Economies of Scope

Definition - What does Economies of Scope mean?

Economies of scope are efficiencies that a buyer may gain post-acquisition by increasing the scope of certain combined functions, such as marketing and distribution, to include additional products (sometimes creating product bundles as seen in the Telecom sector). Economies of scope are one of the reasons a buyer may pay a valuation premium for a target since the combined scope increase will drive higher market penetration and profitability.

Divestopedia explains Economies of Scope

The concept of economies of scope differs from economies of scale in that the average cost per product is being reduced by adding products and bundling them together. In a marketing example, there are no economies of scope if a sales person only promotes one product, such as soap. If additional products are added organically or by acquisition, such as an entire line of hygiene products, the sales person can now cross-sell the soap and the other products as one combined value proposition. This averages out the salary paid to the sales person plus all other related costs (advertising, travel, etc.) amongst a larger product base. Economies of scope are achieved because the average price per product is decreased.

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