The Sweet Spot

During this week I've been writing exclusively about economies of scope. Before I change the topic - the goal of this newsletter is to look at different sources of growth for your consulting practice, after all - I'd like to address a reader's question.

Love this Dan, I must admit I hadn't heard about economies of scope before. Do you have any data on what the ideal number of offerings for a boutique like mine (8 people, close to $1 mi/year rev) is? What's the sweet spot?  

Thank you for the question - I was absolutely sure someone would ask me this when I picked this topic for the week.

Short answer: No, I don't have data. And no, there's no sweet spot.

Venkatesh Rao, in this post, shares a powerful idea that helps me provide a longer answer:

Economies of scale and scope (...) are both types of learning.

Economies of scale are the advantages that can result when repeatable processes are used to deliver large volumes of identical products or service instances. Scaling relies on interchangeable parts either in the product itself, or in the delivery mechanisms, in the case of intangible services.

Economies of scope are the advantages that can result when similar processes are used to deliver a set of distinct products or services.

As a first approximation, you could say that economies of scale result from learning the engineering, while economies of scope result from learning the marketing. The first is primarily a one-front war between a business and nature. The second is primarily a two-front war where a business fights nature on one front, and market incumbents on another.

When I'm helping boutique consultancies rethink their offering mix, these are some questions that typically come up:

• What is the right level of diversification for our services?
• Which new market segment can we serve with the services we already have?
• What is the right way to bundle and price related services?
• How much implementation support should we offer? Are there any clients who would actually pay for our consultancy to do everything for them?
• Which new offerings should we develop? Which services or IP should we acquire from or deliver through external collaborators?

These decisions can create economies of scope for your consulting business. They may reduce the average unit cost of serving a client and increase your margins. But they are, essentially, marketing questions.

This is why there's not a single solution to the question "how many offerings should you promote?" It's not an engineering problem, like the ones you have when scaling production inside a factory. The market changes, your clients' needs and preferences change, and you do your best to adapt.

As Venkatesh puts it, improving your offering mix is a learning problem. The more you learn, the better your services will be accepted in the market. So I'll answer the reader's question with another question: What's the data you have about your market? How much time and resources are you investing in learning more about it?