On the surface, there are many downsides to running your business at a place where the rent is sky high. For example, there is a higher startup capital required – If your rent is RM10,000 a month, landlords typically require a 3 months rent advance and a 1 month deposit, on top of that there are utility deposits; there goes near to RM50,000 of cash that can be used for many other things.
Higher rent also increases the business risk and difficulty of achieving your monthly profit. How am I supposed to profit when my rent alone is equivalent to 3 or 5 staffs?
So, back to the question, why are some businesses willing to pay (way) higher rent to operate? And the even more important question is, should you pay higher rent?
In a nutshell, so long as your business depends on customers walking in to your shop and physically purchasing your product or service from you, you should, and for a couple of good reasons:
High rental places provide high foot traffic
Typically, high rental places have higher volumes of foot traffic compared to low rental places. If we break these down into daily numbers, the high rent will suddenly seem very manageable.
Let’s take the example of a cake shop. They sell cakes that are RM40 each and their current rent is RM3,500 a month.
If they move to a high rent place that now costs them RM10,000 a month, how much extra sales do they need to make to cover the rent? RM6,500. That’s RM217 a day for 30 days, which means selling extra 5 cakes a day
With a high rent location, footfall is easily double or more than a low rent location. With these taken into consideration, an extra 5 cakes a day doesn’t seem so scary anymore, does it?
Location and business visibility
High rental locations are usually more prominent and more convenient to access. For example, it could be a corner lot facing the main street where a lot of cars drive by and pedestrians walking by.
When it comes to marketing, one of the biggest challenges is to accurately target people who are located or live nearby your business location (although you can target locally with many digital marketing platforms, it is often hard to target only the people who are living within a certain radius of your outlet as the audience size is too small). With a big and visible signboard that is facing the main road, your business exposure is actually to people who either pass by your location frequently or lives nearby. In other words, people who are your most potential customers.
Regular, repeat customers is also an important source of income for businesses. If your potential and current customers are constantly reminded of your business through your prominent location and they can easily access your business; you will be in a much better position to close the sale both to a regular and a new customer.
You might argue that you could locate your business at a low rent location and put the extra money into marketing efforts and make your business famous, attracting people go for further lengths just to buy what you sell. I’m not saying this strategy doesn’t work, but from my experience, it is much easier (and cheaper) to sell to a local, regular crowd. On top of that, how often would a customer travel 30km to buy your product, irregardless of how much they love it?
Quality of customers
The quality of its surrounding audience is also one of the factors that contribute to a high rental price. Quality can be in both in terms of spending power, acceptance to the product that you are selling, and also familiarity with the products that you are selling.
I’ve experienced this first hand. Around 6 years back, I had two outlets in different locations specialising in selling creampuffs and cakes. For the sake of not causing arguments such as ‘So you saying people in location A (high rental) is better than people in location B (average rental)?’, let’s stick to calling these places location A (high rental) and location B (average rental).
For the many years that I have operated in location B, I have never received a tip. During the second month that I was operating in location A, I have received a tip that is equivalent to the value of the products purchased, and that wasn’t the only time that this happened.
Taking all these factors into consideration and combining the benefits that they can bring, does the RM6,500 seem like a smaller sum now?
While I advocate locating your business in high rental places for better chances of success, you do need to be smart about it. Rent at some places are just artificially higher without being able to provide the much needed foot traffic, exposure, and quality of customers, so please go about doing some homework before you decide on a location. You also need to exercise your business acument and judge whether it makes sense for your business type to invest in a high rental location. Don’t go opening your business in a high rental location when you are selling non differentiated products and have two competitors on the same street
What are your thoughts? I’d love to hear from you if you have any comments or first hand experience!