Three criteria are often considered when determining if a behavior can be considered a value added activity:. 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. 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. When tempted to say Value-add, consider replacing it with the following which may express your meaning with greater clarity:.
Added value is the difference between the selling price and the cost price of a good or service. When a good or service is made more appealing, customers will usually be willing to pay more. Therefore, adding value increases the amount of profit that a business can make. How much value has the crisp manufacturer added to the potatoes? Normal profit represents the total opportunity costs both explicit and implicit of a venture to an investor, whereas economic profit is the difference between a firm's total revenue and all costs including normal profit.
In both classical economics and Marxian economics, profit refers to the return of capital stock means of production or land to an owner in any productive pursuit involving labor, or a return on bonds and money invested in capital markets.
By extension, in Marxian economic theory, the maximization of profit corresponds to the accumulation of capital, which is the driving force behind economic activity within capitalist economic systems.
Some common-use definitions of profit include the following:. It is a standard economic assumption though not necessarily a perfect one in the real world that other things being equal, a firm will attempt to maximize its profits. Given that profit is defined as the difference in total revenue and total cost, a firm achieves a maximum by operating at the point where the difference between the two is at its greatest.
In markets that do not show interdependence , this point can either be found by looking at graphical representations of revenue and cost directly, or by finding and selecting the best of the points where the gradients of the two curves marginal revenue and marginal cost respectively are equal. In interdependent markets, game theory must be used to derive a profit maximizing solution.
Economic value is a measure of the benefit that an economic actor can gain from either a good or service. It is generally measured relative to units of currency. The interpretation, therefore, is "what is the maximum amount of money a specific actor is willing and able to pay for the good or service? If a consumer is willing to buy a good, this willingness implies that the customer places a higher value on the good than the market price.
Exactly how much added value is determined by the price that a customer pays. Alternatively, imagine a celebrity chef preparing a meal at his luxury restaurant. Once the cooking is complete, the meal is being served and sold for a high price, substantially more than the cost of buying the ingredients.
For example, businesses can add value by:. Building a brand — a reputation for quality, value etc that customers are prepared to pay for. Nike trainers sell for much more than Hi-tec, even though the production costs per pair are probably pretty similar! Delivering excellent service — high quality, attentive personal service can make the difference between achieving a high price or a medium one. Product features and benefits — for example, additional functionality in different versions of software can enable a software seller to charge higher prices; different models of motor vehicles are designed to achieve the same effect.
Offering convenience — customers will often pay a little more for a product that they can have straightaway, or which saves them time. A business that successfully adds value should find that it is able to operate profitably.
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