Economies Of Scope

Why do companies create multiple products and services? How can consulting practices grow by developing new offerings while reducing risk? What are the limits or disadvantages of creating new consulting services?

I believe all of those questions can be better answer by understanding one key economic idea: Economies of scope. This is why I'll be exploring the topic during this week through those short posts.

Let's start with the definition. What are economies of scope?

Economies of scope exist where an organization reduces the cost per unit sold by producing a bigger variety of products or services.

This idea was first explored by John Panzar and Robert Willig in a 1977 article entitled “Economies of Scale in Multi-Output Production”. When people hear about it, they often think about the much more popular idea of "economies of scale". They're related, but not the same.

Economies of scale are characterized by volume. The bigger your output (units produced or clients you sell to), the more you reduce your marginal cost. It's a key advantage for large companies such as Walmart, Amazon, Boeing, Toyota, Intel, and so on.

Economies of scope, on the other hand, are characterized by variety. Producing several different offerings is more cost-effective to a firm than producing fewer products and services. Or producing each one of them separately.

To benefit from economies of scope, you don't need scale. That's why it is a much more useful concept for boutique consulting firms that might not have access to, or the ability to serve, a large number of clients.

Tomorrow, I'll share why this happens and what are the sources of economies of scope for consulting businesses.