Case Study
August 15, 2024

Why Diversify Products? Economies of Scope Explained

While running your business, you must've read articles or heard business experts say that you should diversify products to improve your chances of selling. This directly implies that your business would be able to cater to a wider variety of customers.

Rather than looking for cost saving shortcuts, economies of scope allows businesses to expand by looking at how many customer segments they will target by producing a diverse amount of products. 

Your business might need this strategy to help scale it beyond your minimum threshold of growth. However, it is important to understand that while diversifying your product range, many products could be a hit or miss.

Or maybe the new market you are trying to expand to, does not respond favorably. 

Nonetheless, to diversify products also means you get to be more creative with your range of services. For small businesses this might seem like a fool's dream but applications like Markaz allow users to choose from multiple categories of products and survey their catalogue of thousands of wholesalers.  

If you're looking for what is economies of scope and why product diversification is essential then keep on reading. 

What is economies of scope?

 What is economies of scope?

Economies of scope is defined as the process of manufacturing multiple diverse forms of goods and products simultaneously rather than developing the same category of products. This concept also ties the cost with how production of diverse products is done. It decreases as the diversity increases, according to Investopedia

As compared to economies of scale which are defined by the scale of production of the same type of goods, economies of scope are defined by the variety of production. Looking at how economies of scope works, it could be said that this is an important way of not worrying about cost saving and aiming to adapt to changing market trends. 

When it comes to product diversification, there are different strategies you can use to incorporate it into your plan for using economies for scope as a concept to scale your business. First of all, there is concentric diversification which allows businesses to add a new range of products to market to their existing customer base.

Then there is horizontal diversification which implies how companies expand into new areas of products that they haven't ventured in yet, in order to cater to different customer bases. 

Companies diversify products when they want to move beyond their old brand image and range of services. If done right, economies of scope and pricey diversification has helped brands enhance their profit margins.

But there's more to the concept of diversifying products than what meets the eye. Below we have shared some more insights as to why product diversification is essential. 

Here are few reasons why product diversification is essential

Other than improving your profit margins, companies diversify products to:

  • Companies can expand their markets with product diversification. This will in turn increase your customer base and return in investment. This is why even though product diversification might seem like a hefty investment, it has been known to profit businesses in the long term. 
  • Your business will not have to rely on the success of one single product. Apple and Samsung did not just rely on one tech product to scale their business although they had endless demand. If they hadn't expanded into other products and catered to the changing market trends, someone else would have taken over the lead with their innovative products. Diversity products offered by your brand in order to reduce the risk of being boxed in one category. 
  • When companies diversify products, they are also looking to improve their chances of beating their market competition. Basically market trends drive diversification. This is an important factor as to why companies look into investing in new products. When you're listening to your customer's changing behaviors and market trends, you might want to look into market expansion. 
  • Staying relevant in your target market is important. This is why businesses can also expand not just in products but in channels as well. Just in 2021, about $4.9 trillion has been earned by ecommerce channels. If you're looking to expand into ecommerce then you will access more customers related data via website and analytics. Having access to this kind of information will allow you to leverage this data to boost your conversions. 
  • When you're adding new channels or products to your business processes, you have the opportunity to compete with your competitors. Staying ahead of market competition is another reason why businesses prefer to scale their products by diversification. 
  • Cross selling is also another reason why companies diversify products. They introduce new products in the old market and vice versa.

Diversification in ecommerce: 

Diversification in ecommerce

It should be noted here that product diversification in ecommerce is not linear. It could mean a lot of different things. Diversifying your ecommerce can include changing your strategic marketing strategy and making it more omni channel. Meaning that if you haven't expanded to some digits media tool like paid advertising, SEO or Instagram stories, then doing so will help you reach a wider segment of your audience. 

When diversifying your ecommerce business, you need to ensure that you are also aware of social commerce. Often times marketers face issues with converting customers because of poor ecommerce Web design or customers losing interest in tracking their online store after they see their post on the social media feed. Social commerce is the solution for that. Now, consumers can access and complete purchase of items via Facebook Marketplace or on Instagram where you can see the price and complete the checkout process without leaving the site.

Although it sounds promising to diversify products, there is no doubt that businesses require huge amount of resources and investment to develop product ranges. However profitable in the long run, if you're looking for cost saving in the short term and don't have enough resources to expand then there are other options in the market to help you with the growth. 

Economies Of Scale Vs Economies Of Scope

Economies of scale and economies of scope are both about cost advantages received by a company but what’s the difference between the two? 

Here’s a quick comparison of economies of scale vs economies of scope.

Economies of scale refer to the cost savings that take place when a business increases the scale of production whereas economies of scope are when a business reduces its costs by producing similar products. 

This is a brief comparison of economies of scale vs economies of scope that will help you make the right decisions for your business by keeping your production in mind. By opting for any of the two approaches, you can witness major cost savings in the long run. 

Example Of Economies Of Scope and Scale

It is essential to look at an example of economies of scope and economies of scale to understand both of these concepts better.

  1. Disney is a great example of economies of scope. It creates a number of products such as movies, merchandise, and shows. 

           As all of these products are somewhat related to each other, Disney is able to save money on the total products.

  1. An example of economies of scale is the production cost. When a company has a fixed cost of $1000, it will be spread across the total units. 

            As the number of units increases, the total production reduces on average.

            This example of economies of scale shows how mass production can benefit businesses to save costs.

Product Diversification Benefits

Here are some of the product diversification benefits that you should know about:

  1. One of the biggest product diversification benefits is that you don’t have to rely on a single product or service.
  2. Organizations that opt for product diversification have a greater market share.
  3. Businesses that choose to diversify are able to enjoy multiple income streams.
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Choose Markaz to diversify and experience unprecedented growth today: 

 Choose Markaz to diversify and experience unprecedented growth today

Markaz is designed to help small businesses scale their online growth by using their catalogue of hundreds of wholesalers to sell products from. Our platform is developed to help micro entrepreneurs without any hidden costs to seamlessly manage the customer journey from leads to completing online payment.

As a pioneer of social commerce in Pakistan, our goal is to remove any barriers for resellers to manage multiple orders and warehousing of goods. 

We have simplified the workflows for our small business owners who are interested in reselling a wide variety of products. Our users can diversify products by using our catalog of wholesalers and utilize their own social circle to start getting leads.

The rest is on us. We manage the process of shipping the goods from the warehouse to the customer's address. The process of cash collection is also managed by Markaz. 

With online payment options, you can easily see your financial growth materialize. Choosing Markaz means simplifying the process of logistics and cash collection for your business. As a small business, product diversification might not seem like an option but with Markaz you can diversify products in a cost saving manner. 

How? Well, we at markaz are not only offering wholesalers retail based businesses. We are also offering multiple product catalogs related to tech equipment, home appliances, makeup etc. Scaling your business is an overwhelming process requiring a lot of resources.

You just need one. And the best is, it's agile, smart and seamless. Talk to us today to do grow with Markaz.

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