Value-Added

What Is Value-Added?

The term "value-added" describes the economic enhancement a company gives its products or services before offering them to customers. Value-added helps explain why companies are able to sell their goods or services for more than they cost to produce. Adding value to products and services is very important as it provides consumers with an incentive to make purchases, thus increasing a company's revenue and bottom line.

Value-added could thus apply to instances when a firm takes a product that may be considered homogeneous — with few differences from that of a competitor, if any — and provides potential customers with a feature or add-on that gives it a greater perception of value. Adding a brand name to a generic product can be just as valuable as producing something new or in a way that no one has thought of before.

Understanding Value-Added

Value-added is the difference between the price of a product or service and the cost of producing it. The price is determined by what customers are willing to pay based on their perceived value. Value is added or created in different ways.

These may include, for instance, extra or special features added by a company or producer to increase the value of a product or service. The addition of value can thus increase either the product's price that consumers are willing to pay. For example, offering a year of free tech support on a new computer would be a value-added feature. Individuals can also add value to services they perform, such as bringing advanced skills into the workforce.

Consumers now have access to a whole range of products and services when they want them. As a result, companies constantly struggle to find competitive advantages over each other. Discovering what customers truly value is crucial for what the company produces, packages, markets, and how it delivers its products.

Bose Corporation, as an example, has successfully shifted its focus from producing speakers to delivering a "sound experience," or when a BMW car rolls off the assembly line, it sells for a much higher premium over the cost of production because of its reputation for stellar performance, German engineering, and quality parts. Here, the additional advantage has been created through each brand's symbolic value and years of refinement.

Value-Added in the Economy

The contribution of private industry or government sector to overall gross domestic product (GDP) is the value-added of an industry, also referred to as GDP-by-industry. If all stages of production occurred within a country's borders, the total value added at all stages is what is counted in GDP. The total value added is the market price of the final product or service and only counts production within a specified time period. This is the basis on which value-added tax (VAT) is computed, a system of taxation that's prevalent in Europe.

Economists can in this way determine how much value an industry contributes to a nation's GDP. Value-added in an industry refers to the difference between the total revenue of an industry and the total cost of inputs — the sum of labor, materials, and services — purchased from other businesses within a reporting period.

The total revenue or output of the industry consists of sales and other operating income, commodity taxes, and inventory change. Inputs that could be purchased from other firms to produce a final product include raw materials, semi-finished goods, energy, and services.

Economic value-added — also referred to as economic profit or EVA — is the value a business generates from its invested capital.

Value-Added in Marketing

Companies that build strong brands increase value just by adding their logo to a product. Nike can sell shoes at a much higher price than some of its competitors, even though their production costs may be similar. That's because the Nike brand and its logo, which appears on the uniforms of the top college and professional sports teams, represents a quality enjoyed by elite athletes.

Similarly, luxury car buyers considering a BMW or Mercedes-Benz are willing to pay a premium price for their vehicles because of the brand reputation and ongoing maintenance programs the companies offer.

Amazon has been a force in the e-retail sector with its automatic refunds for poor service, free shipping, and price guarantees on pre-ordered items. Consumers have become so accustomed to its service that they are willing to pay for Amazon Prime memberships because they value the free two-day turnaround on orders.