The Value-Added Concept in Economics

The term value-added represents the enhanced value a company adds to its products and services. You probably notice that products sell for more than it costs to produce them, and services charge more than it costs to render them. This is what value-added represents.

The essential purpose of any business is to create value that we can capture and utilize.

Popular Opinion

Adding value is how businesses get clients to buy their products and services, contributing to revenues and results. We can start with a generic product and add some feature that results in an increased value perception for potential buyers. Sometimes companies have such a strong brand presence that it is enough to slap their logo on a generic product, and people will place higher perceived value on it. Therefore, it is vital to grow and nurture our brand image.

We generally base selling price on what clients are willing to pay for our product or service, striving to match their perceived value while remaining profitable. The difference down to the cost to produce the goods or render the services is the company’s value-added.

Value-AddedIn today’s world, potential buyers have access to an abundance of options. Therefore, companies are always struggling to find competitive advantages and increase their value-added to attract more clients.

Under these circumstances, one of the most critical tasks for a business is to discover what customers truly value.

In terms of industry, the value-added is the difference between the total revenue generated within all industry operations and the total cost to produce goods and render services.

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Economic Value (EV) and Market Price (MP)

When we consider a purchase, we value the goods or services based on the benefit we expect to derive from consuming them. This value represents the EV.

It is important to note that Economic Value is rarely equal to Market Price.

Generally, we have two possible scenarios. Whenever MP is above EV, it is safe to assume that a purchase is highly unlikely. In such cases, we place less value on the item than the importance we place on the money it will cost us. On the other hand, if MP is below EV, then it’s most likely for a purchase to occur. In this case, we perceive the item to have more value than the money we have to pay for it and are more willing to buy.

As there’s no way to measure Economic Value, there are various approaches to its estimation. The most known method is to see how much people are paying for a product or service. This is the classical economic approach and is called ‘willingness to pay.’

Another popular approach is ‘hedonic pricing.’ This method employs various statistical models to estimate Economic Value based on historical data for similar transactions.

Value-Added Concept

The extra value added on top of something’s original value is what we refer to as value-added. This concept can apply to products, services, management, business areas, and others. We can describe it as an enhancement that our company provides on top of the product value.

One way to add value is by providing superior after-sale customer service. We can add value by improving the product or giving extras and bonuses. Some companies with a strong brand add value only by placing their logo on generic products.

Gross Value Added (GVA)

This metric helps us to measure the value contributed to the economy. It represents the gross value generated by a product, company, region, and others. GVA is essential as we use it to calculate Gross Domestic Product (GDP), a critical indicator of a nation’s economic state.

We can calculate GVA by preparing a Value-Added Statement (VAS), and if we subtract depreciation and amortization from it, we end up with the Net Value Added metric.

Economic Value Added (EVA)

It represents the incremental deviation between a company’s return rate and its cost of capital (WACC). You can read more on EVA and see how to calculate it in our dedicated article on the topic. Economic Value Added (EVA) Case Study: Nestlé S.A.You can also take a look at a sample EVA Case Study on Nestle.

Market Value Added (MVA)

If we take the business’s current market value and deduct the invested capital, we get the MVA measure. Here, invested capital refers to both shareholders’ equity and debt.

The Market Value Added shows the effectiveness with which company management can increase shareholder value. The metric yields the best results if we analyze its development over time.

Generating Value-Added

One way to arrive at Value-Added is to build and maintain strong customer relationships. Doing so will result in a strengthened brand image. It will also generate loyalty through improved customer satisfaction.

A common way to form long-lasting partnerships with our clients is to give them superior support. Repeat business is crucial to most companies, as they rely on it to grow. Also, long-term customers often become honest advocates for our products and services.

We can get our clients to engage more with our brand by providing online support, detailed instructions, a frequently asked questions section on our website, customer training, and more.

Businesses should follow up on recent customers to ensure they are getting the most out of their purchase. We can provide our customers with useful, actionable ideas on maximizing the benefit from our products by regularly reaching out via a company blog, newsletter, or directly. This will ensure that our clients receive up-to-date information on how to use our products to maximize value for them.

Another common approach is to assign customer service representatives to high-value clients. Such a personalized approach is common in today’s market and helps develop close and long-lasting relationships. We must be proactive in our communication with clients. But in recent years, there’s much feedback showing that many clients feel their assigned customer reps are too pushy.

Another way to drastically improve engagement with our brand and give value-added to potential buyers is to offer some form of warranty or after-market service. This shows our clients the company is committed to the product and will stand behind it long-term. When people see that, their confidence in our business will increase. They will be more willing to form long-term relationships.

To create value-added for our clients, we have to go a step further than the satisfactory experience. We need to complement our products and services with a strong marketing strategy, to generate brand awareness and improve engagement.

We must also ask for customer feedback. While doing our research and analysis is important, it is crucial to know what people think and feel about our products, services, and brand. If we know where our clients stand, we can strive to improve their experience by meeting their specific needs.

Value-Added vs. Value-Created

Creating value (Value-Created) usually has a slightly different meaning than adding value.

We generate value-added when we take something of value and add it to what the customer is already getting with the raw product. Ways to achieve this include giveaways, incentives, loyalty programs, and others.

Creating value takes this concept one step further. The difference comes from the personalization factor that we associate with value creation. We are not merely adding something on top of the product or service, but instead creating unique personalized value that resonates with the specific customer. This requires identifying and understanding what would be of value to a given individual customer. This task becomes even more challenging when we realize that our potential clients don’t usually think in such terms, and they rarely directly ask for the benefits that would matter to them.

In recent years, the increase in competition resulted in higher and more specific customer demands. Therefore, businesses are shifting their focus more and more towards creating value.

We need to consider what value creation represents for this particular potential buyer at this specific point in time.

Conclusion

Potential clients always compare the value they place on money to the value they place on a product or service. Businesses face the difficult task of figuring out what this perceived value is and how to increase it, generate more revenue, and, consequently, a better bottom line.

On top of improving products, personalization options seem to work best as they create the most perceived value for a potential customer.

Now, more than ever, it is critical to understand our target audience and how we can maximize the value for them, to build a better brand and ensure more sales. Therefore it is essential to look into customer feedback and figure out what our individual clients need and what we can do to meet their needs.

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Dobromir Dikov

FCCA, FMVA

Hi! I am a finance professional with 10+ years of experience in audit, controlling, reporting, financial analysis and modeling. I am excited to delve deep into specifics of various industries, where I can identify the best solutions for clients I work with.

In my spare time, I am into skiing, hiking and running. I am also active on Instagram and YouTube, where I try different ways to express my creative side.

The information and views set out in this publication are those of the author(s) and do not necessarily reflect the official opinion of Magnimetrics. Neither Magnimetrics nor any person acting on their behalf may be held responsible for the use which may be made of the information contained herein. The information in this article is for educational purposes only and should not be treated as professional advice. Magnimetrics and the author of this publication accept no responsibility for any damages or losses sustained in the result of using the information presented in the publication.

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