The Process of Adding Value (Cambridge (CIE) O Level Business Studies)

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

A Diagram to Show Methods of Adding Value — **Some of the methods of adding value allow for product differentiation, which allows the business to charge a higher selling price**

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	Apple has built a brand that many customers believe is superior to other brands They have achieved this through the use of quality materials, innovative design and good marketing This branding allows the firm to charge a higher price for its products, thus increasing the added value
Convenience	Persil initially provided a bottle of dishwashing liquid for dishwashing machine use This resulted in spillage as customers added the liquid to their machines, so Persil then created tablets The tablets offered a much more convenient option and Persil was able to charge a higher selling price for them
Quality	Jo Malone perfume products are well known for their beautiful packaging, which creates an exciting opening experience for the customer This allows the firm to charge a higher price for its products, thus increasing the added value
Unique selling points (USPs)	MoonPig birthday cards can be completely customised (size, colour, design etc.) and the level of customisation has helped them gain a competitive advantage This customisation allows the firm to charge a higher price for its cards, thus increasing the added value
Design	Samsung Galaxy Watch 5 has robust health tracking tools built into it, along with an amazing screen, which has helped it gain a competitive advantage These features allow the firm to charge a higher price for its products, thus increasing the added value

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.

Last updated: 12 June 2024

You've read 0 of your 5 free revision notes this week

Sign up now. It’s free!

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

Did this page help you?

Previous:The Nature of Business ActivityNext:Classification Using the Economic Sector