Where should a business locate itself? This is a very important decision to make seeing as the rent it pays for premises are a key fixed cost – and remember, the lower a firm’s total costs, the lower its break even point will be, and this means they will have to sell fewer items in order to reach this point – and of course, the sooner they reach their break even point, the sooner they move into making a profit.
A business will consider its proximity (how close it is) to 4 key factors:
Proximity to market (customers)
Some businesses need to be near their customers (e.g. hairdresser), some don’t (e.g. a company selling holidays over the phone).
Rents on properties which attract a heavy amount of footfall might be expensive. A business will have to consider the trade off between paying a high rent and the revenue it can generate from being so close to customers.
Proximity to labour
A business might locate where there is plenty of skilled labour for whatever the business does, or where there is plenty of available (and usually cheap) labour.
Proximity to materials
The closer a business is to the raw materials it needs, the lower its costs will be because it doesn’t need to pay as much to transport them to where they use them. For example, in the UK there are lots of cider makers in the south west as this is where the climate is particularly suitable for growing apples.
Proximity to competitors
Some businesses will locate where there are other businesses selling the same thing (direct competitors). The idea is that this will draw customers to the general area and customers can find alternatives close by. This is sometimes called the cluster concept.
So where to locate?
Wherever a business chooses to locate usually depends on the nature of the business avtivity and there will be an element of trade off.
For example, if the products a business makes are bulk gaining (end product is bigger) then it might choose to locate near its customers so that transport costs are kept down. However, if the products are bulk reducing (end product is smaller) then it might choose to locate near its raw materials for the same reason.
The impact of the Internet on location decisions
E-commerce and M-commerce means that some firms no longer require fixed premises. Some don’t even have a website, trading instead on platforms such as e-bay. Others may locate parts of their business according to the needs of that part of the business – think about ASOS, their head office is in London (close to tech savvy and fashion aware employees) and their distribution centre is in Barnsley (good transport links to the rest of the UK plus cheaper labour to work in the warehouse).
Benefits of e-commerce include:
- keeping fixed costs low as no need to pay rent for expensive premises
- global customer base
- open for business 24 hours a day