What a business is for: needs, wants and adding value

Why would anyone pay ten times as much for the same bottle of water? In a supermarket multipack, a half-litre bottle works out at about thirty pence. From the fridge in a corner shop, the same bottle costs around one pound twenty. At a festival bar, it is three pounds or more, and people hand the money over without arguing. It is tempting to call that a rip-off, but nobody is forced to buy it. So what exactly are those people paying for? By the end of this video, you can put a name to each of those three prices.

A business is an organisation that provides goods or services to customers, in most cases to make a profit. Goods are things you can touch, like that bottle of water. Services are things done for you, like a haircut or a bike repair. Sorting goods and services into their different types is the job of a later video in this chapter. Profit is the money left once the costs have been paid, and working it out properly has its own video later in the course. Some businesses make goods themselves. Some supply a service. Some sell on goods that another business made. The corner shop never made a drop of that water. It buys the bottles in and sells them on, and that still makes it a business. The purpose of all this business activity is to produce goods or services that meet customers' needs and wants. The words in most cases are there for a reason. A charity shop sells goods to raise money for a cause, not to make a profit for an owner. Organisations like that get their own video later in the course. A quick check now. Which one of these is not business activity? A, a window cleaner who charges each house. B, a market stall that sells phone cases it buys in. C, a family cooking Sunday lunch for themselves. C is the odd one out. The family provides nothing to customers, so it is not a business. The window cleaner supplies a service, and the stall sells on phone cases it did not produce, which still counts.

Customers buy things because of needs and wants, and those two words mean different things in business. A need is something a person must have to survive: food, water, shelter, warmth and clothing. A want is something a person would like to have but could live without, such as a games console or a holiday. The test is one question: could this person live without it? Price is not the test, and one item can show why. Tap water costs almost nothing, and it meets a need, because everyone must drink to survive. A branded sparkling water at two pounds a bottle meets a want, because tap water would keep you alive just as well. Now try one. Which of these meets a need rather than a want? A, a designer handbag. B, a plain winter coat. C, a new games console. Take your pick before the reveal. The plain winter coat, option B. Warmth and clothing are needs, so a plain coat meets a need, while a person could live without the handbag or the console. The difference matters to a business, and a village shop shows how. Harbour Mini-Mart is a village shop that sells bread, milk and bottled water, and also boxes of luxury chocolates. The bread meets a need. It is food, so villagers keep buying it every week, whatever is happening to their money. Now suppose villagers have less to spend this month. A different question, and this one wants a reason. Which of the shop's sales would you expect to fall first, and why? The chocolates. They meet a want, so when cash is tight, they are among the first things people cut back on. Which means the shop can rely on its bread and milk, but it should not order lots of chocolates in a month when local spending is falling. Saying what the difference means for this one shop is what turns a definition into an answer about a business.

Added value is the difference between the price a customer pays and the cost of the bought-in inputs. Bought-in inputs are what a business buys to make or sell its product, such as ingredients, parts or the bottles themselves. As a sum, added value equals the price, minus the cost of the bought-in inputs. Take a cafe. The coffee beans, milk and cup for one drink cost it forty pence. The cafe sells that coffee to a customer for two pounds eighty. Two pounds eighty, minus forty pence of inputs, leaves two pounds forty. That two pounds forty is the value the cafe has added, and it is an amount of money you can measure. Now one of your own. A seller buys phone cases for two pounds each and sells them for nine pounds. What value does it add on each case? Seven pounds. Nine pounds minus two pounds of inputs leaves seven pounds of added value on every case. A business can widen that gap in five ways: convenience, branding, quality, design and a unique selling point. Convenience means the product is easy to get, at the time and place the customer wants it. A sandwich brought to your desk saves you going out, which means you will pay more for it than for the same sandwich in a shop, though its ingredients cost no more. Branding means a name and logo that customers recognise and trust. Because they trust it to be the same every time, they pay more than for a plain version that cost the same to make. Quality means a product is well made and reliable. Better materials cost a little more, but customers pay a lot more for something that lasts, so the gap still grows. Design is how a product looks and works. A rucksack with a padded laptop pocket can sell for far more than a plain one made from the same cloth. A unique selling point, or USP, is a feature that no rival offers. Customers cannot get it anywhere else, which means they will pay more than a rival charges, for inputs that cost the same. Quick one. On a rainy evening, a seller outside a station charges eight pounds for an umbrella that costs four pounds online. Which of the five ways is that? Convenience. The umbrella is no better made and has no special feature; the customer is paying to have it right there when the rain starts. Every one of the five ways works in three links. First, the feature. Then, what it changes for the customer. Then, the price they will pay above the cost of the inputs. Pedal Point is a bike repair shop, and it is the only repairer in its city that collects a bike from the customer's workplace in the morning and brings it back fixed by five o'clock. A repair there costs forty-five pounds, and the bought-in parts cost about twenty pounds. Rival repairers, where customers bring the bike in themselves, charge about thirty-five pounds for the same twenty pounds of parts. Two students explain how this USP could add value. Answer A says: the USP makes Pedal Point stand out, so more people go there. Answer B says: commuters do not lose time dropping the bike off and collecting it, so they see the repair as worth more. Which means Pedal Point can charge forty-five pounds, where rivals charge thirty-five. Which answer explains how the USP adds value, A or B? Take your pick, and hold on to your reason before I show you. Answer B. Answer A says why a business would want a USP, but it never says what changes for the customer, and it never reaches the price. Now the money in answer B. At a rival, thirty-five pounds minus twenty pounds of parts leaves fifteen pounds. At Pedal Point, forty-five pounds minus the same twenty pounds of parts leaves twenty-five pounds. Pedal Point adds twenty-five pounds of value on each repair, ten pounds more than a rival, and the USP is the reason. One examiner's report looked at a question on how a USP could add value. It says many students did not score every mark, because they wrote about why a business should add value rather than how value gets added. That is answer A: a reason for wanting a USP, with no customer and no price in it. The same report says the answers it looked for included some form of reference to added value being a financial value. The fix is to finish every adding-value answer on money: the price the customer pays, above the cost of the inputs.

