Companies do many types of market research to determine the needs of their customers and how to serve them most effectively. When companies want to find out where to reach customers, they often use a tool called trade area analysis. If you work in sales of marketing, it may be helpful to learn more about this technique and how it can help you target customers more effectively.
In this article, we explain what trade area analysis is and explore its benefits, list the types of trade area analysis and describe what factors to consider when conducting trade area analysis.
What is trade area analysis?
Trade area analysis is a process that involves studying the economic activity in a certain area. Businesses usually perform trade area analysis to determine the most advantageous areas for new store locations. Trade area analysis usually focuses on five factors:
Types of business: Companies often analyze what other businesses are in the area they want to move into. This can tell them whether they might fit in and whether they will face excessive competition.
Number of businesses/ concentration: Professionals may also note the number of businesses within a given area to determine whether the area can support increased commercial activity.
Number of potential customers: This is usually a simple calculation of the number of potential customers who live in or pass through a given area. It may also include demographic data like age, ethnicity or economic status.
Patterns of movement: It’s often important for companies to map the daily travel of potential customers. This allows them to situate businesses in heavily-trafficked areas.
Products being purchased: During the trade area analysis process, a company might also study the type of commerce in an area. Knowing what customers are buying can help businesses decide whether they might fit into the local economy.
Types of trade area analysis
Although trade area analysis is a common tool for retail businesses, professionals in other fields may use it to gauge the viability of projects or determine the needs of a community. These are the three primary types of trade area analysis:
Healthcare trade area analysis
Healthcare providers commonly use trade area analysis to plan future medical infrastructure and enhance their service to local communities. In these cases, medical providers use trade area analysis to determine the number of medical service providers in an area, understand what services they are providing, estimate the number of medical patients and gauge whether they have adequate care. They may also collect demographic details that affect people’s need for health services, especially age and income.
For example, a healthcare services company may find that patients in a certain area have multiple options for basic care but may have to travel long distances for access to specialists like ophthalmologists or endocrinologists. This shows that it might be beneficial to open specialized medical practices in the area. This process allows healthcare providers to serve the needs of communities more effectively while creating thriving businesses.
Retail trade area analysis
Retail businesses are some of the most likely to employ trade area analysis in their planning. Building a new store requires extensive resources, and it’s important for companies to ensure that they receive a return on their investment. Before planning a new store, retail companies often analyze different locations to understand how many potential customers live in the area, how much money they have to spend and what products they are interested in. They also usually investigate possible competition and traffic patterns in the area.
The information they gain from these analyses can help companies choose a location that offers good earning potential. Customer insights can also help companies create effective marketing strategies tailored to their unique market.
Trade area analysis is community planning
Another common use of trade area analysis is community planning. In these cases, analyses are usually the result of government initiatives rather than private business interests. The primary goal of this process is to determine how to best serve communities and revitalize urban areas.
In urban planning analyses, governments usually collect information of the services provided in a given area, along with demographic data and traffic patterns. This allows them to determine what services are lacking in the area and ensure that community members have access to important services like public transportation and commercial infrastructure.
Trade area analysis benefits
Trade area analysis can have a number of benefits for companies looking to relocate or open a new store. These are four of the most important benefits:
Inventory and supply chain planning
Trade area analysis can be an effective tool for inventory planning. It gives business leaders increased insights into the demographics and purchasing habits of people in the area of a new store. This allows companies to predict which products they are most likely to sell and when demand will be highest. Collecting this information can help companies determine how much inventory to maintain, which helps them meet the needs of their customers more effectively.
It can also be an effective tool for supply chain management. Increased customer insights allow businesses to schedule deliveries to coincide with higher demand. When demand is lower, companies can use their insights to reduce inventory, allowing them to save money.
One of the primary goals of trade area analysis is to investigate local markets. This includes determining what type of customers live in an area, what their needs are, how much money they have to spend and what goods they are most interested in. Trade area analysis can also help companies find out if an area has regular visitors. These factors allow businesses to create focused marketing campaigns that are optimized for an area’s customers.
There are many ways for businesses to pursue personalized marketing after a trade area analysis. For example, before opening, a company might send out materials announcing its arrival and advertising products that are popular in the area. Businesses can also use data from trade area analysis to tailor their storefronts to a certain area. This might include changing the size and layout, featuring particular products or modifying their stores’ aesthetics to mirror customer preferences.
Ready business intelligence
Business intelligence allows companies to gauge their competition and remain strong in their market. Another benefit of the trade area analysis process is that it allows companies to collect extensive business intelligence before beginning a new project. This usually includes the number of potential competitors, their primary target customers and details on their offerings and business practices. This information can help company leaders decide whether their business can thrive in a certain area and develop competitive strategies. It may also help them find ways to serve unmet needs in their target demographics.
Better site selection
Trade area analysis is one of the most effective tools for choosing a good business location. It Allows companies to find customers that are interested in their products and that have the income to purchase them. It also allows them to compare operating costs in different localities, learn about potential competitive risks and mitigate them. This information can help companies choose their ideal area from a set of potential locations.
Trade area analysis techniques
A catchment area refers to the space around a business that provides it with customers. Companies can find expected catchment areas based on distance, drive time and other factors, and this process is an important part of trade area analysis. These are three of the most common techniques that companies use to measure catchment areas:
Buffer trade areas
Buffer trade areas are a simple way to determine whether a business might encounter a challenge for competitors. First, leaders determine a likely buffer area based on distance from the store and place it on a map. They can then locate all nearby competitors and give them similar buffer zones. This allows professionals to determine whether their catchment areas overlap with their competitors’ zones of influence.
Mobility trade areas
Mobility trade routes give companies a more detailed view of customer habits and travel patterns. They use anonymized location data from cell phones to see who visits a store and how they move. This data can help businesses determine how far away their customers live, how long they stay in the store or nearby areas, how they travel and what other stores they visit or avoid. When paired with demographic data, this can give business leaders extensive information on brand affinity and competition. It can also help map their catchment area based on real customers and their habits.
Walk/ drive time areas
Some companies determine their catchment areas by measuring dive or walk times instead of just distance. This can provide a more accurate picture of where customers might come from since it gives definite measures of accessibility. Professionals use isochrone maps based on travel time to determine their catchment areas. They can further modify these maps by including traffic data, which can affect drive times and the likelihood of customer visits from certain areas. Walk and drive time area maps are especially useful for companies with multiple locations who want to determine how customers choose between stores.
Factors to consider when conducting a trade area analysis
These are some of the most important factors to keep in mind when performing a trade area analysis:
Demographics can tell companies a lot about their chances of success when starting a new location. They can also help stores tailor their offerings to best serve the needs of customers in a certain area. The most important demographic details that companies collect are age and income level. These factors often determine what products customers are interested in and how much they are willing to spend.
Customer accessibility is a vital consideration when starting a store in a new area. When measuring accessibility, it’s helpful to focus on local roads, public transportation, traffic patterns and natural obstacles. All of these factors can make it more or less convenient for customers to shop in a store and may impact their decision to shop with a competitor.
If a store moves into a new location with established competition, it may be challenging for it to create a customer base. Because of this, it’s important for companies to determine what competition they might face before opening a new location. If an area has multiple competitors, businesses may choose to modify their offerings to target unserved needs or move to a different location that offers more opportunities.