Business

HOW TO CHOOSE THE RIGHT BUSINESS LOCATION

Choosing a business location is amongst the severe challenges that small business owners and entrepreneurs face. The situation is even worse for a startup entrepreneur. Whether you are an experienced business owner or a startup, this article is for you.

This article follows the questions, discussions, and opinions obtained from the readers of ‘things I wish I knew before starting my own business. Most of the discussion points, thoughts, and questions raised focused on the need to have more follow-up articles that would expand the itemized issues in the ‘things I wish I knew before starting my own business. One of the areas that called for further discussion was how to choose a business location.

To make this article self-contained, we make a recap of what business is. The article briefly talks about profitability to bridge the gap between the business and the factors necessary while choosing a business location.

What is business?

Business is about selling goods or services for Profit. However, in some cases, the sale of goods or services can be charitable, i.e., without Profit. Focusing on profitability definition of business, and according to Investopedia, a business is an organizational or enterprising entity engaged in commercial, industrial or professional service activities. The focus here is for the businesses that aim at making a profit. Businesses can go from small operations operating in one industry to large operations working in many industries worldwide. Regardless of the size of the businesses, all such businesses focus on profitability.

Profitability

Profitability is a business’s ability to produce a return on investment based on its resources in comparison with an alternative investment. In other words, profitability is the ability of a business to use its resources to generate revenues over and above its expenses. The surplus after taking revenues minus costs is what we call Profit. Profit equals Total Revenue (TR) Minus Total Costs (TC), i.e., P = TR – TC. Thus, to achieve a certain level of Profit, the business owners and managers are responsible for ensuring a constant increase in Total Revenue while controlling costs.  

Total Revenue

What is the shape of total revenue curve under perfect competition?Total Revenue equals the Selling Price (SP) times the quantity (Q) sold. With the assumption of having a constant selling price, Total Revenue reflects a direct relationship with sales volume. The more the sales volume increases, the more the Total Revenue.  Thus, business owners and managers are tasked to find strategies for increasing the sales volume at all times. The figure below reflects the direct relationship between Total Revenue and the Number of sales.  

With a varying sales price, the total revenue curve changes depending on the selling price. The figure below reflects a situation where Total Revenue started to decline with the decline of the selling price.

Total Cost (TC)

The total cost can be defined as the Total expenses that a business will have to incur in supplying goods or services. The TC can be broken down into Total Fixed Costs (TFC) and Total Variable Costs (TVC), as reflected in the figure below. Thus, TC = TFC + TVC. On the other hand, TFC are those costs that do not depend on the quantity of supply. Such cost includes administrative overheads such as office rental charges, salaries for managers, bank charges, staff training costs, and the like.

From the figure above, you can see the TFC curve remaining constant despite the increase in the volume of output. However, TVC kept on increasing with the increase of the volume of output. You will see further that, even at zero Quantity, there are FC incurred that makes TC exist even at zero Quantity.  

The Influence of Location in the level of Output/quantity

A proper business location is critical to your business success as it helps to reduce costs and can facilitate in raising sales volume, which finally positively impacts your business profit. There are two schools of thought here. One side thinks that business location is not an integral part of business success as long as you sell suitable goods and services. The other school of thought considers appropriate location as essential since your right products and services may not be sold at all if not in a proper location.  Take an example of locating your shop at the heart of Lima, Peru, selling quality umbrellas. As we know through geography that rains never fall in Lima, Peru, will the umbrellas be sold? Where are the forces of demand and supply here? Let’s look now at the factors that are necessary ingredients while choosing business; location.

Factors to be considered while Choosing Business Location

It is worth noting that the right business location influences the business performance and repeated purchases attitude of your customers.

Demographic factors

Demographics play a great role in selecting business locations for your goods and or services. There should be a link between the goods or services your business offers and the type of customers you have around your business location. For example, if your business is selling construction materials, you will surely choose a place where many construction activities are going on. Locating your construction materials shop along a high street is considered a failure since the type of people visiting such a street are not for construction materials demand. I researched the sustainability factors for the construction materials industry in Tanzania, took Kinondoni Municipal Council’s case, and observed that most of the shops for construction materials are located along the Bagamoyo Road, where construction activities are mushrooming.

Style of operation (psychographics)

This factor is mostly about considering your market niche. If you want to sell high fashioned handbags and clothes, your market segment covers those with a high spending capacity. This means locating such a shop close to a primary school building is a failure from the beginning. Such a shop will have to be located downtown and on high streets or near the Embassy and some government offices and big hotels.

Nearness to market and pedestrian traffic

You should also keep in mind that your business location does not disturb your customers in terms of parking spaces and the like. Buyers of your products need not get too much trouble to reach your business location. Instead, it should be a walking distance. This factor is also applicable to online businesses. It would help if you placed your online business in a place with high turnover.

Accessibility and Basic Infrastructure

Accessibility of your location should consider factors more than the clients. It should entail your customers, suppliers, as well as employees. Packing space should also be considered to allow comfortable loading and offloading of the goods. You can get a location on a busy street, but there is no packing facility nearby. Your customers will find it difficult driving all the way and park a kilometer or so away.

Competition

When choosing a business location, you should keep in mind that you are not alone doing that business and not alone taking into consideration the factors for selecting an appropriate place. Prime business location is a source of competitive advantage. Thus, when considering customers, market, and accessibility, you should consider your competitors. However, you should blend this factor with the type of business you are in. Some businesses require a location where you have your competitors around, but businesses will not afford to have competitors near you. An excellent example of businesses that require your competitors around you is the small business on construction materials. Customers of construction materials usually require to be saved on a one-stop center approach. However, many small business owners in the construction materials industry do not have the capital for a one-stop center approach.  Seles keepers use to tell the customers that they are going to fetch the items from the store, but instead, they get the material from a competitor.

Proximity to other Businesses & Services

Proximity to your business and services is also essential in selecting a location for your business because some other businesses may help to boost your business without you knowing. For example, if you plan to have a 24 hours food vending business, you may need the existence of a nightclub and or a pub that will boost your business with customers who would like to have food service while entering the pub or club. In such an environment, you may wish to collaborate with such service providers and allow yourself to get boosted.

History of the Location

Although you might have been satisfied with all the other factors, you should also obtain the past image and history of the location. You may ask the previous tenant to get hands-on information. You may find some historical information that might work against your business and hence make a prior strategy to counter the possibility of harm. For example, if you want to start a lady’s saloon in a place where the previous operator failed, without knowing the reason for the predecessor’s failure and taking the necessary step,  you may also fail.

Utilities and other Costs

Since starting your business is to make a profit, consider the utilities and other costs. Remember that Profit equals Total Revenue minus Total costs. If Utilities and other fixed costs are on the high side, it will impact the level of Profit you will generate. Knowing such facts and aligning with how you will do your business is essential if you want to run a profitable business. For many businesses, utilities are fixed costs that do not go along with the level of sales. Thus if not known from the beginning, it will negatively impact the profitability level of your businessthe