When multiple products can be combined and produced at one facility at a lower cost than they can be produced separately is known as what?

Economies of scope is an efficiency-enhancing notion that promotes cost-saving mechanisms from using similar operations to simultaneously manufacturing distinct products instead of going for one at a time. It occurs when the total cost of producing two or more output types is lower than the total cost of producing each output type separately.

Table of Contents Show

• Examples of Economies of Scope
• How to Determine Economies of Scope?
• Ways to Achieve Economies of Scope
• Recommended Articles
• Advantages of product bundling
• Increase your average order value
• Decreases marketing and distribution costs
• Reduce inventory waste
• Types and Examples of Product Bundles
• Pure bundles
• New product bundling
• Mix-and-match bundles
• Cross-sell bundles
• Gifting bundles
• Inventory clearance bundling
• Buy-one-get-one bundles

• Economies of scope can be described as producing two or more products simultaneously at a lower cost than producing them individually.
• For example, a company uses similar raw materials and production units to produce various products instead of going for one at a time.
• It is a fantastic concept that can be achieved by adopting different strategies like flexible manufacturing, product diversificationProduct diversification is a business strategy that involves developing and selling a new line of products, services, or a service division that uses the same or completely different sets of knowledge, skills, machinery, etc.read more, linking supply chain, and M&A.
• The notion has gained immense popularity and is being adopted across manufacturing, operations, banking, and IT services.

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Examples of Economies of Scope

• Many sectors are exploring ways to improve businesses using economies of scope, which we will explain with an example.
• Apart from e-commerce, the banking sector also capitalizes on economies of scope. Banks that have developed a robust IT infrastructure offer many services such as traditional banking, investment bankingInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more, credit card services, trading services, wealth management, and mutual fund services.
• After the initial set up of the IT infrastructure, the tech-savvy banks could provide so many services without incurring additional cost, which would have arisen from arranging additional units for each service.

How to Determine Economies of Scope?

In terms of mathematical explanation, we can illustrate the economies of scope. But, first, we need to consider the production possibility frontierThe Production Possibility Frontier (PPF) is a visual representation used to illustrate the maximum possible output combinations of two separate products produced using the same amount of limited resources.read more (PPF).

#1 – First Production Possibility Frontier (PPF)

In the case of PPFx, the total cost of production is TC. Suppose P1 and P2 are the products that are manufactured. Suppose the company created 20 goods of P1 and 20 goods of P2.

TC = 0 P1 + 20 P2——-20 goods
TC = 20 P1 + 0 P2——-20 goods

Suppose the total cost incurred in the first case is 100 for producing 20 units of P1, which are a type of candle. In the next case, the business produces 20 units of another variety of candles at 100. They are both being produced separately.

#2 – Second Production Possibility Frontier (PPFy)

The company has a second production possibility frontier (PPFy). Its production has achieved economies of scope resulting in the TC either being the same or lower while more products are being produced.

TC2 = 10 P1 + 15 P2 —— 25 goods

1. How is that possible? Suppose a business deals in offering storage facilities for goods. There is a warehouse storing different products. Earlier, it was storing 20 units of P1 and P2. The manager noticed more space availability, so he added five more units of P2 in the same warehouse. So, the storage cost remains the same. If earlier 20 units of P1 and P2 could be stored at 100, 25 units of P1 and P2 will be stored at 100.

2. Take the candle example again. The owner sees the possibility of reducing the production cost of the two varieties of candles by using the same workers, materials, storage, and delivery facility. The same workers who produced five candles in a day will do six now at the same cost. The same machines will also simultaneously mold the additional candles.

The same storage and delivery will simultaneously carry the new variety as well. The marginal cost enhancement will come from using more current stock to produce the additional unit. As such, ten units of P1 and 15 units of P2 will cost TC2, which will slightly be over 100. Although overall, the cost will still be less than producing them separately. In short, the overall average unit costUnit cost is the total cost (fixed and variable) incurred to produce, store and sell one unit of a product or service. It is calculated by adding fixed and variable expense and dividing it by the total number of units produced.read more of the overall average production will come down.

Ways to Achieve Economies of Scope

Recommended Articles

This article has been a guide to what economies of scope are?. Here we discuss how it does work, how to determine it, along with an example and ways to achieve it. You may learn more about financing from the following articles –

• Economies of Scale vs Economies of Scope
• Diseconomies of Scale
• Average Cost

Reading Time: 5 minutes

Product bundling is a technique in which several products are grouped together and sold as a single unit for one price. This strategy is used to encourage customers to buy more products. McDonald’s Happy Meals are an example of product bundles. Instead of selling a burger, soda, and french fries separately, they are sold as a combination, which leads to more sales than offering them separately.

Advantages of product bundling

Bundling helps you do much more with your existing stock. Let’s take a look at the advantages of product bundling and how it can be beneficial for your business.

