Diseconomies Of Scope

Yesterday I wrote about the benefits of economies of scope - having a variety of offerings decreases the average cost of promoting and delivering each one of them, leading to better financial performance and security. But there's a trick to it.

Just like with economies of scale, this rule is not always true. The average cost falls until a certain point. A consultancy that offers too many products and services might begin to see an increase in the average cost of each offering.

This is what John Panzar and Robert Willig called diseconomies of scope.

But why is that true? How does creating a service list longer than a Thai restaurant menu hurt boutique consultancies?

There are three main factors diseconomies of scope include:

1. Diluted competitive focus: If you do everything, for every kind of client, whenever they want... it's impossible to differentiate yourself in the market. And if your prospects and clients can't tell you apart from other consultancies, the only way to compete is by price. This is not a wise or feasible strategy for 99.99% of boutique consultancies.
2. Lack of management expertise: You may be willing to dilute your focus and promote 10 different services. Clients may be open to giving some of those a try. But do you actually have the expertise to deliver all of those? Bringing new offerings to market only to under-deliver your promises will cost your business a lot of trust and reputation.
3. Bottlenecks, shortages, and increased overhead costs: Creating a marketing strategy for a couple of service offerings is straightforward, for 10 different offerings it becomes a full-time job. Finding a contractor to help you with a few standardized engagements is doable, hiring a dozen different consultants for different skills and project sizes becomes a nightmare.

Having only one service offering sabotages your growth. Too many will hurt your margins and add unneeded complexity to your consulting business. The challenge is to reach the right balance.

Tomorrow, I'll close the week with the last post on this topic - some key questions you can ask yourself to improve your offering mix.