April 3, 2009

Lately, we’ve been talking about the subject of generating substantial “Added Value” to keep customers loyal and improve margins.

Originally meaning: “The contribution of the factors of production, i.e., land, labour and capital goods, to raising the value of a product out of commodity status”, “added value” has become a term that is bandied about daily.

Now the meaning has broadened to include pretty much anything we spend, whether time or money, doing what we can potentially charge for. “What’s the value added?” we ask.

Last week, at one of the courses I teach at our local University, to group of middle managers, I said, “We all talk about adding value all the time, so tell me, what is value anyway?” Well, not a lot of hands went up.

Although we use the term “added value” all the time, we still can’t define it.

Barry Nalebuff gives a great definition of added value that we can use every day, he says, “Added Value is total value MINUS the value without us. What you get is what you bring to others.”

For example, if it doesn’t matter who in your department goes to a meeting, your added value is zero. If it’s just as valuable for me to get your PowerPoint via email as to go to your presentation, your added value is zero. If I get the same result from your product as from the other guy’s, your product’s added value is zero. If I can have the same shopping experience at three stores in the same mall …well, you get it.

With no added value, guess what increment I am willing to pay for your product over the competition’s? Zero. In fact, if you want my business, you’re going to have to create value by lowering your price. Which although it doesn’t make much sense, is a pretty accurate indicator of your worth to me.

The point is, every time we add enough value to be noticeable, we actually force our competitors to change their game—it becomes our rules, our ball, our game.

Added Value = total value MINUS the value without you. It’s a terrific base line to consider when contemplating any move in your business.