When it comes to opening a retail store, the old mantra of "location, location, location" remains one of the most important things to consider. Where you locate your store, however, has to be balanced with the cost of that location and the other needs of your business.

In a very rough sense, the highest-traffic locations with the nicest real estate will cost the most. That's why most small business owners choose not to locate in malls. Yes, a mall will put your business in front of customers, but the cost may make it not viable.

To pick a location for your retail business you have to consider the demand for whatever you sell and the cost of getting customers in the door. That has to be balanced with the expense of putting your store in a high traffic area.

An empty mall.

The mall may not be right for every retailer. Image source: Getty Images.

Location versus cost

For two years I ran a very large toy store in an old mill building on a somewhat hard to find side street. The store was (and is) a destination for anyone into toys, model trains, dollhouses, collectible gaming, and many other areas, but very few people ever stumbled upon it.

It would have been cost-prohibitive for us to relocate into a higher-traffic area. The owner and I looked at locations that were mall adjacent and ones that were at least on major streets.

In all cases, our rent would have increased by so much that we did not believe we could bring in enough extra business to cover it. So, we stayed where we were and focused our advertising dollars on bringing in new customers. That worked for us because the store was special enough that people would travel out of their way to visit us once they knew we existed.

Rent versus advertising

If you open a gelato store in a mall where most potential customers will walk by, then you probably don't need much advertising. You may want to offer mall patrons free samples or coupons, but a sizable audience will walk by your storefront everyday regardless.

Take the same store and put it in a lower-traffic strip mall and you may not be exposed to enough customers. In that case, you need to take steps through advertising to get people to visit your shop.

It's a math problem

If rent at the mall would be $10,000 a month and rent at a lower-profile location would cost $3,000 you have to figure out if the savings is worth it. Could you, for example, spend another $3,000 on advertising and bring in the same amount of business you would have served at the mall?

To understand any of this, you need to understand your margins and know what sales you will need to cover your expenses. If you average 40% margins, then every $1,000 in sales will give you $400 to cover overhead and eventually build to profit.

Every dollar you spend on rent or advertising pushes that breakeven point farther away. You do, however, have to be realistic in your calculations. Traffic may be great at the mall, but can you really sell enough of your product to make money? Conversely, rent might be dramatically cheaper in a lower-traffic area, but can you build enough business to cover even those lower costs?

Make your pick

In many cases, it makes sense to hedge your bet when it comes to a small business. Perhaps you pass on the mall but pick a location that's in a supermarket shopping plaza or a strip mall with decent traffic.

Once you make a selection, do your math. Know the sales numbers you need to hit and work to build to that audience.

The Motley Fool has a disclosure policy.