THEY SAY ADDING VALUE IS ADDING COST, TO WHAT EXTENT IS THIS TRUE!
Value addition can be simply described as the art of incorporating something into your product to make it look more appealing or tastier. As an entrepreneur you don’t just wake up one day and decide to add something new to your product, even though venturing into entrepreneurship is taking a risk, they can be reduced by conducting market research and further breaking down the data to deeply define your customers in terms of: who are they, where they stay, what they do, what they like and to some extent how much they earn. This information can help you to decide on whether adding value to your product will cause you more harm than good.
For instance, if your company is making plain grey, short sleeved, round neck and medium in size. Many of the people won’t like the product, maybe because it’s not fancy, it doesn’t have a logo or due to the fact that it is not colorful.
The total cost incurred in manufacturing the shirt is one hundred and fifty shillings, you are selling it at two hundred to ensure that you cover your expenses both fixed and variables. After manufacturing the shirt still, no one wants to buy it! The entrepreneur will have to look for a good logo, play around with the colors and add some unique design to ensure that the shirt is more appealing to the clients. The value-added cost will make the price to rise to five hundred from two hundred. Now your company is able to sell the shirts imputing the sale to the value addition.
Many of the companies take into consideration the price of what they sell rather than the value of the product they sell. It is salutary to sell goods at an affordable price, but affordability doesn’t always mean cheapness. To some extent, the price of the product or service may shout the quality. I’m not luring companies to hike their prices because we are all in different industries and with different competitors, what works out for company A may not work out for company B and vice versa. To completely understand the difference look at the scenarios below and choose what you think my work and why before we discuss.
Scenario A
Today your company "super Bag Company" sells simple leather bags with a shoulder strap in Nairobi. The cost of production is eight hundred shillings, you sell the bags at one thousand shillings. In one day you are likely to sell five bags at most.
Scenario B
In the same business "super Bag Company" a local zipper approaches you and offer to start selling zippers which can be added to your bags. With the zippers, the cost of production per unit will rise to nine hundred shillings. In order to cover the cost of production and also get some profit, you sell the bags at one thousand and fifty shillings. You are now likely to sell seven bags to ten bags at most on a daily basis.
For many people scenario, A nailed it, I mean making two hundred shillings per unit sold and also fifty more than scenario B, sounds nice. The price is affordable (cheaper than scenario B), this is what the customers need. Let’s talk about the gross profit, attaining a profit of one thousand in a day is quite remarkable with lesser expense the entrepreneur thinks that the profit margin is higher, well this may be correct but not always.
Scenario B is so daring because there is the increase in the cost of production which reduces the gross profit, the selling price may scare away the client. Contrary to the expectation the entrepreneur is likely to make more money with scenario B than A. When looking for the gross profit of a single unit, we subtract the cost of goods sold from the selling price. In scenario B the gross profit will be one hundred and fifty but on a bad day the business can make a profit of one thousand and fifty and one thousand five hundred on a good day, both are higher than scenario A.
As an Entrepreneur, you need to stop selling a product or service and start selling quality. This guarantees the customers value for every penny they spend to purchase your product.
