The Process of Adding Value

Adding value is the process of taking raw materials and using them in such a way that the end product created is worth more than the cost of the raw materials used to create it - value has been added
The added value is the difference between the price that is charged to the customer and the cost of inputs required to create the product or service
- E.g. customers are prepared to pay more for potatoes when they are packaged as oven chips than they would be willing to pay for a bag of potatoes
- If value is not added to the materials and components that a business buys then fixed costs cannot be paid and no profit will be made

Diagram to Show Methods of Adding Value

A Diagram to Show Methods of Adding Value

Some of the methods of adding value allow for product differentiation which allows the business to charge a higher selling price

Product and marketing teams will constantly explore ways in which to increase the added value
- The most common methods have been summarised in the diagram and include branding, offering more convenience to customers, improving the product quality or design, and building out the unique selling points

Real World Examples of how Businesses have Added Value

Adding value is an important concept for businesses. The greater the added the value the more successful the business is likely to be and the higher their profits

Method

Example

Branding

Apple has built a brand that many customers believe is superior to other brands
They have achieved this through the use of quality materials, innovative design and good marketing
This branding allows the firm to charge a higher price for its products thus increasing the added value

Convenience

Persil initially provided a bottle of dishwashing liquid for dishwashing machine use
This resulted in spillage as customers added the liquid to their machines, so Persil then created tablets
The tablets offered a much more convenient option and Persil was able to charge a higher selling price for them

Quality

Jo Malone perfume products are well known for their beautiful packaging which creates an exciting opening experience for the customer
This allows the firm to charge a higher price for its products thus increasing the added value

Unique Selling Points (USPs)

MoonPig birthday cards can be completely customised (size, colour, design etc.) and the level of customisation has helped them to gain a competitive advantage
This customisation allows the firm to charge a higher price for its cards thus increasing the added value

Design

Samsung Galaxy Watch 5 has robust health tracking tools built into it, along with an amazing screen, which has helped it to gain a competitive advantage
These features allow the firm to charge a higher price for its products thus increasing the added value

Exam Tip

Businesses may use several methods of adding value. It's important to understand that adding value adds raises costs, but it is worth it if the increase in selling price outweighs the costs associated with the method e.g. if improving the packaging costs £1 per unit and the firm is able to raise its selling price by £1,40 per unit, then the firm can improve its profitability by changing the packaging.

The Process of Adding Value (CIE IGCSE Business)

Revision Note