Increase your average order value

Product bundling can increase the profits and sales of individual items over time. By grouping your items together you can make your customers buy more than one product during a single purchase, which increases your average order value. For example: Instead of buying just one pencil during a single purchase, your customer can be given an option to buy a pencil, eraser and sharpener as a bundle, making them purchase more than one product thereby increasing your average order value.

Decreases marketing and distribution costs

Bundling enables you to sell more and decrease marketing and distribution costs. Instead of marketing every product you can group complementary products together and market them as a single product. By packaging different items together you only need one warehouse bin to store them instead of different bins. Also, bundling helps you ship fewer boxes of individual items and saves you money on postage. Instead of making print and wed ads for every single item you can show them as a bundle which helps you save more on your marketing costs and at the same time markets all your products. For example: if you have 10 individual products you need to market and sell 10 products, but if you bundle them you market and sell them as a single unit, helping you increase efficiency by reducing marketing and distribution costs.

Reduce inventory waste

Merchandise that doesn’t get sold remains in your inventory as dead stock, adding to your holding costs, and is eventually discarded as waste. You can use bundling to clear out this dead stock before it becomes a problem. If you bundle a slow-moving or stagnant item with a faster-selling product, customers will see the bundle as a bargain and be more inclined to buy it. This helps reduce your inventory waste, free up warehouse space, and decrease your inventory holding costs.

Types and Examples of Product Bundles

There are several different bundling techniques which are used to group products:

1. Pure bundles

2. New product bundles

3. Mix-and-match bundles

4. Cross-sell bundles

5. Gifting bundles

6. Inventory clearance bundles

7. Buy-one-get-one bundles

Pure bundles

In pure bundling, the individual products that make up the bundle can be purchased only as a bundle and not as standalone products. This technique limits the choices offered to the consumer. For example, HelloFresh is a company which does pure bundling successfully. It bundles the ingredients that their customers need to cook a healthy meal. They offer meal options based on the number of people and recipes the customer requires each week, but they don’t allow you to choose the ingredients as individual items that can be bought separately.

New product bundling

In this technique, newly-launched products are grouped along with existing or popular products as a promotion to help customers discover your latest product. This method is used by ecommerce stores, which mix new products with their well-known merchandise to gain some exposure for the new product. The more well-received the existing product is in the market, the more it brings the buyer closer to the new product. For example: The Nintendo switch + the legend with Zelda product bundle, is one of the fast-selling Nintendo’s bundle, in this bundle Nintendo introduced their brand new games which is grouped together along with their existing best selling products. This bundle offers an unique Zelda carrying case which is available with this bundle exclusively and two brand new games (Breath of the wild and Super Mario Kart) along with the accessories for gaming.

Mix-and-match bundles

The mix-and-match bundling technique allows the customer to choose among multiple similar products. This is mostly done by brick-and-mortar stores for fast-moving consumer products such as perishables or bulk items. Here, you specify a few products for your customers to choose from and they can create their own custom bundle from the options available. This method helps the customer feel that they’re in direct control of what they want to buy, thereby increasing the perceived value of the item. It’s the perfect method for encouraging your customers to buy products in bulk without forcing them to buy items which don’t interest them. For example, some retail stores offer a deal where you can match complementary pieces of clothing from an array of choices for a fixed price, such as any shirt along with any pair of trousers for $50.

Cross-sell bundles

In this bundling technique, retailers sell a complementary product as an add-on to a main product. This type of bundling works well with lower-priced items, or accessories or parts that go with a more expensive item. For example, if you buy an iPhone, you would probably like to buy a case along with it. So the iPhone and case can be sold together as a bundle.

Gifting bundles

Gift bundles are aimed at shoppers who want to give a bundle of complementary products together to a loved one. This type of bundle is mostly sold during holiday seasons. For example, beauty brand Estee Lauder offers a popular protect-and-hydrate gift set containing four skincare products that work together.

Inventory clearance bundling

In this bundling technique, you pair a faster-moving item in the inventory with a stagnant or slower-moving item to clear inventory space and decrease your inventory holding costs. This method includes discounts on your bundles so that shoppers who are interested in a top-selling item will see the whole bundle as a bargain and will be more inclined to buy it. For example, the popular specialty tea retailer T-WE found out that their tea accessories were selling faster than their teas (which was unfortunate, because the teas offered a higher profit margin). So they started to bundle their teas along with the accessories so that they look like more of a deal.

Buy-one-get-one bundles

This bundling is used when you buy one main item, you can avail a discount for another complimentary product or get another product free. This is a best used technique for one time purchase products For example, electronics, if a customer buys a hair dryer they wouldn’t be coming in to buy the same product again. Hence, offering a complimentary product, discount or gift card will encourage your customers to add more items to their carts at a lesser price.

Bundling adds value to your products by adding extra features or products to your existing purchase. You can tailor your product offerings according to the preference of your customers to align with their wants. Offering unique and carefully curated bundles can help you stand out in comparison with your competitors. It clears out your aging inventory, increases your items’ perceived value in the eyes of your customers, and boosts sales.