Adding value

Adding value means making a good or service more valuable to customers than the inputs used to make it. Added value is the difference between the cost of the inputs used and the selling price of the finished good or service.

For example, a small business buys plain cotton aprons for £2 each and spends £1 on fabric paint and a patch to customise them. It sells each apron for £12. The added value is £9 per apron (£12 − £3). The customisation makes the apron more appealing, so customers will pay more than the cost of the plain materials.

Added value is not profit

Profit is what is left after all business costs are paid. It takes account of costs such as rent for a market stall, wages for staff and advertising, as well as the inputs. If the apron business has £5 of these other costs per apron, its profit is £4, even though its added value is £9. A business can add value but still make a loss if its other costs are too high.

How businesses add value

A business can add value by increasing the price customers are willing to pay, reducing input costs, or both. The main ways to do this are branding, design, quality, convenience and a unique selling point (USP). Adding value helps a good or service stand out from competitors.

Each method works by changing what customers are willing to pay or what the inputs cost.