Value Added

Loading the player...

What is 'Value Added'

Value-added describes the enhancement a company gives its product or service before offering the product to customers. Value-added applies to instances where a firm takes a product that may be considered a homogeneous product, with few differences (if any) from that of a competitor, and provides potential customers with a feature or add-on that gives it a greater sense of value.

BREAKING DOWN 'Value Added'

A value addition can either increase the product's price or value. For example, offering one year of free support on a new computer would be a value-added feature. Additionally, individuals can add value to services that they perform, such as bringing advanced financial modeling skills to a position in which the hiring manager may not have foreseen the need for such skills.

In the digital age, when consumers can have access to any product they want and have it delivered in record time, companies are struggling to find a competitive advantage. Companies are constantly challenged to find a way to add value to justify their pricing to a more discerning market. Companies are learning that consumers are less focused on the product, and more focused on what the product will do for them. Finding out what the customer truly values is critical to how the company produces, packages, markets and delivers its products.

For example, Bose Corporation has successfully changed its focus from a company that produces speakers to a company that delivers an uncommon sound experience. When a BMW rolls off the assembly line, it sells for a high premium over the cost of production because of its reputation for high performance and sturdy mechanics. The added value has been created through the brand and years of refinement.

The value added is the difference between the price of 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.

Strong Branding

Companies that build strong brands add value just by adding their logo to a product. Nike Inc. can sell shoes at a much higher price than some competitors, even though their production costs are similar. The Nike brand, which shows up on athletic apparel and uniforms of the top college and professional sports teams, represents a quality enjoyed by elite athletes.

Superior Service and Additional Features and Benefits

Buyers of luxury cars from BMW and Mercedes-Benz are willing to pay a premium price for their vehicles because of the ongoing maintenance programs that the companies offer.

Amazon has been at the forefront of e-customer service with its policies of issuing automatic refunds for poor service, free shipping and price guarantees on pre-ordered items. Consumers have become so addicted to their services that they are willing to pay annual fees for Amazon Prime memberships because they value the two-day turnaround on orders.

RELATED TERMS
  1. Productize

    To take a new service, product or product feature - that a company ...
  2. Versioning

    A business practice in which a company produces different models ...
  3. Value-Added Reseller

    A firm that enhances the value of the products it resells by ...
  4. Market Leader

    A company that has the largest market share in an industry, and ...
  5. Penetration Pricing

    A marketing strategy used by firms to attract customers to a ...
  6. Product Life Cycle

    The period of time over which an item is developed, brought to ...
Related Articles
  1. Economics

    What is Value Added?

    Value added is used to describe instances where a firm takes a product and adds a feature that gives customers a greater sense of value.
  2. Economics

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  3. Options & Futures

    These Financial Products Are Too Complex For The Average Joe

    Structured financial products are so elaborate that investors are unable to assess costs and risk.
  4. Retirement

    How To Profit During High Inflation

    Some companies are better than others at pivoting their strategies to overcome inflation or other cost-increasing concerns. The best companies can push cost increases out to the market quickly ...
  5. Options & Futures

    An Introduction To Structured Products

    Learn a simple way to bring the benefits of derivatives into your portfolio.
  6. Personal Finance

    How Companies Create A Brand

    We take a hands-on approach to creating a brand, and see what it can mean as an investor.
  7. Term

    How Penetration Pricing Works

    Penetration pricing unveils a new product or service at an initially low price to attract customers away from competitors.
  8. Economics

    Understanding Competitive Pricing

    Competitive pricing is the practice of setting prices for products or services based on what the competition charges.
  9. Professionals

    Be A One-Stop Shop For Your Clients

    Offering comprehensive financial services can bring in business, but coordination is the key to success.
  10. Economics

    How Can Companies Increase Market Share?

    Companies that increase their market share enjoy a competitive advantage. They receive better prices from suppliers, and they’re able to produce goods faster.
RELATED FAQS
  1. What are some examples of companies that are Value-Added Resellers?

    Learn what a value-added reseller is, what companies most often provide value-added products and services, and what products ... Read Answer >>
  2. What are some ways a company can expand its product line?

    Understand what a product line is and why it's important. Learn about specific ways in which a company can expand its product ... Read Answer >>
  3. Is there any way to reverse the law of diminishing marginal returns?

    Learn more about how consumer spending, supply and demand impact production decisions. Find out more about the law of diminishing ... Read Answer >>
  4. What is the difference between cost and price?

    Consider how cost affects a product's price. Corporate expenses and the current cost of living both impact the final sticker ... Read Answer >>
  5. What are examples of economic values in use today?

    Learn some examples of economic values in use today as the global marketplace expands and new theories emerge to explain ... Read Answer >>
  6. What are the four types of economic utility?

    Understand the four main types of economic utility that apply to transactions between consumers and businesses: form, time, ... Read Answer >>
Hot Definitions
  1. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  3. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  4. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  5. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center