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Spatial Analytics: How Customers Make Decisions and What You Can Do to Influence Them

by Mike Mack|
02. 16. 2017
|

Analytics

Spatial analytics how customers make decisions.jpg

Spatial analytics how customers make decisions.jpg

“Decisions are the hardest thing to make, especially when it’s a choice between where you should be, and where you want to be.”


The desert example


Let’s imagine a situation.


If you were traveling by a car through a desert and encountered a crossroad with two signs that read:


“Left – Store A with 100 products, 30 minute drive” vs “Right – Store B with 200 products, 60 minute drive”


Which way would you go?


Not the easiest of choices to make.


You are faced with two, seemingly different, but in reality, equivalent choices and while standing at the crossroads trying to figure out which way is more beneficial for you, you find yourself at point zero, or the event horizon as we call it.


Let’s picture this from the spatial analytics perspective.


First of all, the desert is there to symbolize a clear road – no matter which way you choose to go, you will not encounter any obstacles (like rivers, mountains, or any other blockers). This technically means that the only two things preventing you from making a clear choice are time and the reward you will obtain for putting in the time needed.


Moving forward to the two stores.


Store A offers less travel time and smaller reward, and naturally has a smaller trade area. Store B on the other hand, offers twice as big of a reward, but you will need to travel twice as long to get there. Store B also has a bigger trade area compared to Store A.


Notice how, from a business perspective, Store B seems to be the best choice for a potential customer (since there is a higher reward in the end), but due to the precise position of Store A, any customer will pause and think about it. In this sense, we can say that the trade areas of both stores can be viewed as functions of time, and when a customer is standing at the event horizon, both choices feel equal, even though Store B has a bigger trade area and offers bigger rewards.


Why?


This phenomenon is based on science.


In physics, when an asteroid passes through two, equally sized planets, it will eventually go straight through since the gravity force of both planets will be equal and none of them will be able to tilt the asteroid to their side.


The difference between this and our example is that an asteroid has no choice, but to move forward. Customers on the other hand, have a choice and they need to make one.


This is where spatial analytics and permeability comes in.

 

What is permeability in spatial analytics?


In science, there are two types of permeability: magnetic permeability and transmitting permeability.


Magnetic permeability is the degree of magnetization of a material in response to a magnetic field. To put it simply, permeability shows how strong an object is pulled when a magnetic field is applied. Naturally, the stronger the magnetic field, the higher the permeability of the object.


Transmitting permeability is a measure of the ability of a material to transmit fluids, or in other words, it shows how easy can fluids (gas or liquid) flow through rocks. The more permeability rocks have, the easier (and faster) fluids can flow through.


In spatial analytics, we also have two types of permeability: magnetic and displacing permeability.


Magnetic permeability in spatial analytics stands for the ability of businesses to “pull customers towards them”. Naturally, the more market share a business has, the higher its permeability and the more customers it will be able to magnetize.


Displacing permeability is the amount of time needed to permanently alter/dislocate an obstacle for your business. In other words this means how much time and effort you will need to put in for your competitor to give up and close their store, or how much time you will need to dislocate a natural obstacle (a small mountain, for instance).


Naturally, the harder it is to get rid of the obstacle, the more displacing permeability it has. Displacing permeability is measured in years since most obstacles (both natural and business related) take at least a year to displace.


Here are a few displacing permeability (DP) measures of different obstacles, based on our calculations:


1. Equal competitor: 1 year DP - once you have the correct strategy, you will need about 1 year to dislocate an equal competitor.

2. Retail cluster: 25 years DP - A retail cluster is harder to break apart, but if you really want to put the time in, you will achieve your goal in around 25 years.

3. Mountain: 50 years DP - A mountain is pretty large and difficult obstacle to get rid of, but using the technology that we have today and being determined, it's not impossible.

4. Ocean: 1000 years DP - Even if you try your best, with the technology we have today, you will never be able to displace an ocean (but who knows in 1000 years).


Going back to our example.


Even though Store B has a bigger trade area, the magnetic permeabilities (or the ability to “magnetize” customers and pull them towards itself) of both store A and B are equal from the standpoint of the customer, which essentially means that they have equal market shares. This is why, on the psychological level, this choice is hard to make for any human.


If we change the numbers in the example in any way, the choice becomes much easier to make:


“100 products, 5 minute drive” vs “200 products, 20 minute drive” or “50 products 10 minute drive” vs “200 products, 20 minute drive” etc.


This leads to understanding how customers make their choice when faced with a variety of options in the same field:


Conflict arises when market shares collide, and the one with higher magnetic and/or displacing permeability wins.


When the choices are equal, there is no conflict and the customer struggles while standing at the event horizon, making it a lot more possible for his or her decisions to be made randomly. On the other hand, when there is even a tiny inequality, the store with higher permeability will win in most situations.


Transferring the desert example to the real world


In case you were wondering, the desert example is perfectly applicable to the real world and real businesses, with the same factors influencing the decision making of customers, but with one important note to understand and keep in mind:


A trade area is a function of time, NOT distance.


When in the desert, we disregarded the distance you need to travel, since it would always be a road with no obstacles. In reality however, a customer might be standing 10 yards away from your store, but she wouldn’t be able to get in since there is a river blocking her from entering your store, and she would have to drive for 2 hours to circle around.


This is why when creating territories, trade areas and choosing locations for businesses, it’s important to take into account not the vicinity, but the time needed to get to your store from different parts of your trade area.


The river is basically an obstacle (or a time blocker in that regard) for customers, yet it is an easy example. Let’s look at the more difficult time blockers.


For example, if we take the ocean, which has 1000 years DP, it would be a very bad idea to compete against it, since you’ll simply kill your business in the process. This is why you never see any marketing encouragement for people to travel over oceans to visit a store, since there is no way they can justify the amount of time needed for traveling 14 hours (even if we disregard the travel costs).


A retail cluster on the other hand, has 25 years DP. This means that if you want to gain the market share of a competitor’s retail cluster (or in other words, get their customers to visit you instead), you will need to “attack” his trade area for 25 years, using correct data interpretation and marketing techniques. Depending on your business strategy and goals, you might decide to try and tackle the cluster, but in any case, it’s a more reasonable choice than trying to penetrate the ocean.


Permeability can also show whether you are competing with yourself.


For example, you might have four stores located in the same state, but due to incorrect positioning and market share collision, you might be hurting your business without even realizing it. After a detailed assessment of your stores’ permeability, you may want to close one of the stores and move another one to stop the competition umongst yourself and end up with a much healthier business.


Conclusion - Time is of the essence


In the modern world, it's important to understand that when common factors are relatively equal (service, quality, price, etc.) the main driving force behind customer decision making is time, or rather, the amount of time needed to travel across space. If you can minimize the time that your customers need to travel to reach your store, you will be able to get a few steps ahead of your competitors and gradually, win over their customers and make them your own.

Mike Mack

Mike Mack

Mike is the Co-Founder and CEO at Fract. With over 20 years of retail and business location analytics experience behind his belt, Mike counsels business owners and helps them get the most out of their business and sales data. He is also a passionate art lover and enjoys a glass (or two) of good wine with friends and family on the weekends.

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by Mike Mack|
02. 16. 2017
|

Analytics