How many times have you, as a retail store owner, said, “Gee, I think this would be a good spot for my business, but I wish I had an objective measurement of the site’s sales potential”?
Of course, there are a lot of numbers you can look at: residential population, household income, daily car counts, number of local businesses, and so on. All of these numbers are valid indicators of a site’s sales potential.
Which ones are the most influential for your retail concept? How do you factor in the all-important customer lifestyle and purchase behavior patterns of the population in your area? How do all these numbers and factors interact and interrelate to define your sales potential before a significant investment is made?
I have developed a process that captures that information for a defined trading area in an objective, numerical manner that is unique to your specific retail business, ultimately yielding a finite sales projection for a potential location. I call it the Site Selection Modeling process, and it involves three distinct steps.
The first step is the development of a Customer Profile unique to your retail business concept. The Customer Profile uses one of the independent lifestyle segmentation systems that categorize the US population into several broad lifestyle clusters made up of a larger number of individual lifestyle segments.
The segmentation system is cross-referenced against stated customer purchase patterns and usage preferences for specific retail businesses such as yours. This purchase and usage information comes directly from syndicated research conducted specifically for your retail industry. Those lifestyle segments that indicate above-average usage of retail outlets similar to yours will be analyzed and developed into a unique Customer Profile for your business brand.
The second step is the development of an Ideal Site Model for your retail business concept. That model uses the above lifestyle Customer Profile along with other relevant demographic and geographic variables. A numerical value is determined for each relevant variable based on a projected annual sales volume goal and the size of the primary trading area for the business (for example, a five-mile radius).
The variables then are set up into a primary and a secondary group, based on their degree of relevancy to the specific retail concept. The Ideal Site Model is constructed in such a manner that the variables, taken together, reflect a trading area that will support the retail business concept at the stated sales volume.
The third step is the analysis and evaluation of specific sites and trading areas. The statistics of each trading area are individually compared with the matching variable in the Ideal Site Model, yielding an index number for each variable. An index of 100 means the specific trading area statistic exactly matches the Ideal Site Model target, which in turn means that the trading area will support the required sales volume for the business on that variable. For example, an index number of 120 would mean the trading area is likely to support a volume 20% over the projected goal on that variable. Or, stated another way, the trading area is 20% more likely to achieve the projected volume goal. Likewise, an index of 72 means the trading area is likely to support a volume 28% below the stated goal on that variable.
Individual sites, once their trading area variables are compared with the Ideal Site Model, will culminate in an overall index score, called the Effective Population Base. That process not only allows each site to be compared against the sales volume goal itself, but also allows the sites to be compared with each other to determine which one or ones have the highest probability of sales success.
The Effective Population Base index for each site represents a precise sales projection, which can then be used to evaluate other key financial parameters for the proposed retail outlet, such as building size, parking, etc. The site with the highest sales volume potential may not necessarily have the best pro forma profitability, depending upon other key financial variables that must be considered.
For retail store operators who have identified specific expansion markets but not specific sites, I recommend taking the additional step of a Market Penetration Study. Using the unique Customer Profile described above, a color-coded market map is developed for each targeted market on a zip code basis, identifying the geographic clusters where a high percentage of the defined customers are found. This Study then focuses the real estate search effort in each market to the trading areas with the greatest sales potential. Once specific potential sites are then identified, the three-step Site Selection Modeling process described here comes back into play.
This Site Selection Modeling process will also work just as well in evaluating your existing retail locations. Once the Ideal Site Model is determined, the trading areas of existing stores can be matched to it with the same resulting index scoring. Accordingly, the actual sales of existing locations can be compared with the predictive sales potential of their respective trading area to determine which locations are exceeding, equaling or falling short of their potential.
This will prove to be a very effective way to allocate your company’s resources, including capital, marketing, operational talent and human resources effort. Or, in the case of a single-unit retail operation, the modeling process can reveal whether or not you are offering the type of retail products and services that the customers in your trading area are interested in purchasing on a frequent basis.