Why is added value important?
Added value is important because sales revenue is greater than the cost of
materials bought in by the business. This means the business:
can pay other costs such as labour costs, management expenses and costs
including advertising and power.
may be able to make a profit if these other costs come to a total that is less
How could a business increase added value?
There are two main ways in which a business can try to increase its added value:
Increase selling price but keep the cost of materials the same. This might be
possible if the business tries to create a higher quality image for its product or
service. If consumers are convinced by this then they might be prepared to pay
higher prices and buy the same quantity as before the price rise. A jewellery
shop could employ very experienced and knowledgeable sales staff, decorate
the shop to look luxurious and use high-quality packaging. Note though: other
costs might increase when trying to create this quality image.
Reduce the cost of materials but keep the price the same. A building firm could
use cheaper wood, bricks and other materials when constructing a home or
shop. If the price charged to customers stays the same then a higher added
value will be made. Note though: lower priced materials might reduce the
quality of the product. Will customers be prepared to pay the same price for a
product that they believe is of lower quality?
1. How added value helps a business?
2. How to add value to a business?