Economies of Scope
Economies of scope are one of the main reasons for such marketing strategies as product bundling, product lining, and family branding. The situation that arises when the cost of performing multiple business functions simultaneously proves more efficient than performing each business function independently. A case of synergy.
Often, as the number of products promoted is increased and broader media used, more people can be reached with each dollar spent. This is one example of economies of scope. These efficiencies do not last, however, at some point, additional advertising expenditure on new products will start to be less effective (an example of diseconomies of scope).
The affect of an economy of scope is to increase the efficiency of production as a result of increasing the number of different but related products offered.
If a sales force is selling several products they can often do so more efficiently than if they are selling only one product. The cost of their travel time is distributed over a greater revenue base, so cost efficiency improves. There can also be synergies between products such that offering a complete range of products gives the consumer a more desirable product offering than a single product would. Economies of scope can also operate through distribution efficiencies. It can be more efficient to ship a range of products to any given location than to ship a single type of product to that location.
For example, since jet fuel, gasoline, heating oil, lubricating oil and so forth are all constituents of petroleum that are gotten by "cracking" the petroleum into the separate constituents of its mixture, there is an economy of scope in operating a refinery. It is obviously better to produce all of these products jointly than to try to produce them separately.
For example, McDonalds can produce both hamburgers and French fries at a lower average cost than what it would cost two separate firms to produce the same goods. This is because McDonalds hamburgers and French fries share the use of food storage, preparation facilities, and so forth during production.
Another example is a company such as Proctor & Gamble, which produces hundreds of products from razors to toothpaste. They can afford to hire expensive graphic designers and marketing experts who will use their skills across the product lines. Because the costs are spread out, this lowers the average total cost of production for each product.
Often, as the number of products promoted is increased and broader media used, more people can be reached with each dollar spent. This is one example of economies of scope. These efficiencies do not last, however, at some point, additional advertising expenditure on new products will start to be less effective (an example of diseconomies of scope).
The affect of an economy of scope is to increase the efficiency of production as a result of increasing the number of different but related products offered.
If a sales force is selling several products they can often do so more efficiently than if they are selling only one product. The cost of their travel time is distributed over a greater revenue base, so cost efficiency improves. There can also be synergies between products such that offering a complete range of products gives the consumer a more desirable product offering than a single product would. Economies of scope can also operate through distribution efficiencies. It can be more efficient to ship a range of products to any given location than to ship a single type of product to that location.
For example, since jet fuel, gasoline, heating oil, lubricating oil and so forth are all constituents of petroleum that are gotten by "cracking" the petroleum into the separate constituents of its mixture, there is an economy of scope in operating a refinery. It is obviously better to produce all of these products jointly than to try to produce them separately.
For example, McDonalds can produce both hamburgers and French fries at a lower average cost than what it would cost two separate firms to produce the same goods. This is because McDonalds hamburgers and French fries share the use of food storage, preparation facilities, and so forth during production.
Another example is a company such as Proctor & Gamble, which produces hundreds of products from razors to toothpaste. They can afford to hire expensive graphic designers and marketing experts who will use their skills across the product lines. Because the costs are spread out, this lowers the average total cost of production for each product.
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