What’s it: Adding value means widening the difference between the input price and the selling price of the output. Business activities are basically to add value, namely by processing inputs into higher value outputs. For example, a furniture company buys wood from loggers and processes it into various household appliances. To do so, it requires manpower and machines to run the production process.
Businesses add functional benefits to their products; for example, smartphone manufacturers use 5G technology for their products. Some companies have also developed emotional and self-expression benefits, increasing functional benefits and making customers willing to pay more. Of course, they do it all to make a profit and money.
However, adding value does not always make a company successful and profitable. It depends on other factors, namely competition and consumer tastes and preferences. Companies must face competitors in the market to satisfy customers. To be successful in generating profits and encouraging consumers to continue to buy, they must be competitive. Otherwise, the money goes to competitors, not to them.
Competitive companies must outperform competitors to generate sustainable profits. Sometimes they succeed, but not a few also fail.
Competitors may develop competitiveness and offer better-added value, making consumers prefer competitors’ products. If that happens, of course, what the company has to offer becomes non-sellable and therefore non-profitable. As a result, it failed to achieve success and competitive advantage.
Then, companies must also face the changing tastes and preferences of consumers. It also affects consumer interest in buying products.
Take the increasing public awareness of health and the environment as an example. It’s getting more and more popular lately. As a result, many consumers shift demand to products they consider safe for the environment and health. In this case, the company can offer added value by offering environmentally friendly products. Producing organic food is another way to add value.
How to add value
Michael Porter provides useful insights into how companies can add value. He presents the value chain concept to explain where companies can do it. He grouped company activities into two categories: primary activities and support activities.
By definition, creating added value is about widening the gap between price and input costs. Companies can increase added value in two ways. First, they create incentives for customers to be willing to pay higher prices. Second, they lower costs.
And in each of the activities in Porter’s value chain, companies can manage costs optimally, enabling more efficient business, lower total costs, and higher profit margins. In addition, companies can also stimulate customers to be willing to spend more, such as through branding.
Added value to main activities
The main activities are divided into five and how companies can create value; here are examples:
- Inbound logistics – ensuring inputs arrive at the factory site as specified and on time, reducing waiting time for the production process.
- Operations management – designing more flexible production systems to allow customization.
- Outbound logistics – ensuring product quality is maintained when it reaches consumers and on time when consumers need them.
- Marketing and sales – branding, decorating the store as attractive as possible and developing the right marketing mix.
- Service – providing reliable after-sales support and offers a repair warranty.
Added value to supporting activities
Support activities cover four subcategories, and within each, companies can add value, for example by:
- Firm infrastructure includes accounting, legal, finance, public relations – providing lenient credit policies to customers to keep them interested.
- Human resource management – ensuring those in direct contact with customers have adequate skills and expertise.
- Technology – developing an integrated information system in the value chain.
- Procurement – maintain good relations with suppliers, allowing the company to obtain discounts and more lenient purchase credits.
Example of how to add value
If in the previous section, we discussed how companies can add value along the value chain, in this section, we look at specific examples of value creation for the company’s products and marketing functions:
Additional features or functions
Adding new features and functions can increase the functional benefits of the product. For example, smartphone manufacturers add high-resolution cameras to their products.
Another example, software manufacturers provide various additional functions to make it easier for consumers to use them. For example, Google added a document translation feature to its Google Translate. Or, the company adds a TAG Locations feature to its Google Maps.
As another example, car manufacturers offer acceleration rate, maximum speed, and fuel consumption per mileage to create value.
Such additional elements can meet consumer expectations and make consumers pay extra.
Consumers like convenience when using the product. It makes them more relaxed or enjoy what they are buying.
For example, restaurant visitors not only come to enjoy the food menu but also look for the atmosphere in it.
Another example, many hotels are located near tourism to provide convenience for visitors while enjoying their leisure time.
Another example is choosing a store location close to consumers. It reduces their cost, effort, and time to buy the things they need.
The company may offer products with attributes and features that are standard and relatively the same as competitors. But, they offer customization to customers. For example, they can choose the color or design they like.
Or, even specifications, some manufacturers offer customers to be able to customize what they will buy. Many fashion houses provide such services to their loyal customers, making them willing to pay high prices.
Companies provide free delivery service, thereby saving customers time and costs. Then, they deliver the goods to the customer’s house. So, customers just have to wait in front of the door for the goods to arrive.
Offering free installation at home also adds value. Customers also save time and don’t worry too much about technical issues to get product benefits. Finally, they are reluctant to switch to competing products if they do not get similar services.
Many people buy fast food because it saves them time. As a result, they don’t have to linger in the kitchen just to prepare their food.
Take software companies as another example. They launched an enhanced version to allow their product to run faster in executing orders.
Branding adds emotional benefit to the product. It affects consumers’ perceptions of the product’s value. Clothing from fashion houses and non-fashion houses may be similar in quality, but the two can have very different prices.
The company also creates a recognizable brand name and identity. So, when consumers need product benefits, they immediately know what brand they need. It saves their time and effort instead of having to search and choose the right brand from various alternatives.
Customer service quality
A memorable experience with sales staff can be a plus for customers. In addition, their friendliness and knowledge when offering products and interacting with customers can be the main consideration for customers to use its products in the future.
This aspect is essential for service businesses such as hotels, restaurants, and consulting services, where company staff have direct contact with customers. Their satisfaction depends on how they are served by the staff.
Advertising, one of its aims, is to promote product awareness to consumers. When it is successful, it will bring more new customers to the company.
For example, you see an ad at a glance and remember it. Then, one day, you need the product. And because you remember the ad, you know what product you need and don’t have to spend more time searching.
Speed is important because consumers like it when products are available at the right time when they need them. Take Amazon.com as an example. Its integrated logistics system allows products to be available and delivered on time.
Shipping and postal services also rely on the speed of delivery to create superior value for their customers.
Speed of delivery requires companies to manage the flow of information and goods effectively. Information technology support and effective processes among activities in the value chain are very important to ensure that.
A broad and in-depth product line allows us to have many choices. Therefore, it is highly strategic for the retail business.
When we shop at a brick-and-mortar or e-commerce store, many products make us more comfortable. We don’t have to visit other places just to buy other products beyond what we previously planned to buy.
Likewise, having more options allows us to compare prices, specifications, and quality to get the most suitable one.
Company image and reputation
Take credit card services, for example. To facilitate payments, we only choose trusted and reputable companies. For example, they have the best security, allowing our data to be safe.
An eco-friendly reputation is also gaining popularity these days since consumers are increasingly concerned about environmental issues. Thus, they are only willing to buy products from companies with a reputation for being environmentally friendly because they fit their values and principles.
Companies can add value by offering free products to include with core product purchases. For example, a soap manufacturer might offer their shampoo product for free every time a customer purchases their soap product.
Free gifts keep consumers interested and happy. They get more for the money in their pocket.
In addition to free gifts, companies can also offer other sales promotions. For example, they offer coupons or discounts using released loyalty cards.
Unique packaging and design
Design and other aesthetic aspects are alluring aspects when we see the product for the first time. For example, when choosing a smartphone, perhaps the first consideration may be their design before looking further into their specifications and features.
Likewise, packaging design is also another consideration. Manufacturers can add aesthetic aspects to make it attractive while also focusing on its main function to protect the product inside.
We love the ease with which we use the product. We avoid the hassle.
Computers and software are great examples where we take ease of use into consideration. For example, we like software with specific buttons to execute commands rather than having to write code to execute commands.
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