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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
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)
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
• 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.