Defining your trade area
The tl;dr
To understand your stores means to understand their trade areas
Trade areas can come in many different forms, but they should generally represent the area that captures ~80% of a given store’s customer base
My preferred trade area type is a drive time because consumers generally think of their willingness to shop a store in terms of how much time it takes to get there
Please don’t use radius trade areas…if you are, then you should definitely read this
No two trade areas are the same; find the one that fits your brand (ie your consumers’ shopping behavior) the best
Trade areas define a store’s influence
Gone are the days of tallying up your store’s receipts at the end of a day to measure how much the location drove in sales. In this day of omnichannel shopping, stores serve just as much of an immeasurable purpose as they do a measurable purpose: consumers touch multiple channels before transacting, and traditional attribution models give zero credit to the immense amount of interaction a consumer has with pre-purchase channels:
As analysts evolve their ways of capturing the store’s true impact, it must start with its area of influence, or its trade area.
Your store’s trade area is the geographic region from which a majority of sales are generated
“Majority” can mean anything from 51-100%, but most academic definitions and professionals tend to center on numbers or ranges of 75-90%.
Personally, I like to use the range of 80-90%, or 80% if I need to pick a single number.
Okay, so you’ve landed on a number, but what does that mean in practice?
The next logical question is “how do I figure out what that geographic region is?” I like to think of two ways to define a trade area:
Unique Trade Areas (UTA)
Trade Area Proxies (TAP)
And if you’re wondering, yes, I made these acronyms up.
Think of a Unique Trade Area (UTA) as a custom fitted suit
Just as every person’s body is unique and can benefit from a custom fitted suit, so too are custom fitted trade areas — or as I’ve defined: Unique Trade Areas.
Let’s start with a visual representation of two commonly used trade areas, and a new emerging one:
Drive time: This is my preferred definition of a trade area, because most consumers think in terms of time (eg “how long would it take to get there”). Despite people saying they like / don’t like to go somewhere because “it’s super close / too far,” the distance is only important because distance = time. Put another way, it’s more likely that consumers across the country have a universal 30min drive time threshold for locations they like to visit, rather than a 10 mile radius threshold — which brings me to the next trade area definition…
Radius: I HATE this. Very few consumers think in terms of miles, and the relevance of a specific radius (eg 10 miles) declines as you think about applying it to coastal cities. For example, the radius that captures 80% of any location in San Diego will likely be much larger than that of a midwestern city like Kansas City. Meaning, you can’t compare a 10 mile radius between the two, or any other set of two locations with similarly contrasting geographic features. That said, this is the easiest trade area to derive in excel (more on that later).
Regardless of which version you choose, you need to calculate the trade area: at what point (either drive time minutes, or radius miles) do you capture 80% of your store’s sales?
Assuming you have your customer’s address data (more on the power of DTC brands’ data here), we could create a “trade area curve” to understand how many minutes of travel (could be drive, walk, public transit — all are measurable if you have the right tools) it takes to capture the threshold (80% of sales):
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