Value-Add: Term Meaning and Usage in Business

What is the formula for Value-add?

The equation typically used to establish added value is the difference between a product or service’s final selling price and the direct and indirect expenses incurred in providing that good or service.

In other words, Added Value = The selling price of a product or service - the cost of materials, labor and other related expenses (utilities, wrapping paper, software, etc.)

What Does “Value-add” Mean?

“Value-Add” or “Value Added” are terms that describe special improvements, often intended to generate increased revenue, that a company makes to a product or service.

Sometimes referred to in everyday terms as “bang for the buck,” Value-Add is a term that addresses special features or improvements added to a product or service to increase its monetary value and desirability to consumers.

Often this approach is used to distinguish a product from market competitors or increase profit-margin by finding new uses for a company’s staple goods and services.

Use by Marketers

Generally, there is an implication that whatever is being done will increase the value of a product or service, making the amount of money that can be charged for that thing larger. This is good for businesses, as it allows them to increase their “value capture,” meaning the amount of money they can charge based on the value they create for their target customer(s).

In practice, the term “value add” or “value added” is used in an unspecific manner, used to describe pretty much anything that improves anything, regardless of whether or not that thing produces economic value.

The term is commonly used by marketers to describe the process of offering “free” items such as ebooks, blog posts, etc, with the assumption that this will make it easier to ask the audience to pay for something in the future.

Understanding Value-add

Value-Add is a term that refers to special features or improvements added to a product or service to increase its desirability and monetary value to consumers. Value added features are commonly used to distinguish a product or service from market competitors, or to increase profit-margin by finding new uses for a company’s staple goods and services.

While terms like “upgraded” and “enhanced” can be used as synonyms for Value-Added, it is important to keep in mind that what makes a good or service Value-Added is not just cosmetic changes. In order for a change to be a Value-Add, it must be initiated deliberately with the intention of adding an improvement, and it must measurably increase the product or service’s desirability and financial value to the customer.

This aspect of keeping benefit to the customer central to the business’ thinking is part of the Value-Add concept. For instance, an airline may save money by reducing the portion size of airplane meals – and sometimes those choices must be made – but it is not a Value-Add to the consumer. However, offering an on-flight subscription meal plan with high-end options for regular fliers may be a Value-Add for which consumers are willing to pay.

Furthermore, the calculation on which Value-Adding is built requires that direct and indirect costs associated with the improvement be subtracted from the final purchase price of the product or service. The difference remaining is an assessment of the “value” the modification added.

Taking this into consideration, it is necessary that those seeking to add value to a product or service gain a clear picture of whether a change truly benefits the bottom line. Some direct and indirect expenses that a company may want to consider in their Value-Add formula are as follows:

Indirect Expenses:

• Administrative salaries
• Office expenses
• Rent
• Security expenses
• Telephone expenses
• Utilities

Direct Expenses:

• Labor
• Materials
• Supplies
• Production machinery

What is an example of a value-added product?

A Value-Added product can be any product or consumer good that has been enhanced in a way that increases profit margin for the company. However, the term is becoming increasingly common in organic farming.

An example of a Value-Added product in organic farming is one in which products may be packaged or modified in a special way to add value to the original product. An apple farmer who begins making organic cider, or a farmer who bundles vegetables into salad mixes, has transformed an original product into a consumer good for which they can charge significantly more.

What are some synonyms for Value-Add?

Synonyms for Value-Add or value added include: upgrades, improved, enriched, expanded, modernized, augmented, “bang for the buck,” and advanced.

What is a Value-Added reseller?

A Value-Added reseller is an individual or business that adds components or services to an existing product which are intended to improve its benefits to the consumer. The value-added reseller then makes the modified product available as part of package.

An example of a value-added reseller would be a technology company which sells currently existing hardware, bundled with their own installation and customization services, as one product bundle.

What are Value-Added activities? The term Value-Added activities can be used to describe any actions that modify a good or service to bring increased value to the customer, and profit to the company. That said, every addition to a product or service does not necessarily add value.

Three criteria are often considered when determining if a behavior can be considered a value added activity:

1. The activity moves the product or service closer to completion
2. The step is done correctly and deliberately (it is not an accident or a correcting of a previous mistake)
3. The activity increases the product or service’s desirability and financial value to the customer

An example of a Value-Added activity would be a car repair shop that offers to perform basic services at your job or at your home. This activity increases the ease and convenience of car maintenance services, and is a benefit for which many consumers would be willing to pay.

Origin of the term “Value-add”

Initially the term Value-Added appeared as a concept in economics, but by the 1990’s it had spread to business, software, and even education.

The popularity of the term has grown in conjunction with business and technology communities’ increased interest in Lean Six Sigma methodology. Six Sigma is a business framework that seeks to eliminate wasteful processes and understand the “value” or return-on-investment for all possible goods, services and activities.

This understanding of what programs, goods, and activities add value, and how they add it, can help a business make wise investments in time and energy. However, in many business circles, the term Value-Add is used less formally, and is intended to reference product or service enhancements that increase the customer appeal, or monetary value, of a consumer good.

Synonyms and variations of Value-add

• Value-added
• Add value
• Give value

When tempted to say Value-add, consider replacing it with the following which may express your meaning with greater clarity:

Beneficial, useful, extra service, bonus feature.