The Process of Adding Value (Cambridge (CIE) IGCSE Business)
Revision Note
Written by: Danielle Maguire
Reviewed by: Steve Vorster
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
The greater the added value, the more successful the business is likely to be and the higher their profits
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
Examples of Added Value
Method | Example |
|---|---|
Branding |
|
Convenience |
|
Quality |
|
Unique selling points (USPs) |
|
Design |
|
Examiner Tips and Tricks
Businesses may use several methods of adding value. It's important to understand that adding value 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.
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