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.