Economies of scope involve reducing production costs by using the same resources to produce multiple products. It is similar to economies of scale but focuses on producing multiple products. Product bundling is an effective tool to drive efficiency.
Economies of scope have to do with the concept that the average total cost of production is influenced by the total units of different goods that are produced by a given business. This means that the cost of production will start to decrease as the number of individual units of each good produced increases. The idea is that some of the resources used in the overall production process are relevant to more than one product and that sharing the cost of these processes among different products results in lower production costs per unit.
There is some similarity between economies of scale and economies of scope. Both involve trying to make the most efficient use of available resources as a way of producing the greatest number of products at the lowest possible unit cost. What is different is that economies of scale are usually associated with producing a single product, where economies of scope are focused on using some of the same resources and facilities to produce large quantities of two or more products.
An easy way to understand how economies of scope work is to consider operating a fast food restaurant. As restaurants of this type often include a menu that offers a variety of options, it is important to identify resources that can be used in preparing all these offerings, as well as promoting the different menu items. By using the same food prep areas, some of the same ingredients, and even using the same advertising strategies to promote the menu items, the company can produce each item at a lower cost than trying to use separate resources to produce and promote it. each item. of these items. The end result is more efficient use of available resources, lower overall production costs and a higher net profit for the restaurant owner.
One effective tool that helps drive the efficiency of economies of scope is known as product bundling or bundling. Using the fast food restaurant example, the business might promote a special that includes a hamburger or sandwich, along with a drink and a side order of fries, salad, or some other menu item. The idea here is to create an offer that uses more than one product and encourages the customer to choose that offer instead of ordering individual products. While this may reduce the actual profit on each unit sold, it can actually increase sales volume. This often allows the seller to make more efficient use of resources and offset the selling price difference relatively easily.
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