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Adding value is important for businesses because, with it, they can make a profit. Then, when it is better than its competitors and maintains it over time, it can make more profit.
Businesses satisfy consumers’ needs and wants through the goods and services they produce. They make a profit by adding value to the input. They process the input and make it a higher-value output. That way, they can sell their product at a higher price than the dollars they spent paying for the input. Long story short, they have to create value to make a profit.
Businesses succeed in creating value if customers are willing to pay a price higher than what they charge input suppliers. However, they must also consider another aspect, namely competition.
In maximizing those profits, businesses must also create a better value than – and therefore outperform – competitors. It requires them to offer superior value creation to customers. Thus, consumers prefer to buy their products over competitors’ products.
If a company manages to outperform competitors and generate a higher rate of profit—measured by return on invested capital (ROIC)—than competitors, the company gains a competitive advantage. Then, if it is able to maintain it over time, the company generates a sustainable competitive advantage.
Making more profit
Adding value is important because it directly impacts a company’s profitability. The more value a company adds to its products or services, the more willing consumers are to pay a premium price. This is because adding value creates a greater perceived benefit for the customer.
For example, a company that simply purchases bauxite has a raw material with a specific cost. However, by processing that bauxite into aluminum plates, they’ve added value. The price of aluminum plates is significantly higher than the cost of the bauxite ore. This added value allows the company to charge a higher price for their product.
The importance of adding value is further amplified when aluminum is used to manufacture car or airplane frames. These applications require high-quality materials, and the added value from processing the bauxite contributes to the final product’s worth.
Similarly, processing cotton into yarn creates a product with a higher market value compared to raw cotton. When this yarn is then woven into clothing, the added value translates into a multi-million dollar industry. These examples showcase how companies that excel at adding value – through processing, manufacturing, or service – can achieve greater profitability.
Standing out from competitors’ products
In creating a competitive edge, adding value is important. Companies can achieve this by incorporating unique features into their products, setting them apart from competitors. As Michael Porter articulated in his generic strategies, this approach is known as “differentiation.”
Differentiation, fueled by adding value, allows companies to charge premium prices. The unique features not only justify a higher price tag but also attract customers seeking a superior offering.
Adding value isn’t limited to premium products. Companies can also leverage it through cost leadership. This strategy focuses on offering products at a lower price point compared to competitors. While cost reduction is a key element, adding value remains important. Companies achieve cost leadership by:
- Optimizing production processes: Streamlining operations minimizes production costs per unit, allowing for competitive pricing while maintaining profitability.
- Economies of scale: Increased production volume allows companies to leverage economies of scale, further driving down unit costs. This strategy is particularly effective for businesses with a large customer base.
- Standardization: Focusing on a core set of features at a lower price caters to budget-conscious consumers seeking functionality without unnecessary frills.
Finding the right balance
Both differentiation and cost leadership rely on adding value as the foundation. However, achieving a sustainable competitive advantage requires striking a balance. Companies using differentiation need to ensure their value proposition justifies the premium price. Conversely, cost leaders need to maintain a minimum level of quality and functionality to remain attractive to customers.
In essence, adding value is the cornerstone of both differentiation and cost leadership strategies. By understanding customer needs and effectively creating value, companies can carve out a strong position in the marketplace.
Long term cost-efficiency
Say the company produces a successful product in the market. Customers see their products as offering superior value. They are more likely and willing to buy and recommend their products to their friends or family for such reasons.
If a company consistently offers superior value over the long term, it can lead to strong long-term relationships with its customers and make them loyal to the company’s products.
Then, such loyalty will save costs for the company’s advertising and promotional activities, for example, when it launches a new product in the future. Without spending many dollars on advertising, the company can attract existing customers to buy its new product because they trust the company.
Moreover, loyal customers are more likely to promote and recommend their new products to others. So, with the same promotion costs, the company benefits more.
Then, in general, the cost of retaining a customer is less than the cost of attracting a new customer. Encouraging new customers to buy often requires intense promotion.
