What Is Value Added?

Value added describes the enhancement a company gives its product or service before offering it to customers. It can be considered as an extra special something added by a company or producer to add value to a product or service.

Value added applies to instances where 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. For instance, a company may add a brand name to a generic product or produce something in a way that no one has thought of before.

Adding value to products and services is very important as it provides consumers with incentive to make purchases, therefore increasing a company's revenue.

Understanding Value Added

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.

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. 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. Finding out what the customer truly values is crucial for what the company produces, packages, markets, and how it delivers its products.

Bose Corporation has successfully shifted its focus from producing speakers to delivering a 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.

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Value Added

Value Added in the Economy

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, a system of taxation that's prevalent in Europe.

Economists can determine how much value an industry contributes to a nation's GDP. Value added of an industry is 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 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.

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

Key Takeaways

  • Value added is that extra something a company adds to its products and services before offering them to customers.
  • Adding value to a product or service helps companies attract more customers, which can boost its revenue.
  • Value added is the difference between a product's price and the cost of producing it.
  • Value can be added in different ways such as adding a brand name to a generic product or assembling a product in an innovative way.

Value Added in Marketing

Companies that build strong brands add 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 from BMW and Mercedes-Benz are willing to pay a premium price for their vehicles because of the 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 two-day turnaround on orders.