Q&A - What is meant by adding value

Adding value is a key concept in busiesss studies. This note explains in more detail.

Added value = the difference between the price of the finished product/service and the cost of the inputs involved in making it

So added value is the increase in value that a business creates by undertaking the production process.

It is quite easy to think of some examples of how a production process can add value.

Consider the examples of new cars rolling down the production line being assembled by robots. The final, completed and shiny new car that comes off the production line has a value (price) that is more than the cost of the sum of the parts. Value has been added. Exactly how much added value is determined by the price that a customer pays.

Alternatively, imagine a celebrity chef preparing a meal at his luxury restaurant. Once the cooking is complete, the meal is being served and sold for a high price, substantially more than the cost of buying the ingredients. Value has been added.

You don’t have to use robots or have the culinary skills of Gordon Ramsay to “add value”. For example, businesses can add value by:

Building a brand – a reputation for quality, value etc that customers are prepared to pay for. Nike trainers sell for much more than Hi-tec, even though the production costs per pair are probably pretty similar!

Delivering excellent service – high quality, attentive personal service can make the difference between achieving a high price or a medium one

Product features and benefits – for example, additional functionality in different versions of software can enable a software seller to charge higher prices; different models of motor vehicles are designed to achieve the same effect.

Offering convenience – customers will often pay a little more for a product that they can have straightaway, or which saves them time.

A business that successfully adds value should find that it is able to operate profitably. Why? Remember the definition of adding value: where the selling price is greater than the costs of making the product.

By definition, a business that is adding substantial value must also be operating profitably.

Finding ways to add value is a really important activity for a start-up or small business. Quite simply, it can make the difference between survival and failure; between profit and loss.

The key benefits to a business of adding value include:

- Charging a higher price
- Creating a point of difference from the competition
- Protecting from competitors trying to steal customers by charging lower prices
- Focusing a business more closely on its target market segment