August 29, 2013 § Leave a comment
This really only pertains to liquor retailers, but might be an interesting insight for others. The title is a problem that every retailer needs an answer to.
Typically we look a geographic area and say this is our market area, which, if you lived in Victoria, where I live, would mean that if you have a store in greater Victoria your market area is about 180,000 people. Sorry but if you are basing your business plan and shareholder promises on this simple demographic, you are setting yourself up for disaster.
Here are a couple of realities that play a role and have proven true over the years no matter the structural or competitive changes in the market. In other words if you want to build a solid business that can withstand wacky rule or market changes that can come at you from left field, here is where you start.
1) The maximum distance that someone will drive to visit your store is 50km.
2) 80% of your business, and that of your competitors, is premised solely on the convenience of your location. The more convenient your location the better your business.
3) 20% of your customers are up for grabs and will move to another store for reasons of price, service, cleanliness, parking, lighting, advertising/offers, product knowledge and store environment. This also means that 20% of all your competitors customers within a 50km radius are also up for grabs.
4) The growth of your business will only come from your ability to appeal to the 20% of your competitor’s customers.
5) The average customer will shop a liquor store once per month. So what is the size of your market and your risk? Go on to FreeMapTools.com (link below) and draw a 50km radius around your store. Determine how many people of drinking age live in that circle (link to statscan.gov.ca is below). Not everybody of legal drinking age drinks. The best information I have been able to get is that about 80% of those of legal drinking age (LDA) and above, drink and are therefore potential customers. So take the total number of people of legal drinking age and multiply it by 80%, this is the total number of customers in your stores market area or (TMC).
Formula 1: LDA+ x 80% = total market of customers (TMC). i.e: 100,000 x 80% = 80,000 total market of customers.
Divide this number, for ease of calculation, by the number of stores, including yours, in that circle. This will give you your total potential customers or your baseline customers – TBC (this will become really important when we talk about how to measure the health of your business).
Formula 2: Total number of customers / number of stores within 50km radius = Total Baseline Customers (TBC) per store. i.e. 80,000/5=16,000 TBC.
The number of customers that you can count on as being yours is 80% of the TBC. As I mentioned above 80% of customers shop solely by convenience and they don’t change. I call these my SCB or solid customer base.
Formula 3: TBC x 80% = SBC. i.e. 16,000 x 80% = 12,800 SBC.
The number of customers that you stand to lose to a competitor is 20% of your total number. I call these Customers at Risk or CR. When I combine these with the CR’s of others stores I call it Customers in Play or CIP
Formula 4: TBC x 20% = CR or TBC – SBC = CR. i.e. 16,000 x 20% = 3,200 cR or 16,000 – 12,800 = 3,200 CR.
Your business will only grow by attracting new customers or by ‘up selling’ the customers you have. Likely you will have to do both. In later posts, perhaps in an e-book, I will go into greater detail on strategies for both, but for now I will just focus on determining the size of your market. I refer to the number of potential new customers for my business as Customers in Play or CIP. This number changes from year to year by people who move into the area, the number of stores operating, etc. How to calculate your CIP is pretty easy. It is 20% of the total market customers. 20% of your customers are in play for you and your competitors, and 20% of your competitors customers are in play for you and them.
Formula 4: Total Market Customers x 20% = Customers in Play (CIP) or 80,000 x 20% = 16,000.
I always breakdown the CIP into my customers at risk and my competitors customers at risk for a couple of reasons. How I approach my customers at risk is different, albeit at times slightly, than how I approach my competitors customers at risk. The other reason is cost. The cost of maintaining a customer is always lower than the cost of acquiring a customer. The cost of acquiring a customer is always cheaper than the cost of getting a former customer to come back.
If you are already operating a store you likely have the ability to track the number of transactions you have in a day, month, year. Take your annual number of transactions and divide by 12. This is you of customers you have or TBC, 20% of whom will move to a competitor if properly motivated (CR).
Anyway this should give you a pretty good idea of the size of your market, how many people you can count on and how many people you need to attract to build your business. If you have any questions or comments please don’t hesitate to ask.
Drawing a radius around your location on a map: http://www.freemaptools.com/radius-around-point.htm
Population Stats: http://www.statcan.gc.ca/
For more detailed stats (neighbourhood density and such) you will have to approach you local municipality.
Feel free to contact me by filling out the below contact fee. I am a consultant and am happy to help you with your business.