This guide will help you understand everything you need to know about trade area analysis.
Table of Contents
Trade area analysis is a process used by professionals such as retailers, property developers, and community planners to map out business activity and consumer behavior in a specific location. Analyzing a trade area entails studying things like traffic patterns, shopping habits, and existing businesses, for the purpose of exploring the market potential of a planned venture or optimizing the management of an existing one.
Trade area analysis enhances decision-making by asking questions like:
The benefits and importance of trade area analysis can be illustrated with a specific example. Imagine you operate a grocery store chain and are considering opening a new location. A couple of other popular chains operate in your area. But is there enough demand to go around? Where should you locate your new venue?
Your first step is to collect business intelligence on the grocery stores that already operate in the area. How many visitors do they attract on a daily basis? Where do most of their customers come from? What are the demographic and psychographic characteristics of their customer base?
Next, you need to find out as much as you can about the specific locations you’re considering. How many people pass by each location every day? What are the local traffic patterns? What is the demographic breakdown of the local population, and how much discretionary income do they have? Given the distances actual customers drive to get to existing stores, how far will they be willing to travel to get to yours?
Once your store is up and running, trade area analysis can help it operate more efficiently. Information on household income in the store’s trade area, for example, can inform your pricing strategy.
A proper trade area analysis gathers in-depth data on all the various place-dependent factors that may contribute to the success or failure of an enterprise. Some of the main elements that should be considered include:
Infrastructure and Other Regional Attributes: Things like local geography, transportation infrastructure, traffic patterns, and road layout can play a big role in determining a venue’s accessibility and attractiveness. If a location is hard to reach, or if traffic jams make getting there a nightmare, it will be much harder to attract the right audience. Such factors also impact the size and location of the target consumer base. If a town boasts a convenient light rail or train line, the location may draw in visitors from further away.
Similarly, trade area analysis should account for other regional attributes like the real estate market, popular local events, planned construction and development, and more.
The Competitive Landscape: A venue’s capacity to attract customers is also heavily impacted, of course, by the competition it has to contend with. And the more data one can collect on the existing market, the better. To be useful, an analysis of the competitive landscape should include as much information as possible – not only on the size and location of existing businesses, but also on their visitation patterns, the demographic and psychographic characteristics of their customer base, and more.
Demographics and Community Characteristics: This brings us to the third major factor that should be considered in trade area analysis: the characteristics, habits, and preferences of the local community and of visitors to the area. This includes basic demographic data like median household income, population fluctuation, and age distribution – but also broader information on things like popular interests and shopping preferences.
Trade area analysis allows both business owners and civic stakeholders to make data-driven, intelligent decisions. It is an important tool for many different kinds of industries:
Trade Area Analysis in Retail – When setting up shop, trade area analysis allows merchants, restaurant owners, and franchise operators to determine whether their store is a good match for the community. It also helps them choose an ideal location for their venue – where their offerings will be in high demand and won’t face too much competition. Once they are in business, ongoing trade area analysis helps retailers cater more effectively to their actual customers’ needs. This, in turn, makes the shopping experience more enjoyable and promotes brand loyalty. Regular trade area analysis can also inform day-to-day operating decisions, from optimizing store layout to planning inventory to match consumers’ routines.
Retail trade area analysis can also be used by consumer packaged goods companies (CPGs) to strategically determine the best places to stock their products, as well as by dining establishments.
Trade Area Analysis for Managing Commercial Real Estate (CRE) – Trade area analysis can be used by commercial real estate brokers to market their properties and to make decisions about how to best manage them. Say, for example, that a CRE broker wants to find tenants for a shopping center. Information about the mall’s existing customer base – where visitors come from and what they’re interested in – can allow them to more precisely assess the value of the property, to determine the relevant target audience and to market it more effectively. Trade area analysis takes the guesswork out of the decision-making process for CRE investors by allowing them to make informed choices about which properties to buy.
Community Trade Area Analysis – Municipalities and urban planners can use trade area analysis to maximize the return on their investments in city development. Local governments often have limited budgets and need to find the best ways to spend their money while bringing maximum benefit to their communities. Conducting trade area analysis allows them to make data-driven decisions on where to focus development resources and on how to tailor them more precisely to the specific needs of the people that live there.
In the past, the primary method for determining a venue’s trade area was the “radial method,” which involved simply drawing rings of different sizes around the location in question. While this technique was cheap and easy to implement, it was extremely imprecise – and technology has now come a long way in facilitating much more accurate trade area analysis that is adapted to each use.
Other traditional techniques include “gravity modeling,” which seeks to predict customer behavior by considering additional factors like the attractiveness of different shopping districts. Focus groups, credit card data and even license plate information have all been used to try and more precisely estimate actual trade areas.
But in the age of mobile phones, many of these methods have become outdated. Today, the best way of determining a trade area is by using location analytics – anonymized, aggregated location data, which shows how people move and where they come from. Whereas in the past, professionals had to use rough estimates to determine how far one might be expected to travel, say, to a grocery store, foot traffic analytics allows one to precisely determine where a specific venue’s customers come from.
By combining visit metrics with other data sets like census figures, retailers, local governments, and others can easily analyze the actual trade areas of both their planned venues and of potential competitors. In addition to more granular information about a business’ potential customer base, foot traffic data can provide deeper insights into the competition, by revealing cross shopping patterns and visitor journeys.
Placer.ai provides the next step in the evolution of trade area analysis, through real-world mobile location data. Its easy-to-use platform offers stakeholders easy access to the information and data points they need to conduct accurate, effective and timely trade area analysis.
Rather than relying on radial methods or other estimations, Placer.ai’s platform uses foot traffic analytics to map out a business’ True Trade Area (TTA), which encompasses the actual areas where visitors to a target site come from. Placer.ai’s platform can assess the size of a venue’s TTA, analyze the full competitive landscape – including potential overlap with other enterprises – and evaluate consumer preferences and behavior using census figures and psychographic data sets. It can also provide detailed area analysis of any location, including information on vehicle traffic volume, planned development, local events and even crime statistics.
Trade area analysis is one of the most important tools business owners and civic stakeholders can use to plan new ventures, run existing ones, and decide where to invest their limited resources. It is a key factor in site selection – the all important process of determining where to locate a planned venture – and it helps avoid cannibalization and unnecessary competition. Properly conducted trade area analysis is also critical to attracting the right audience to properties and events, and to evaluating real estate opportunities. In the past, analyzing trade areas was a long and laborious process, involving lots of guesswork. Today, with the advent of foot traffic analytics like those provided by Placer.ai, it has become easier and more accurate than ever before.