER DISTANCES THAN SMALLER TOWNS.

• The maximum distance a customer will travel to shop in a smaller town can be calculated using the following formula.

Techniques for IdentifyingTrading Areas

• Reilly’s Law

Techniques for IdentifyingTrading Areas

• Limitations of Reilly’s Law-

Distance is only measured by major thoroughfares; some people will travel shorter distances along cross streets

Travel time does not reflect distance traveled. Many people are more concerned with time traveled than with distance

Actual distance may not correspond with perceptions of distance

Techniques for IdentifyingTrading Areas

• Huff’s Law-

Huff’s law of shopper attraction delineates trading areas on the basis of product assortment (of the items desired by the consumer) carried at various shopping locations, travel times from the shopper’s home to alternative locations, and the sensitivity of the kind of shopping to travel time

Techniques for IdentifyingTrading Areas

Where: •Aj is a measure of attractiveness of store j, such as square footage •Dij is the distance from i to j     • α an attractiveness parameter estimated from empirical observations •      is the distance decay parameter estimated from empirical observations •n is the total number of stores including store j.

Techniques for IdentifyingTrading Areas

• What % of customers will shop in city A for gift items? A B C• Sq. ft. of selling space for gifts 5,000 10,000 12,500

• Travel time 10 min. 15 min. 20 min.

• Sensitivity to travel time = 1 • So: 5,000 ______10’_______ = 500 = 27.9% 5,000 + 10,000 + 12,500 1791.67 10’ 15’ 20’• 28% of customers will shop in City What % of customers will shop in city A

for gift items?

Benefits of Trade Area Analysis

• Identify gaps or overlaps in the market coverage of your existing store network, and make corrections by opening, closing or moving stores

• Make better site selection decisions by using characteristics of existing trade areas to predict trade areas around potential locations

• Define a geographic area to analyze for market potential, market penetration, and competitive threats

Benefits of Trade Area Analysis

• Become more efficient and effective at target marketing by reaching out only to those customers and prospects in a store's trade area

• Use as a key input into customer profiling.

Factors that Impact Trade Areas

• Analyzing trade areas should be performed regularly to provide key metrics for improving sales and marketing performance.

• Adding new stores to your network will cause the trade area of nearby stores to change. In a saturated market, or if stores are placed too close to one another, cannibalization can occur.

Factors that Impact Trade Areas

• A change to product offerings will impact the trade area, as will shifts in population and demographics, the existence of competitors, changes to highways and roads, and the addition of other businesses that attract people to the area.