Added value is the difference between the cost of acquiring the raw materials and finished goods.
Value added = Sales Revenue - cost of Raw materials
For example, if I am selling wooden chair.
Cost of wood for one chair=$100
Selling Price of one chair=$250
Added Value= Selling price-Cost of raw material i.e. ($250-$100) =$150
Value added is NOT the same as Profit.
To calculate profit we subtract the cost of raw material + labour cost + other expenses from sales revenue whereas in Valued added we subtract the raw material cost only.
The concept of added value is very important for businesses. Business which adds more value to their products and services can charge more to their customers and eventually lead to higher revenue.
Have you ever noticed that some business charge more for certain kind of goods then other businesses?
The reason behind this is that they add more value to the same product, as compared to the other business.
For example, you take a flight from New Delhi to Mumbai. An economy airline will charge less as compared to a normal airline. This is because the latter has added more value to its service by providing better, more comfortable seats, more leg room, better trained in-flight attendants etc.
Despite the fact that both these flights are traveling the same distance and the cost of the fuel will be almost equal.
Ways of adding value
There are different ways through which businesses can add value to their products and services.
Creating a brand: Brands represent quality and sometimes status. Consumers are prepared to pay more for products which have a strong brand attached to it. Why does a pair of Nike sell costlier than its counterpart Puma, though the cost of production may not be much different.
Advertising:Through advertising the business can create a strong brand loyalty among its customers and in the process charge more for its goods or services.
Providing customised services:Business providing better quality personalised services to their consumers add more value. Consumers are willing to pay a little extra for customised services
Providing additional features:A product or service with additional features or functionality can make the consumers pay extra. This is very often seen in different version of a car model. Toyota has 12 versions of its Innova model. The basic engine and build is the same, but the price increase as additional features are added.
By offering convenience: Consumers love convenience. If you get a product or service without much effort then you might happily pay a premium for it. For example, free home delivery of your weekly grocery.
Benefits to a business of adding value
There are a number of benefits a business derives through adding value to its products or services.
First of all, it can charge more to its customers. This leads to more profitability for the business in the long run.
A business can differentiate itself from its competitors. By adding more value to its goods or services a business can stand out among its competitors as producer providing superior or premium quality.
A business can save the cost on advertising and other promotional activities once it has created a perception of high quality and brand loyalty among its customers. Thus, adding value helps cost cutting in the long run.
