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 perception 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 value added has been created through the brand and years of refinement.
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.
Value Added in Marketing
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.
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 accustomed to their services that they are willing to pay annual fees for Amazon Prime memberships because they value the two-day turnaround on orders.
Value Added in GDP
The contribution of a 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.
Value added of an industry is the difference between the total revenue of an industry and the total cost of inputs purchased from other businesses within a reporting period. The total revenue or output of an industry consists of sales and other operating income, commodity taxes, and inventory change. Inputs that could be purchased form other firms to produce a final product include raw materials, semi-finished goods, energy, and services.