What is the difference between added value and the profit of a business? explain clearly

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krishna-agrawala's profile pic

krishna-agrawala | College Teacher | (Level 3) Valedictorian

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Added value in marketing and management usually refers to the monetary value of the increase in the benefit or value of a product to the customer, as a result of operations performed by seller on the inputs used for making the product available. This may be expressed in form of a formula as:

Added Value = (Total benefit/value that a customer can derive) - (Cost  incurred by seller)

Customers buy a product because they derive more value from it than the price paid for it. Therefore, a company must sell its product at a price that is lower than the value derived from the customer. The selling price must also be higher than the cost of the product. Otherwise the company will not be able to make any profit.

The profit made by the company is equal to price of the product less the cost incurred in making it. For a company to be able to sell its product and make profit the value added must always be more than the profit, so that customer get more value from the products they purchase than the price paid, and the manufacturer or the seller gets higher price than the cost incurred. In this way both buyer and seller share between them the total amount of added value.

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william1941 | College Teacher | (Level 3) Valedictorian

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Value added is a term used to refer to other goods or services that are provided with a product or service that is sold to customers so that it allows the company to increase the number of customers it has al well as charge a premium over what it could have charged for the product originally. Value added services may lead to a net decrease in profit from a product or service, though no company will intentionally try to decrease its net profits.

For example if you are getting free one-year maintenance when you buy your mobile phone, that is a value added service. It is put in place by the company to make you prefer that mobile phone over a similar phone being sold by a company that is its rival.

It is difficult to try to differentiate the terms added value and profit as the two terms refer to different concepts.

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