Why is location important?
Part 3 of ‘Mind Stretching’: a series aiming to debunk game theory concepts, whilst encouraging you to expand your creative horizons.
How much thought should you give to your location?
Let’s say you own a candy cart, and next week there is a fair in your town. You decide to make some candy apples and sell them at the fair.
The high street in your town will be closed for traffic at both ends, and people will walk freely from one end to the other. You know everything that needs doing, all you need to decide is where to position yourself. You estimate that at any given time there will be about 4,000 people walking on the street, and you want to make sure each of them will notice you.
You think to yourself: “The street is not that long, and it’s only natural for everyone to walk the length of the high street at least once. It doesn’t really matter where I park - everyone will pass by me. Actually, I’m going to park by the west entrance because it is closer to my home, and I won’t have to push the cart that much.”
Sounds logical, right?. You place your cart based on convenience. The closer you are to your home, the more time you’ll have to practice your piano skills – as you always say, you don’t have enough time to do it.
But what if someone else decides to bring a second apple candy cart at the fair? Your customers will half. This isn’t ideal, but that’s ok - the fair will last for several days and you’ll still sell plenty of apples. But what makes you think you’ll get half the customers? How is your location influencing the number of customers? And more importantly, how is your competitor’s location influencing the number of customers you will get?
If the second candy apple cart was positioned by the east entrance, you will both get roughly 2000 customers - not bad. But what is stopping them from moving the cart just a bit closer to yours?
If they positioned their cart along ¼ of the street’s length, there will be around 3,000 people between the two carts. If fairgoers were buying apples from the closest cart, you will each be closest to approximately 1,500 customers found between the two of you. BUT the customers found by the east entrance will most likely buy sweets from your competitor alone.
Not great! But it can get worse. What if they decide to come even closer to you?
You could turn tables, and move your cart towards the middle of the fair.
This will give you majority access to 2,500 people, and they will be left with 1,500.
As soon as they realise this, the only logical option will be to move next to you. This way, the location factor reached what is called ‘equilibrium’. The location factor will become irrelevant, and you will only compete on quality and price.
You might’ve noticed many businesses with very similar products (or service providers) being located next to each other. Now you know why.
Proximity to customers and competitors is not the only factor when a business decides to open a new location - but it is an important one.
You may wonder: is this the optimum decision? The answer is no.
In an ideal world - a world in which the customer has to travel the shortest distance - the optimum business location choices would look like this:
The two carts will access the same number of customers, and the travelling distance for customers would be minimal. BUT this positioning poses two risks - one for the seller and one for the buyer.
1) The seller does not have the certainty that the other one won’t move closer to them, to have better access to more customers. But if they somehow agree to stay in place, in the long run, this might disadvantage the customers.
2) The two sellers might get complacent or greedy. If they know they have a certain number of people that got into the habit of buying only from them, they might lower the quality or increase the price.
Equilibrium (in this case - optimal positioning) is a matter of perspective - a thorough understanding of each factor. What do I and the people around me value the most? What risks can be mitigated under the current circumstances? What if the current circumstances change? How adaptable are we?
These are simple questions we can ask ourselves at the beginning of any project or activity.