Kettle and Crumb is a small bakery, and its sourdough loaf uses ninety pence of ingredients. It sells each loaf in a printed paper bag with its own logo, and its name is now well known across the town. The chain runs the same way as at the bike shop. Customers recognise the name and trust every loaf to match the last, so they see it as better than a plain supermarket loaf. Which means customers will pay more for it than for an unbranded loaf from the supermarket. Try it on paper. It sells for three pounds forty, with ninety pence of ingredients: what is the gap? Two pounds fifty, because three pounds forty minus ninety pence leaves two pounds fifty. A plain loaf at two pounds ten leaves only one pound twenty. Writing that branding helps a bakery stand out would be the same slip as answer A at the bike shop: a reason for branding, with no price in it. A question that asks you to discuss wants one more step, the other side, and then a judgement. Branding costs money too. Kettle and Crumb paid a logo designer, and each printed bag costs about eight pence. And if a rival bakery opens that people love just as much, customers may stop paying that much. Have a go at this one before I show you. Does branding add value for Kettle and Crumb overall, and which fact about the bakery tips it? Branding is likely to add value here. Three pounds forty is one pound thirty more than a plain loaf at two pounds ten, and the bag costs only eight pence of that. And the name is already known across a small town, where word of mouth carries it. One examiner's report on a branding question says most students showed some understanding of one of the two ideas, branding or added value, but very few showed both. Those answers described the brand and stopped, or talked about value with no brand in it. The habit that fixes it is to end every branding sentence on the gap between the price and the cost of the inputs. Adding value matters beyond one shop, because business activity creates prosperity, which means more wealth for people and places. Pedal Point pays its mechanics wages, its owner keeps the profit, and both spend money in the city's other businesses. That is the role business activity plays in prosperity: jobs, wages, and wealth for owners and the area they work in.

Time to check what has stuck, one question at a time.

In one sentence, what is a business?

A business is an organisation that provides goods or services to customers, in most cases to make a profit.

Now a new case. A sandwich bar spends eighty pence on the bread and filling for each sandwich and sells it for three pounds. What value does it add?

Two pounds twenty, because three pounds minus eighty pence of inputs leaves two pounds twenty.

A different kind of question. Tap water is free from the kitchen, so is a bottle of spring water from a shop a need or a want, and why?

A want. Water is the need, and the tap already meets it, so the bottle is something you could live without.

Now the last one: how does a USP add value, in three links?

First the feature, the USP itself, then what it changes for the customer, then the price they will pay above the cost of the inputs.

Back to the bottle of water, the same water in the same plastic at three prices. At thirty pence in a multipack, the supermarket adds very little beyond a shelf to buy it from. At one pound twenty, the corner shop adds convenience: the bottle is cold, close to home and on sale late at night. At three pounds, the festival bar adds convenience at the very moment you are thirsty, with nowhere else nearby to buy. That is what those people are paying for. It is value the seller added, the gap between the price and the cost of the inputs, and not a rip-off.

If you could explain the bike shop's answer to a friend, give this video a thumbs-up, so you know this one's done. If it has not landed yet, save it, and try the Pedal Point sums again on paper before you press play again.

Next in the chapter is Factors of production and opportunity cost. Hopefully that's next in your feed, but if not, search for ScholaFly B U oh one, oh two.

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