What would you pay for this coffee?

What could Starbuck’s add to this cup of coffee?

With your additions taken in to consideration what would you

now pay for the coffee?

1.1.4 UNDERSTANDING THE NEED TO

ADD VALUE

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

 1.1.4 UNDERSTAND THE
NEED TO ADD VALUE

Firms add value to a product to provide a competitive

edge. This allows them to charge higher prices.

Higher prices will allow for a bigger profit margin per

unit sold. Profit margin is the difference between the
cost of the item and its selling price.

Bananas are bananas!

Why do you think that customers will pay more for

bananas from Marks and Spencer’s than they will for
bananas from Asda or Morrisons supermarkets?
1.1.4 UNDERSTANDING THE NEED TO ADD VALUE
 ADDING VALUE - THE FACTORS OF
PRODUCTION

These are the inputs into a production process in order to achieve an

output:

❖ Land – natural resources such as agriculture, fishing, forestry, oils

❖ Labour – the skills available and characteristics of the workforce

❖ Capital – investment in man-made aids to production such as

factories and machinery

❖ Enterprise – the risk undertaken by an entrepreneur in

transforming the other factors of production into output in order
to gain a reward, normally profit

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

THE MEANING OF ADDED VALUE

Adding value is when a business increases the

worth of its factor inputs (the factors of
production) by creating new output (the new
product).
This added value can be measured in terms of
financial worth. The total value of inputs to a
car might be worth £6000 in terms of metal,
wages etc. and the firm sell the car for £10000 -
adding value of £4000.
1.1.4 UNDERSTANDING THE NEED TO ADD VALUE
ADDING VALUE – THE DESIGN COUNCIL’S
EIGHT ACTIVITIES

1. The retail experience – the shopping environment, location and opening times

2. Online services – web-based ordering systems: information on products

3. Physical services – fitting, installation, technical support or flexible delivery

4. Customer relationships – through after-sales service or knowledgeable staff

5. The design of products – improved quality, customising to meet personal needs

6. Finance or insurance options

7. Developing a valued and trusted brand

8. Bundling products and services to create packages

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

 ADDING VALUE – A CASE STUDY

Choose a retail business that you are familiar with.

1. Comment on the retail experience at your business

2. Do they have any online services?
3. What physical services do they provide?
4. Comment on customer relationships
5. Describe the design of their products
6. Do they provide finance or insurance options?
7. Have they developed a valued and trusted brand?
8. Do they bundle products and services to create packages?

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

 ADDING VALUE – IMPORTANCE IN BUSINESS
SURVIVAL AND SUCCESS

◎ Choose a product that you are familiar with

◎ What ingredients go into your product? Estimate their cost

◎ How are these transformed into a finished product?

◎ What is the selling price of your product?

◎ What would happen if the selling price was higher than the cost?

Proces Added
Input + = Output
s Value

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

ADDING VALUE – IMPORTANCE IN BUSINESS
SURVIVAL AND SUCCESS

Watch this video about the production of Goodfella’s Pizzas

How do Goodfella’s manage to reduce their input costs?

How will the process help Goodfella’s to increase output?

Do you think that this type of production will lead to the

success of Goodfella’s?

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

 THE MAIN SOURCES OF ADDED VALUE –
CONVENIENCE AND SPEED

Consumers look for ease of access and fast service when buying products

Is it important for a start-up business to provide

convenience and speed to its customers?

Do you have easy access to a big 4 supermarket?

Do you queue for long?

Would it stop you from visiting a store if it wasn’t convenient and the service
was slow?

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

 THE MAIN SOURCES OF ADDED
VALUE – BRANDING

Branding
Organisations spend enormous amounts of time and money branding
their company and products.

Branding involves the creation of an identity for the business that

distinguishes that firm and its products from other firms. Branding can
add value to a product allowing firms to charge higher prices and also
leads to brand loyalty whereby customers will continue to buy
products from that firm.

Pure Genius:

How can this type of advertising help to brand a product?

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

 THE MAIN SOURCES OF ADDED VALUE – BRANDING

You have 30 seconds to write down as many brands as you can think of starting from
NOW!

En
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
1
2
3
4
5
6
7
8
9
d
Look at this image displaying the world’s top brands.
How many of the brands did you list?

How important is brand name to you when buying a product?

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE
THE MAIN SOURCES OF ADDED VALUE – QUALITY AND
DESIGN

◎ Quality can be expressed or measured in a number

of ways, these include:
◉ Aesthetics i.e. physical appearance
◉ Features i.e. physical attributes
◉ Core Aspects i.e. basic abilities/ functionality
◉ Actual Aspects i.e. added extras / functionality
◉ Augmented Aspects i.e. support feature e.g. warranty
◉ Performance i.e. reliability, durability
◉ Intangible Aspects i.e. non physical attributes
e.g. brand name, reputation
The rise and fall of Ratners.
How Gerald Ratner destroyed the value of his business in one minute.
1.1.4 UNDERSTANDING THE NEED TO ADD VALUE
THE MAIN SOURCES OF ADDED VALUE – QUALITY AND
DESIGN

◎ Quality is also important when providing a service,

the measures we apply may however be different.
◉ Friendliness of staff
Which measures of quality are most important to
◉ Speed of service you when choosing
• a mobile phone
◉ Efficiency of service • a holiday
• a sports shirt
• a sandwich shop
◉ Staff knowledge How is value added to these products?

◉ Cleanliness of facilities

◉ Appearance of environment

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

 THE MAIN SOURCES OF ADDED VALUE –
UNIQUE SELLING POINT

A Unique Selling Point (USP) is something that

distinguishes a firms product from those of its
competitors.
Firms try to make their product different to the
competition by adapting the actual product in some way
or by distinguishing the product through advertising and
branding. This is known as product differentiation.
A USP can allow a firm to charge a premium price.
A USP at Dragon’s Den!
1.1.4 UNDERSTANDING THE NEED TO ADD VALUE
 ACTIVITY
For a cup of tea identify Consider each of the images below

◎ The inputs ◎ How have the inputs changed?

◎ The process ◎ How has the process changed?

◎ The output ◎ How has the output changed?

How much would you be willing to pay? Does this affect the price you are willing to pay?

What is the estimated added value? Does this affect the added value?

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE

 MULTIPLE CHOICE

1. Which two of the following might be the best ways to add

value to a product
□ A Providing after sales service to a customer
□ B Producing a cash flow forecast for the business
□ C Advertising in the local newspaper
□ D Transforming raw materials into a finished product
□ E Paying higher wages to employees

1.1.4 UNDERSTANDING THE NEED TO ADD VALUE