Value Added

Definition of Value Added

  • Value Added refers to the increase in value a business gives to a product or service before offering it to customers.
  • It represents the difference between the cost of the inputs and the price the output is sold for.

Importance of Value Added

  • Adding value is essential as it offers a competitive advantage to businesses. It allows them to differentiate their products or services in the market, fostering customer loyalty and creating a unique selling proposition (USP).
  • Value added can also result in higher profitability, as it enables businesses to charge more for their offerings without increasing the costs of production significantly.

Ways of Adding Value

  • Product development is a key method of adding value. Enhancing features, improving quality or performance, or designing appealing packaging can all enhance consumer perceptions of a product.
  • Exemplary customer service can also add value. A responsive and attentive service can strengthen customer relationship and boost customer retention.
  • Branding and marketing are other routes to value addition. An effective brand image or powerful advertising can heighten a product’s perceived value in the eyes of consumers.

Implications of Value Added

  • Businesses striving to add value will often need to invest in research and development, staff training, or marketing. These investments may increase costs in the short term.
  • It’s also worth noting that if added value is based on customer perceptions, these perceptions can change over time. Therefore, businesses must continually strive to innovate and refresh their value addition strategies.
  • Competition can erode the effects of value added: if competitors imitate the value-add tactics of a business, the differentiation and resultant pricing power can reduce.

Measurement of Value Added

  • Value added can be measured using the formula: Value Added = Sales Revenue - Cost of Bought-in Materials and Services.
  • This metric highlights the worth a business generates through its own activities and is an essential indicator of operational efficiency.
  • Businesses should aim to maximise their value added while minimising costs, to optimise profitability.