Types of Trade and Service Areas

When beginning the site selection process, it is important to understand trade and service areas to properly analyze how locating a facility at the new site will impact your business. Richard L. Church provides a useful framework for understanding different types of service areas in his book, Business Site Selection, Location Analysis and GIS..

A service zone has a geographic footprint based on a spatial origin. A trade or market area and a service area are therefore types of service zones. They are related notions by definition. A trade (or market) area is the geographical area containing customers (or potential customers) served by a business, firm, retailer, shopping center, and so on. A characteristic feature of the trade area is that customers generally travel to the business/store. A service area can be defined much the same way as a trade area, but typically differs in that products and goods are delivered to customers. Given this, a trade area may be viewed as descriptive, where customers of a business are described in spatial and aspatial ways. Alternatively, a service area is prescriptive in that a company must prescribe how products are to be delivered to customers. We rely on this distinction of descriptive and prescriptive context in this chapter in detailing trade and service areas.

Descriptive Trade Areas

When people travel to a grocery or department store, they make a choice. If there is only one store that is relatively convenient, then the choice is limited. But if there are several from which to choose, then there is a range of potential choices. An individual’s decision to shop at a store, say Grog4Less, represents a small increment in sales to that store. However, the sum of all the choices made by consumers to shop at Grog4Less represents the revenue of the store. Suppose that the owner of Grog4Less has a preferred customer program, called the GrogCard. People with GrogCards get discounts on weekly specials, as well as receive cash back at the end of the year. The store also sends out a mailer to its customers with special coupons every few months.

So, what does Grog4Less get in return? Well, the store gets a wealth of information about its customers. First, it knows who its customers are. Second, it knows where customers live, allowing the manager of Grog4Less to generate a map of the store’s trade area. Over time, the manager can see the changes in the customer base. For example, maybe there appears to be a growing number of customers in some areas around the store, or maybe there is a decline in customers to the north where a competitor, MoSuds, has recently opened a store. The size and extent of the market area for Grog4Less depends on the location of the store, the location of its competitors, the spatial distribution of potential customers, and the products and services it sells.

Identifying and delineating the trade or market area for a store, outlet, or business can be important in a number of ways. Urban areas grow, decline, and change in various ways over time. Companies must be sensitive to these changes if they wish to stay in business. Although the example of Grog4Less discusses potential for tracking and monitoring customers, not all customers participate in such programs and not all businesses can afford to undertake and maintain this type of monitoring effort. Further, if a store does not yet exist at a location, then the trade area cannot possibly be known. However, no one would even consider locating a store at a particular site without an estimate of the potential market. A general problem is determining a trade area, and this can be stated as follows:

   Given the spatial distribution of potential customers and competitors, estimate the market or trade area for a store at a specific location.

This problem is called the trade or market area estimation problem. We might base such an estimate on collected information, such as the frequent shopper program, credit card purchases, detailed survey information, or a model of some sort. In many cases, it may actually be some combination of these approaches. This problem is covered in greater detail in this chapter.

Prescriptive Service Area

Manufacturers also need to get products to the market. For example, Procter & Gamble makes a variety of household products at a number of factories. Much of its product is first transported to regional warehouses; from there, the products are transported to individual stores. When Wal-Mart places an order for detergent, as an example, Procter & Gamble must supply detergent in specific quantities to Wal-Mart's regional warehouses. After Wal-Mart takes delivery of the detergent from P&G, it is shipped directly to a store for sale. To make sure that the system is efficient, it is important for P&G to decide which factories will supply specific distribution centers and warehouses. The area or region served by a given factory or distribution center is the service area of that facility.

This example highlights the fact that a company must make prescriptive decisions about the shipment of products to customers (or warehouses or distribution centers). This must be done efficiently if a business is going to be competitive and make a profit. Given this, the prescriptive service area problem can be defined as follows:

   Given a set of product sources and a set of destinations, identify the most efficient way to allocate supply at sources to satisfy demand at destinations.

This generic problem definition can be made a little more specific by recognizing that sources are typically factories where products are made and destinations are those locations to which the product is to be shipped, such as customers, outlets, and warehouses. If this is to be accomplished efficiently, a modeling approach is obviously needed. Allocation of production capacity at a factory to supply specific demand locations essentially delineates a service area for each factory. This makes the task of specifying service areas somewhat analogous to problem of estimating the trade area for a store.

From Business Site Selection, Location Analysis and GIS by Richard L. Church. Copyright 2009 John Wiley & Sons, Inc. All Rights Reserved. Used by arrangement with John Wiley & Sons, Inc.