By Rajiv Varma
Choosing A Physical Location
Finding the right location for your business can be very tricky. The location alone can make or break your business, but sometimes even the best location will not help your business flourish.
Several aspects are important when choosing a location. Keep these in mind when making a decision.
- How is the foot traffic?
- Do the neighboring businesses complement yours?
- Is it easily accessible?
- How is the parking situation?
- Are there too many competitors around?
What are your minimum requirements?
Think hard about what would be the best location for your business. You can start by establishing the minimum requirements, i.e., the "must have" aspects. Then, you can establish the "totally unacceptable" aspects of a location. Setting this criteria upfront will save you a lot of time by narrowing down the available options.
At this point, a cost/benefit and financial analysis must be done to estimate the feasibility of a given location. This is an essential step and must be done carefully, because a poor choice of location can be a very difficult to fix. Often, for small businesses, acquisition of a location is accompanied by substantial cash out-flow with lease agreements for several years into the future. A poor choice of location would be catastrophic, because breaking the lease would certainly be expensive in terms of cash.
Look at the location requirements in terms of consistency with your business. Do you want to build a luxurious yoga studio with plush furnishings? If so, a suitable location might be in the affluent part of the town. If you wish to set up a yoga studio for cost-conscious individuals, an alternate location might be more appropriate. The point is that both locations may be great fits, as long as they are consistent with your vision for the studio.
The Economics: Does the math work?
A business exists to make profits for its owners, and the profit is equal to the difference between the revenues--also called "sales"--and the total costs.
Net Income = Revenue - Costs
Often, the real-estate expenses, i.e., the lease expense along with upfront payments, are some of the biggest items on the cost side of the equation above. To be profitable, your expected revenue must be substantially greater than your costs. A very effective way of dealing with this problem is to do worst-case analysis. Instead of thinking of this exercise with a pessimistic attitude, treat it as a risk-management tool which may help you in surviving a dry patch for your business.
In addition to the leasing expense, there might be other hidden costs, e.g., renovation expenses, property taxes and management fees. Pay special attention to the recurring expenses, as these become part of your fixed costs, expenses which must be paid regardless of whether any sales are happening or not.
Is a resident of a particular area likely to be your customer? This is a question you must ask yourself before you make the down-payment for a location. For this, you must research the demographics of the location. You can study the average age, average income, and average education, and study if they are likely to be your clients.
The bottom line is that the demographics of a location must be consistent with the focus of your company. An example will make this concept clearer: assume that you are trying to attract young adults in their 20s, 30s and 40s who like to break a good sweat at the end of a busy work day. In this case, a hot yoga studio in the middle of a downtown are or in/around a university campus may be the right choice.
While the client base is most important in estimating the feasibility of a location, another important factor is availability of a specialized workforce around that area. The labor market is also governed by the laws of supply and demand: a large supply may translate into better and cheaper employees for your business.
Facilities, Accessibility and Parking
Let's set up a hypothetical but quite ordinary situation to illustrate this point: you want to specialize in rehabilitation yoga for the elderly and physically challenged individuals in the process of recovering from physical injuries. You have obtained several certifications in this field and have accumulated several years of experience working in rehabilitation facilities. You understand the business quite well, you have several connections in this field, and you are assured of several customers by your business connections.
The next step for you is to find a great location to set up shop. Luckily, you find a big beautiful place on the third floor of a beautiful landmark building in the middle of a busy street at a great price. You act quickly and lease the space for five years because you are assured of a successful business based upon the healthy client stream from your business relationships.
The business starts off well, but it slowly tapers off and starts to decline. It is still not making profits, and you become concerned about why things are not working as expected. Upon further investigation, you find that you are indeed getting a steady stream of new clients, but for some reason you are not getting any repeat business from many of them. You call some of them and find out two problems. First, because the studio is on the third floor, and there is no elevator, some of your customers find it extremely hard to climb up two flights of stairs and, for that reason, decide not to come back. Second, since the studio is in the middle of a busy street, it is very hard to find a parking spot. Therefore, an expected appointment of 1 hour usually takes more than 1.5 hours of your customer's time. Several customers find it extremely inconvenient and decide to not come to your studio.
It is clear that this location was not a great choice. By themselves, these two problems are not that bad. In fact, there are some advantages to these: being in the middle of a busy street, you get more than the expected foot traffic, and two flights of stairs is not that bad for a health-oriented business. But, in the context of your specific business (rehabilitation yoga for elderly and physically challenged individuals), this is a terrible choice.
While other mistakes are relatively easy to fix, trying to change a location for a business is very expensive. It is so much better to put a lot of thought into choosing a location.
The notion of foot traffic can be very tricky. It is easy to overestimate the value of organically increasing customer base without the overhead expenses of advertising and marketing. The reality is that foot traffic is not free; you pay for it because the rent is typically higher for locations which have lots of foot traffic.
Is foot traffic really important to the success of your studio? In our research, the prime retail space is 200-500% more expensive than non-prime real-estate. Often, second and third floors are much cheaper than the ground floor retail space.
The questions you must answer are: Are you better off saving money by locating at a non-retail space? Would you rather pay the extra dollars to get that coveted prime retail space at the corner of the busiest streets in the town? Often, the answer is somewhere in the middle: try to get 80% of the benefits of the prime retail space by spending 20% more on rent. An example would be the second floor or basement location with entrance at the street level.
Complementing or Competing Businesses
Study whether the nearby businesses are competing with or complementing yours. Also, study the image and history of the building in which you are located. A yoga studio may not be appropriate next to a loud bar.
There might be a juice bar or a vegan restaurant next to your yoga studio. This will benefit both of the businesses, because the same clientèle will often patronize both of the establishments.
Competition can be good, sometimes.
Sometimes, a lot of similar business thrive in a cluster in a geographical location. This happens if the market is big enough so that all or most businesses can sustain the competition offered by one another.
Building Infrastructure and Utilities
Check if the infrastructure provided by the building is too little or too much for your needs. Often, these issues are negotiable, and you might be able to bring down your costs based upon the usage of building infrastructure by your business.