What it is: Creating value means making something less valuable more valuable. If it is associated with creating customer value, it is an attempt to generate added value.
What is added value? Value added is the difference between the selling price of a product and the input costs to make it, including raw materials and related components. Take a simple example. Your business produces ice cream for $20. To produce it, your business uses $14 worth of raw materials. In this case, you create an added value of $6 ($20 – $14).
The business role basically adds value by processing inputs into outputs. They create value to the input to make a profit. They buy inputs – such as raw materials and components – and process them to produce outputs. To do so they need employees and equipment such as machines and computers.
Meanwhile, the output can be goods or services. Goods represent tangible products while services represent intangible products.
Businesses then sell goods and services to satisfy consumer needs and wants. They make money with it. In order to make more money, they have to be competitive and outperform the competition. If the value they create contributes to an above-average advantage over competitors, they gain a competitive advantage .
What is the difference between profit and added value?
Added value is different from profit. Value added only takes into account the difference between the selling price of a product and the input costs to produce it. In other words, it equals the selling price minus the direct costs. It excludes indirect costs such as salaries, rent, marketing, general and administration.
On the other hand, to calculate profits, businesses take these indirect costs into account. Usually, they will add a profit percentage (markup) to the product price to make more money. Under a cost-plus pricing strategy, for example, the selling price is equal to the unit cost plus the markup.
Why creating value to customers is important
Here, I’ll cover three reasons why creating value is important for businesses:
- Earn more profit
- Building competitiveness
- Cultivate loyalty
Earn more profit
As I said, businesses make money by creating value. They process lower-value inputs to produce higher-value outputs. The higher the value they create, the better chance they have of making more money.
For example, car manufacturers create value by processing lower-priced aluminum plates. Likewise, furniture manufacturers process the wood they buy from loggers. The price of cars and furniture can be many times the dollar they spend buying inputs.
Businesses can make more money if they satisfy customers better than competitors. For this reason, they must be competitive. And some businesses succeed and others don’t.
Thus, to win the competition, they must create better value than competitors. That is the reason why consumers prefer the company’s products over competitors. If successful in doing so, they can secure customer requests. Customers continue to buy products and make money flowing into the company in the long run.
Offering superior value also allows companies to charge a premium price. They can also persuade competitors’ customers to switch to buying their products.
Creating superior value results in strong customer loyalty. It is a way to build strong bonds and solid relationships with customers in the long term. Customers see the company’s products as more valuable than competitors so they are the first choice to buy. Likewise, competitors’ customers are likely to switch to the company’s products.
Some companies are successful in developing a differentiation strategy. They feature uniqueness to entice and encourage consumers to be willing to pay higher prices. In fact, when they release a new version, consumers are willing to queue to get the product.
Maintaining loyalty requires companies to continue to offer superior value. And, it is a difficult task as consumer tastes and preferences change over time. Likewise, competition is dynamic, where competitors may develop better competitiveness than before.
How companies create value
There are various ways to create customer value. Before giving an example, let’s take a look at the four important steps to do it:
Understanding customers – understanding what they value is the first step. Why do they buy the product? What core benefits do they want? Are there other factors they consider? Understanding customers and the context in which they make decisions is a valuable input for creating value to customers.
Finding opportunities – seeing the gaps between existing products in the market and consumer needs and wants. Have they satisfied customer needs? Are consumers still having problems with existing products? Is it possible to add more features to attract them? Finding market opportunities is essential to creating value. And, considering internal resources and capabilities is the next step to see if the opportunity is worth working on.
Always innovate – innovating is the way to create value. It can be through the development of new products to fill existing market opportunities. Through new products, companies satisfy needs and solve customer problems in completely new and different ways.
Or, the company improves its existing products and processes. Improving the product can be by adding new features or improving quality. Meanwhile, innovating the process can be through, for example, by providing free after-sales service and speeding up product delivery to customers.
Develop differentiation – Adding value to inputs alone is not enough to beat the competition and sustain profits in the long run. Companies need to ensure the value they deliver to customers is better than competitors. That way, there is a reason for consumers to choose the company’s products over competitors’ products. In this case, creating a unique selling proposition is a must to build a sustainable competitive advantage.
Example of adding value
There are several ways to create value, here are examples:
Convenience . For example, restaurants offer layouts and decorations to make visitors feel at home to linger there. Convenience can also come from people conveying the product such as how friendly a restaurant or hotel staff is and cheap to put a smile on.
Saving time. Time is very valuable for those who are busy with daily work. And, for example, fast food businesses save busy people time rather than preparing meals themselves.
Design. Physical features and packaging affect consumers when they first see. Many companies rely on it to entice customers to try and buy the product.
Environmental or health friendly. For example, increasing awareness of personal health is driving many people to buy organic products. Likewise, many consumers only buy products that are environmentally friendly because it is in accordance with their values or principles.
Product features and benefits. Companies offer additional functionality to products such as smartphone manufacturers increasing storage capacity or embedding high-resolution cameras into their products.