ADDED VALUE: TYPES, IMPORTANCE AND EXAMPLES - DUDAS - 2025

The added value of a product or service is what describes the improvements that an organization gives to its service or product before offering it to customers in the market. It is used in cases where a company takes a product that can be considered analogous, with few differences from the competition, offering a complement or feature to potential customers that provides a greater appreciation of value.

Value added is the highest portion of the income of integrated companies, such as manufacturing companies. On the other hand, it is the lowest portion of the income of less integrated companies, such as retail companies.

Source: pixabay.com

What is the added value of a product or service?

In economics and marketing

In economics, value added is the difference between an industry's total sales revenue and the total cost of materials, components, and services purchased from other companies within a fiscal period, usually one year.

It is also the industry's contribution to gross domestic product (GDP) and the basis on which value added tax (VAT) is calculated.

In marketing / marketing, it is the creation of a competitive advantage. This is accomplished by bundling, combining, or bundling features and benefits that generate greater customer acceptance.

Therefore, it refers to the "extra" characteristics of an item of interest that go beyond standard expectations and offer something "more", although the cost may be higher for the buyer.

From the administration

The added value is the difference between the price of the service or product and its cost of production. The price is set by what customers are willing to pay based on the value they perceive. This value is created or added in different ways.

Companies are constantly challenged to find a way to add value. Thus they can argue their prices in an increasingly rigorous market.

Companies are learning that consumers are less focused on the product itself and more focused on what the product will do for them.

It is essential to discover what the customer really values. In this way, the way in which the company produces, packages, markets and delivers its products can be defined. A value addition can increase the price or value of a product or service.

In the digital age, when consumers can have access to any product they want and it is delivered to them in record time, companies struggle to find a competitive advantage.

Value added in GDP

The contribution of the government sector or private industry to the overall gross domestic product (GDP) is the added value of an industry, also called industrial GDP. If all phases of production occurred within the boundaries of a country, what is counted for GDP is the total value added in all phases.

The added value of a company is the difference between its total revenue and the total cost of the materials it has purchased from other industries within a period of time.

The total production or income of a company consists of sales and other operating income, inventory changes, and taxes on commodities.

Among the inputs purchased from other companies to manufacture a final product are energy, services, raw materials and semi-finished products.

The total added value is the final market price of the service or product. It is on this basis that the value added tax (VAT) is calculated.

Types

Gross value added

Gross value added (GVA) helps measure the contribution to the economy of a sector, region, industry or producer. The GVA measures the gross value added of a particular product, service or industry.

The GVA is important because it helps to calculate the Gross Domestic Product. This is a key indicator of the state of the total economy of a nation.

Economic added value

It is defined as the incremental difference between a company's rate of return and its cost of capital. It is used to measure the value that a company generates from the funds invested in it.

Economic added value (EVA) = BONDI - (CI x CPPC), where:

-BONDI: Net Operating Profit After Tax. It is the profit generated by a company through its operations after adjusting for taxes, but before adjusting for financing costs and non-cash costs.

-CI: Invested Capital. It is the amount of money that the shareholders invest in the business.

-CPPC: Weighted Average Cost of Capital. It is the minimum rate of return expected by the providers of capital, who are the investors in the business.

EVA helps to quantify the cost of investing capital in a project. It also helps to assess whether the project generates enough cash to be considered a good investment.

Market added value

It is defined as the difference between the market value of a company and the capital invested by both shareholders and debt holders.

Market Value Added (VAM) = Market Value - Invested Capital.

VAM indicates the ability of a company to increase its shareholder value over time.

A high VAM indicates effective management and strong operating capacity. On the other hand, a low VAM may indicate that the value of managerial stocks and investments is less than the value of the capital contributed by the company's investors.

Value added in cash

It helps to measure the amount of cash a business generates through its operations.

Cash Value Added (VAE) = Operating Cash Flow - Operating Cash Flow Demand.

The VAE gives investors an idea of ​​the company's ability to generate cash from one financial period to the next.

Importance

The concept of added value is very important in marketing and business administration, as it acts as an incentive for customers to buy a product or subscribe to a service.

It is a means of getting clients. By adding value to a product or service, a business can acquire new customers who are looking for better products and services at a reasonable cost.

It also helps the company retain and build lasting loyalty with existing customers.

A company can also quickly enter a new market by offering an improved product, which offers more value to customers compared to those of competitors.

Value-added offers a competitive advantage for companies operating in a crowded market with competitors offering similar products or services. This is because customers are always looking for something special or extra in a product.

Added value in the brand

In a free market system, clients will be prepared to consider paying more if they perceive that they are getting more value for their money, whether in a functional, emotional, expressive or other way. Brands have the ability to add this additional value, be it real or perceived.

Those who drink Coca-Cola don't just drink a sticky brown drink, but a brand with many connotations.

Their flavor and thirst-quenching ability are relatively less important to their target markets than their ability to invoke desirable lifestyle images or foster positive associations with one another.

The relative importance of functional and emotional values ​​is evident from blind taste tests in both the cola and beer industries.

Some participants who claimed to be loyal to one brand preferred the taste of another, until they were told what they had been drinking. After that, the preference returned to its usual mark.

Examples

An example of a value-added feature in a product, such as a laptop, would be offering a two-year warranty that includes free support.

When a BMW rolls off the assembly line, it sells for a high premium over production cost due to its reputation for high performance and robust mechanics. The added value has been created through the brand and by years of refinement.

When a sample product is given free when you buy another related product, either at a regular or discounted price, such as a free small bottle of mouthwash for purchasing a jumbo-sized toothpaste.

Another example when adding value to a product is when a quality process, such as undergoing ISO certification, is performed to establish the superior quality of the product.

In these cases, products that pass certification can place the ISO logo on their packaging to show customers that the product is of superior quality. Obviously, customers looking for quality will choose an ISO certified product instead of a regular one.

Added value in marketing

An example would be the additional services offered by telephone providers. These value-added services include the ability to conference calls, voice messages, games, and Internet connectivity, all on the phone.

Companies that build strong brands add value by simply adding their logo to any product. Nike Inc. can sell shoes at a much higher price than other competitors. However, their production costs are similar.

The Nike brand, featured on the sports apparel of the best collegiate and professional sports teams, represents a quality enjoyed by elite athletes.

Amazon has been at the forefront of electronic customer service with its policy of automatic refunds for poor service, free shipping, and price guarantee on ordered items.

Consumers have become so used to their services that they don't mind paying an annual fee for Amazon Prime membership. This because they value the delivery time of two days in the orders.

References

1. Will Kenton (2017). Value Added. Investopedia. Taken from: investopedia.com.
2. Wikipedia, the free encyclopedia (2019). Value added. Taken from: en.wikipedia.org.
3. Business Dictionary (2019). Value added. Taken from: businessdictionary.com.
4. CFI (2019). Value Added. Taken from: corporatefinanceinstitute.com.
5. Business Pundit (2019). Value Added. Taken from: businesspundit.com.
6. Alan Kaplan (2019). The importance of adding value to your brand. My Business. Taken from: mybusiness.com.au.