Business location

Location is the place from which a business operates. It may be a shop, an office, a workshop or a warehouse. The choice matters because it affects costs, how easily customers and staff can reach the business, and the chance of making a profit.

A trade-off

Choosing a location usually involves a trade-off: a site that is good for one factor may be poor for another. A bigger unit, or one that is already fitted out, may suit the business better, but its cost of premises — the rent or purchase price — is usually higher. Rent is a fixed cost paid every month whether or not the business sells anything, so high premises costs must be covered by enough revenue. If they are not, profit falls.

Weighing up the options

No site is perfect, so the owner picks the balance that best suits the business. A small print and copy shop is comparing two units.

The owner chooses the edge-of-town unit. Its rent is £1,050 a month lower, a saving of £12,600 a year, which covers the £4,000 of electrical work in about four months. After that the saving is kept every month, and the extra space allows for more equipment and storage. This is the trade-off: a lower rent and more room, against the cost and delay of fitting out the cheaper site.

Proximity to market means being close to the customers a business wants to sell to. It matters most when customers have to travel to the business, such as a bakery, an optician or a dentist. A short, easy journey makes the business convenient.

Being near customers can bring a larger number of potential customers because more people live or pass within easy reach. It can also raise footfall, which helps businesses that depend on passing trade, such as a newsagent beside a busy railway station. Being close can lower distribution costs too, because stock and deliveries travel shorter distances. A nearby market also makes it easier to target customers with suitable products and to identify what they need, for example a surf shop in a seaside town stocking wetsuits and board wax because that is what local customers come in for.

A convenient location can help a business add value and charge higher prices. A convenience store on a large housing estate can charge a little more for a pint of milk in the evening, because residents value not having to drive to a supermarket. In contrast, a business that is too far from enough customers may not sell enough to cover its costs, make a profit or survive.

Footfall is the number of customers passing a particular location. High footfall is valuable to businesses that rely on passing trade, because some of those people may decide to buy. A shop on a quiet side street may have low footfall even if its products are good, so it may need to rely on advertising or online sales to attract customers.

Proximity means closeness. Proximity to labour means being close to an available supply of suitable workers, including people with the skills the business needs. Proximity to materials means being close to raw materials, components or suppliers.

Close to labour

Being near a good supply of workers makes recruitment easier, because more suitable people can apply without moving house. Staff turnover can be lower too: workers who live locally are less likely to leave over a long commute and do not need to relocate. The business can also compare local skill levels and wage rates when it chooses a site: an area with plenty of workers who already have the right skills keeps training costs down, while an area with lower wage rates can cut the pay bill.

For example, a studio that makes computer games needs programmers, artists and sound designers. It sets up in a city with universities and colleges that teach games design, so it fills vacancies quickly and spends less on training.

Close to materials

Being near materials and suppliers reduces transport costs and delays. This matters most when materials are heavy, bulky, perishable or expensive to move, because haulage bills are higher and a late delivery can stop production.

For example, a workshop making garden benches from thick timber planks locates beside a timber merchant. The planks travel a short distance, so haulage is cheaper and deliveries arrive quickly.

When it matters less

Proximity to materials matters little for service businesses, which use few physical materials — a tutoring company needs tutors, not timber. It also matters less when materials are small, light or cheap to move, such as the tiny parts used by a phone repair shop, so that business can locate near its customers instead.

The nature of the business activity is what a business does and how it sells its products. It decides which location factors matter most, so a manufacturer and a retailer can judge the same site very differently.

Where customers come to the business, being close to them matters most. Where the business goes to the customer, the position of its premises matters much less: a mobile dog-grooming van still needs dogs nearby, but its lock-up can sit on a cheaper industrial estate because customers never visit.

Products that are perishable, bulky or used on the spot, and services delivered in person, generally have to be close to the customer: fresh cream cakes spoil on a long journey, heavy garden benches are expensive to deliver far, and a piano teacher who travels to pupils still needs enough of them within a short drive.

Some activities need particular sites. A bespoke staircase maker needs a large workshop, a haulage firm needs motorway links for its lorries, and a recording studio needs soundproofed rooms, so each must choose premises that provide them.

Fixed premises or selling online

Fixed premises are a physical site that customers visit. They let customers see, try and collect products straight away, receive personal service and build trust, and some activities, such as a dental practice or a swimming pool, cannot run without them. E-commerce means buying and selling online. A business may sell only online, use fixed premises only, or combine both: a pottery studio could run classes on site and post glazed mugs to online buyers, widening its reach while keeping a physical presence.

Worked example

A picture framer who frames customers' own paintings needs a shop that is easy to reach, because people carry in fragile frames and collect them later. Selling ready-made frames online instead would let it rent a small unit on an industrial estate, since buyers never come to the door.

The internet has changed the location decision for many businesses. If customers can order and pay online, a business does not need a shop where lots of people walk past. That passing trade is called footfall, and a site with high footfall usually means expensive rent and business rates. A business that sells online can instead choose a cheaper or less central location, trade from home or from a warehouse, and avoid the higher costs of running a shop, such as rent, heating, security and shop staff. For example, a business printing personalised birthday banners might rent a small unit on an industrial estate a few miles outside town, where the rent is far lower than a unit in a shopping centre, and post every order out to customers.

Selling online also widens the market beyond the local area. Customers can come from anywhere, so the number of people living nearby matters much less. A small online shop in a rural village can sell to customers in cities across the UK.

What online businesses look for

An online business still makes a location decision, but its priorities change. It needs a fast and reliable internet connection for websites, orders and payments; good transport links so couriers can collect deliveries; and suitable storage or warehouse space for stock and packing. These needs may matter more than being close to shoppers.

Competition and research

The internet increases competition, because customers can compare prices and buy from businesses anywhere. A convenient location alone will not attract custom if an online rival offers a better deal. Before choosing a site, a business can use the internet to research where competitors are located and where demand is greatest, perhaps by checking online maps, search results and customer reviews. This helps it avoid a weak location and choose one that supports its online sales.