An economic activity can remain operational if the relationships between the costs of its inputs and the revenue from the sale of its outputs is positive. Otherwise, it needs to be subsidized, implying a transfer of wealth from another sector. A location can have an impact on the price of both inputs and outputs, so the choice of a location can be important to ensure its profitability. Two major location strategies can be considered:
- Costs minimization mainly considers location problems where revenues (sales) are generally constant and where costs vary. This is particularly the case for manufacturing and resources that tend to service large markets. Thus, a computer manufacturer is likely to have similar sales, wherever its location, but its production costs are likely to vary depending on its location. The goal is consequently to find an optimal location (O1) that minimizes costs and maximizes profits. Such a location can be “bounded”, implying that a certain geographical area, due to its lower costs, would incur profits for an activity wherever its location within this area. There is a potential positive feedback effect as a low cost location enables to increase profits, which can be passed down the supply chain and likely improve the market share, demand and revenue.
- Revenue maximization deals with constant costs, but varying revenues. This is particularly the case for retail activities whose inputs tend to be constant (such as labor), but whose revenues (sales) can increase at locations that are more accessible to potential customers. There is an optimal location (O2) ensuring the highest access to customers which can be bounded.
Both strategies can be reconciled in a profit maximization perspective where both costs and revenue vary according to location. Under such a perspective, the optimal location could be different (03).