What Are Economies of Scope?

The complexities of modern business are such that it can feel like you have to be an expert in everything. From video marketing to reverse logistics and pricing strategy to HR, you need to get across so many topics. 

On top of practical considerations, there are also economic theories and ideas to keep up with. One such is the concept of economies of scope. Do you know the ins and outs of that idea? If not, you may also have missed the fact that taking advantage of economies of scope may help your business. 

Have we piqued your interest yet? If so, read on to learn all you need about economies of scope. We’ll cover what they are and how they come about. 

What Are Economies of Scope?

The idea of economies of scope is a concept in economics. It states that the unit cost of producing one product can get reduced if you start making a wider range of goods. In short, you can cut production costs by widening the scope of items that you produce. 

Say, for instance, you make bowler hats. You might diversify and start making Trilbys, too. Economies of scope come into play due to the crossovers between the production of the two lines. You’ll use much of the same equipment, materials, and labor for the new items. As such, the cost per unit across both lines is lower.

In the above example, your one factory would make both types of hats at a lower unit cost than two, each specializing in one style. Economies of scope don’t only apply to hats or even to simple manufacturing. The concept can apply to digital products, too. 

Take a company that makes call center software. They could also choose to start selling a call forwarding service. The developers and graphic designers they already have on staff can work on the new solution. Some of the central coding of the products may even cross over. Thus, economies of scope come into play.  

Examples of Economies of Scope

There are a few examples of ways in which economies of scope can come about. The following are three typical instances:

1. Co-products. 

Co-products are separate products created by one production process. It’s where one item is a byproduct of the manufacturing of another. The brewing industry provides an excellent example. Beer production creates yeast extract as a side effect, and brewers sell this to manufacturers of popular spreads such as Vegemite or Marmite. It’s the principal ingredient of those products.   

2. Shared production inputs.

It’s more common for economies of scope to arise thanks to shared production inputs. This is when the same things that go into making one product can also get used to manufacture another. Think elements like labor, machinery, and materials. 

3. Complementary production.

Complementary production is when more than one product or service gets supplied side-by-side. More than that, by doing so, you make the production of each more efficient. A typical example is when companies twin with academic institutions. Students work within businesses for hands-on training and experience. As a result, the businesses get cheap labor, and the universities or colleges improve their provision to students.  

Scope Vs. Scale

Chances are, when you read the title of this page, you first thought it said something else. Economies of scale are far better known than those of scope. The two concepts are similar but are by no means identical. 

Economies of scale are savings made by buying or producing goods in higher volume. Scope relates to making or selling a wider variety of products. In many ways, economies of scope are more beneficial. By diversifying, for instance, you may find more sales leads as well as cutting production costs. 

Conclusion

Economies of scope are the savings you can make by manufacturing a broader range of goods. When you produce more than one line, you can use some of the same inputs for each. Thus, your unit costs are lower across the board.  Seeking economies of scope may be a sensible avenue to explore. You can make real savings on production if you discover genuinely complementary products. What’s more, you may even boost your customer retention rate at the same time. Consumers often, after all, favor brands that can offer them more than just one product.