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Extension > Community > Retail Analysis and Development > Market Area Profiles > Where do your community's customers come from?

One of a series of fact sheets on economic issues for communities

Where do your community's customers come from?

Tip: Define your community's trade area

In the community and economic development field, a trade area is the geographic area from which a community or commercial district pulls a majority of its customers. This measure is extremely important because a trade area's boundaries allow for measurement of potential sales, as well as the number of potential customers and their demographics. This information provides valuable insight into a community's customer base and allows calculating demand for stores, as well as products and services. If you want to analyze possibilities for business development and expansion in local retail and services for your community, defining your trade area is an important first step. (Note: The following information is adapted from the Downtown and Business District Market Analysis Toolbox, which you can access here)

What does a community trade area look like?

Community trade areas often extend beyond city or neighborhood boundaries and come in a variety of shapes and sizes, depending on local geography and a community's pulling power - its ability to attract customers. Below is a map of a trade area for the community of Frazee, MN:

Trade area of Frazee, MN

Important factors

Experience shows that the two most important factors in determining trade area(s) are a community's population and its proximity to other competing business districts. A discussion of these, and other factors in determining trade area boundaries, follows:

Types of trade areas

Trade areas business districts fall under two major categories: 1) convenience trade areas, and 2) destination trade areas.

What methods can we use to define our trade area?

Defining a trade area is more of an art than a science and no one method is the "correct" one. Your main objective is to delineate an area that merchants and other interested parties would deem reasonable for the whole community or business district. If a trade area is too small or too large, any later calculations will prove unrealistic and unhelpful to those you ask to assist with your analysis.

Some of the major methods for defining a trade area include:

Please note that GIS software is often employed to define a trade area, especially when analyzing a large volume of data as in the customer compilation method. If you are not a GIS user, you can contract out this work to a professional, such as a marketing consultant, planner, or university Extension educator.

Can our community have multiple trade areas?

Although local residents generally provide the majority of sales in a community business district, some communities possess important non-local customer segments such as day-time employees, seasonal residents, and tourists. Because these customers live some distance from a business district, you might want to delineate separate trade areas for different customers (such as local and out-of-town), so you can more closely examine spending potential and demographics. Methods for defining multiple trade areas are more complex and should be handled by a professional with data analysis expertise.

What can we do now that we've defined our trade area?

  1. Create a demographic profile.
    A number of tools that allow you to run reports about your trade area are available online; these provide information about common demographics, such as age, income, and education. For example, Business Analyst Online (http://bao.esri.com) allows you outline your trade area online and access a limited number of demographic reports for free.
  2. Calculate potential sales.
    The Economic Census (http://www.census.gov/econ/census/) along with secondary data sources provide rich data on customer spending that you can use to estimate sales demand in your trade area (see Extension's fact sheet, "How can I Assess Demand for a Proposed Business in my Community?"). For example, the Economic Census reports that Americans spent $52.68 per person at book stores in 2007 for a total of $16.8 billion. Multiplying national sales per person (aka sales per capita) by the population of your trade area provides a good estimate of potential sales. One free tool to help you do these calculations is the Trade Area Gap Analysis Calculator available on the "Evaluating Retail & Service Business Opportunities" page of the Downtown Market Analysis (DMA) website - accessible here.
  3. Identify business opportunities.
    Armed with knowledge of your customers' demographics and their spending power, you can better identify which businesses may be viable in your community. A tool like the "Retail and Service Business Opportunities Worksheet" in the DMA Toolbox can help you organize your thoughts and data to methodically vet businesses to target.

What's the bottom line?

A reasonable trade area gives you a good base for analysis of your community's downtown or other commercial district. Take time to define its size and shape carefully, as any subsequent conclusions you make will only be as good as the trade area you define.

References

Downtown and Business District Market Analysis Toolbox (n.d.) Trade area analysis. Retrieved November 14, 2011, from http://fyi.uwex.edu/downtown-market-analysis/understanding-the-market/trade-area-analysis/

Pesch, R. (2011). How can I assess demand for a proposed business in my community? (Fact Sheet). St. Paul, MN: University of Minnesota Extension.

Fact sheet prepared by Ryan Pesch, Extension Educator, Community Economics, December 2011

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