Value Added

Like many terms that come up in strategy discussions, Value Added is one of those things that sound simpler than they really are. In fact, in recent years it has often been hijacked as part of those strategy statements that are mostly a collection of buzzwords and obscure jargon, and don’t actually mean anything. So let’s take a look at what the term really means.

In many cases, when we attempt to sell something, the largest problem we are going to encounter is than many other vendors are selling the same product, or at least something from which the purchaser can get the same functionality. In extreme cases, of course, we are selling a literally identical product – table salt is going to have the same chemical formulation no matter who has packaged and labeled it, for example. Products that the consumer can’t possibly tell apart without a label are generally called commodities, and most of the time the only way to gain a competitive advantage in selling them is to offer a lower price than the competition.

But suppose we can convince the consumer that our version of the product has something going for it that the (supposedly identical) competition does not. Perhaps our table salt has a “fresh, clean” flavor to it, or our gasoline has “detergents” that prevent “engine knock.” Suddenly, we have the basis for selling our product as superior (and therefore worth more) than the competition. It doesn’t matter that all table salt tastes the same, or that all gasoline sold in the United States has the same additives (and is in fact often bought and sold among the oil companies themselves as needed), so long as the customer believes that there is a difference in the products.

This process is generally called differentiation of the product, and one of the classic ways of doing this is to offer the customer something extra. If I offer to provide free car washes and free oil changes to anyone who buys a car from my dealership, customers are more likely to buy from me than from the dealership down the road that is selling exactly the same vehicles (but not offering the freebies). If our company includes a free printer, monitor, scanner and set-up service with every computer, we can argue (correctly) that despite the fact that both machines have the identical Intel™ chip, our product is a better value to the customer, particularly if we are charging the same price as the competition.

This is the classic definition of Value Added, and forms the basis of the Value Added Strategy, in which a company attempts to portray its product as being more valuable than the competition. This can take the form of improved quality or safety (Volvo and Mercedes-Benz come to mind); lower operating costs or efficiency (Toyota, particularly the hybrids), or additional product at the same price (consider any computer product bundle). Some familiar examples even include intangible factors, such as the case of automobiles and clothing lines that add prestige to the obvious value of basic transportation and/or not being arrested for public nudity.

Of course, caution must be taken to insure that the expense of adding value to a given product does not consume the additional profit to be made from increased sales… But that’s a topic for another day.