Positive association
Customers are willing to pay for products not only for their functionality but also for their emotional and expressive benefits. They are more likely to spend more money on a product if they feel it fits their style or values and generates positive self-associations.
Let’s say a company offers a luxury item. The higher the price, the more satisfied customers will be and the happier they will be to buy it. This happens because the higher price increases their image and social status. When we learn about economics, that’s Veblen’s stuff.
Nest, positive associations influence consumers’ product selection. For example, consumers with values and principles of sustainability are not arbitrary in choosing products. They will only buy products that meet their criteria. This aspect—sustainability—is growing in importance as more consumers adopt it.
Growing market share
Adding value is important for companies seeking to expand their market share. By consistently creating a more compelling value proposition than competitors, companies can attract new customers, retain existing ones, and ultimately achieve significant growth.
Here’s how adding value fuels market share growth:
Retention through superior value
When a company offers superior added value, existing customers are more likely to remain loyal. This value can come in various forms, such as:
- Higher quality products with extended lifespans
- Innovative features that solve specific customer problems
- Exceptional customer service that builds trust and satisfaction
By exceeding customer expectations, companies create a sense of loyalty and reduce customer churn (customers switching to competitors). This stable customer base becomes the foundation for sustained growth.
Attracting new customers with a compelling offer
Effective adding value creates a strong pull factor for potential customers. When a company offers a product or service that delivers demonstrably more value for the price compared to competitors, it becomes more attractive. This can be achieved through:
- Competitive pricing strategies combined with high-quality offerings
- Unique features that address unmet customer needs
- Marketing and promotional campaigns that highlight the added value proposition
By effectively communicating their value proposition, companies can attract new customers from the broader market, increasing their market share.
Recommendations and word-of-mouth marketing
Loyal customers who experience the benefits of a company’s added value are more likely to recommend the product or service to others. This positive word-of-mouth marketing can be incredibly powerful, as potential customers trust recommendations from friends and family. By fostering a strong sense of value, companies can leverage the power of organic customer acquisition, further expanding their market reach.
Increased sales and market share growth
Ultimately, the combination of customer retention, new customer attraction, and positive word-of-mouth marketing translates to increased sales volume. As a company’s customer base grows, it captures a larger portion of the overall market share. This virtuous cycle, fueled by adding value, positions the company for long-term success and leadership within its industry.
Maximizing customer equity
Customer equity, representing the total lifetime value of a company’s customers, is a crucial metric for long-term success. Adding value is critical in building strong and lasting customer relationships that contribute to maximizing this equity.
Here’s how adding value fosters customer loyalty and boosts customer equity:
- Repeat purchases: When companies consistently deliver value exceeding customer expectations, they create loyal customers who keep coming back for more. This translates into a steady stream of revenue without the need for constant
customer acquisition efforts. - Reduced marketing costs: Loyal customers are more likely to recommend the company’s products to friends and family, acting as brand advocates. This reduces the need for expensive marketing campaigns, allowing companies to allocate resources towards further value creation.
- Increased customer lifetime value: By fostering loyalty, companies cultivate long-term relationships with their customers. These customers become increasingly valuable over time, as they are likely to make repeat purchases, upgrade to premium offerings, and be more receptive to complementary products and services.
Adding value through various avenues
Companies can add value throughout the customer journey, creating a positive and memorable experience that strengthens brand loyalty. This includes:
- Superior products and services: Offering high-quality products that meet or exceed customer expectations is paramount. Adding value can involve incorporating innovative features, focusing on user-friendliness, or using sustainable materials.
- Exceptional customer service: Providing prompt, friendly, and efficient customer service builds trust and demonstrates the company’s commitment to its customers. This can encompass offering personalized support, going the extra mile to resolve issues, and exceeding expectations.
- Convenience and efficiency: Simplifying the customer experience by offering convenient purchasing options, clear communication, and user-friendly online platforms adds significant value. This includes aspects like easy returns, flexible payment methods, and readily available customer support.
In conclusion, adding value is important in maximizing customer equity. By prioritizing customer needs, delivering a superior experience, and fostering lasting relationships, companies can cultivate a loyal customer base that drives sustainable growth and profitability.
