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:
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:
- Population: Generally, the larger your community's population, the bigger your trade area.
- Proximity of other competing business districts: Typically there is a cutoff point where more customers are drawn to a competing center instead of your community.
- Business mix: A diverse, critical mass of businesses pulls customers from a further distance than a more limited mix of businesses.
- Destination attractions: A significant destination business (such as a large discount department store) or community attraction can expand your trade area - drawing customers from a long distance. Take care, however, not to let a single business's trade area define the entire community's area. Rarely do other businesses match the pull of a prominent destination business.
- Traffic patterns: Each region has distinct traffic patterns strongly affected by its network of streets and highways, as well as major land forms - such as rivers, lakes, and mountains.
Types of trade areas
Trade areas business districts fall under two major categories: 1) convenience trade areas, and 2) destination trade areas.
- A convenience trade area is based on the purchase of products and services needed on a regular basis, such as gasoline, groceries, and bath products. Because these purchases are relatively frequent, people usually find it more convenient to buy these products and services from businesses near their home or workplace. A grocery store's trade area is often used to represent a community's convenience trade area.
- A destination trade area is based on the purchase of "major" products and services, such as appliances or furniture, or of products and services that are distinctive in some way-deeply discounted, for example. People are willing to travel longer distances to do comparison shopping and purchase these kinds of items - thus the destination is more important than the convenience of shopping closer to home or work. A large discount department store's trade area is often used to represent a community's destination trade area.
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:
- Simple rings: The most simple trade area is one based on distance from the center of your business district. Draw a ring at a set distance from the center of your business district, varying the distance based on your community's pulling power.
- Drive time: You can use Geographic Information Systems (GIS) to define a trade area based on travel time from the center of your business district. The great advantage of using drive time over distance alone to define a trade area is that drive time takes local terrain, such as land forms and the street network, into consideration.
- Focus group approach: Experienced merchants know their customer base and customer traffic sources. Simply give a group of merchants a map of your region and ask them to outline a trade area where a majority of the community's customers reside. When they're done, ask group members to outline a trade area where greatest agreement exists.
- Customer compilation: To delineate an accurate trade area, use customer addresses gathered by local businesses. If business lists are not available, you can obtain a sample of customer addresses by holding a raffle, a drawing, or newsletter sign up at your community's businesses. Although not as accurate as addresses, you may find zip codes easier to collect from customers. Then build your trade area around where a majority are concentrated (typically 60-75 percent of customers closest to the center of your business district).
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?
- 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://www.esri.com/software/bao) allows you outline your trade area online and access a limited number of demographic reports for free.
- Calculate potential sales.
The Economic Census (www.census.gov/programs-surveys/economic-census.html) 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.
- 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.
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