Where do my customers come from?

If this cannot be answered, how will existing franchisees be convinced that the proposed new store will not steal their customers.

Expansion always puts franchisors under pressure from existing franchisees who think they are going to lose business. As the number of stores increase in a franchise network, the word “cannibalization” is heard more and more, until one day you arrive at a Franchisee meeting, and everyone is now mentioning the “C” word. As one of our client’s says, “If I open a store in Alice Springs, someone in Sydney will claim it is taking business away from him”

The best way to handle this issue is to understand where the customers are coming from, and try to alleviate the fears using facts and data.

Penetration Rates

The first thing we recommend you do is look at a sample of your current stores and plot customer origins. Addresses can be found by customer account details, delivery details, or, if all else fails, by conducting an Exit Survey to ask them where they live and their itinerary before and after their visit. We do this on a regular basis for a major fast food chain as a way of understanding each store’s market.

When you have a sample you think is representative of your customer base, the data is run through “Geo Coding” software to place each address as a dot on a map (see example below). Effectively, the address of every customer is attributed co ordinates that mapping software such as MapInfo recognizes. Analysis can then take place to look at the penetration rates (customers per 1000 persons) either by postcode, radius from the store, or whatever geographic unit you use.

In many cases we find you can look at the penetration of your customers in concentric circles such as 0 – 1 km, 1 – 2 km, 2 – 3 km etc. Businesses that have been effectively marketing in their local area normally have a very high penetration rate closer in, and then declining as you go further away. Our experience has also been that businesses where the franchisee is “tired” or has not been actively marketing, tend to have a more flat graph, as they are waiting for the customers to come to them.

The examples below show a fairly typical situation for a business off medium drawing power. The penetration of customers relative to population is strongest within 1km of the business location, tailing off as a function of distance. However, the population within 1km is smaller than that within the 1-2km band, the 2-3km band, and so on. Consequently, most customers come from the areas between 3 and 5km of the business location.

Residential or ‘transient’ customers?

Depending on the type of service your business provides, there will be a different balance of ‘local’ and ‘transient’ customers. Local customers patronize a particular store or business based on its proximity to their home. For example a gym or ladies health clinic probably attracts most customers from among the local residents. ‘Transient’ customers are those who do not live nearby. They either have some other reason to be in the area or they are simply on their way from point A to point B. So defined, ‘transient’ customers include those who work near the store or business. For example, a sushi shop in the Central Business District (CBD) has no relationship to where a customer lives, but draws customers from local employees. By way of reference, the oil industry roughly estimates that 75% of purchases are made within 3 kms of the customer’s residence.

If you look at what you are selling, you have a good idea of where you sit in this balance. If you are totally unclear, you can always ask your customers whether or not proximity to their home is a major factor in their decision to employ your services rather than those of a competitor.

What do we learn from this?

We will normally compute approximate radii to capture 60% and 80% of the residential locations of a given store’s customers. On the assumption that for many businesses (as per the oil industry) 75% of customers make their store choice based on proximity to home, these two radii should accurately reflect the size of the primary trade area.

If we can conclude that for example 60% of our business comes from within 3 kms of our store, and 80% comes from within 4.5 kms of our store, then network size, territory/trade area size, and site selection become easier to determine and to justify.

You can now explain to your concerned franchisees that their customers only come from within a given radius and your proposed new sites are outside these distances.

This information can also be incorporated into your Strategic Network Plan as you take a long term view of how many stores or territories your franchise system should be aiming to establish.

By Peter Buckingham - Managing Director, Spectrum Analysis

Spectrum Analysis is a business advisory franchise that specialises in assisting major retail chains and franchisors in property decisions – structuring territories, where to place new sites, which stores to close, and what sales to expect at new stores or within territories.