Adding value to boost profits
by Kara Greenblott, Isabel Carter and Debora Randall
Have you ever wondered why jam usually costs so much more to buy than raw fruit? Or why woven baskets are more expensive than reeds?
There are different steps involved in changing a raw material into a finished product ready for sale. This process is known as the value chain. At every stage in the value chain, the product typically gains value (see diagram below).
Thinking through the value chain can help people to see if there are ways of adding value to the products they are selling. For example, milk can be processed to make butter and cheese. Different products can be combined to make a higher value product, such as bread or street food. As long as the cost of processing is less than the added value, then there should be an increase in profit.
There may also be opportunities to increase profit without changing the product. For example, it may be possible to cut out one of the links or to make the product move along the chain more efficiently. By working together to purchase raw materials or to sell products, producers may get better prices and increase their profits. By simply storing raw materials for a while, the seller may get a much better price for the product out of season.
Location also affects value. Selling in alternative markets (usually further away) may significantly increase profits.
Activity: Value chain analysis
This activity can be carried out with a small group of people.
Brainstorm a list of the products or services that are available in your area: for example, coffee, dairy products, hairdressing, maize, beads, rabbits or papayas. Write them up on a large piece of paper.
Is there much demand for this product or service? Circle all the ones that have a good market. Choose three that represent different kinds of product or service. (You may like to suggest dividing into three groups.)
Using a sheet of paper, map the people and businesses in the value chain (see diagram below): the input suppliers, the producers, the buyers/sellers and the final consumers. Think about how the price of the product changes as it moves through different steps in the value chain and is sold in different locations.
Then decide whether the value chain can become more efficient by answering these questions:
- Can you increase your production (quality and/or quantity)?
- Is it possible to add value by (more) processing?
- Does market price vary with the seasons? If so, could you create better storage and sell later in the season when the price is higher?
- Does price vary with market location? If so, how can you access these new market locations?
- Could you join together with other producers to sell your goods collectively, or share transport costs?
- Are there new buyers you could link to?
If you answered 'yes' to any of these questions, there is potential to use value chain analysis to increase production or profits. Identify people you can approach to help analyse the value chain in more detail. (This exercise is not a full value chain analysis. Agricultural extension workers, NGOs or other organisations may be able to help with a thorough analysis.)
Once you have analysed the value chain in detail, you can work out the best way to increase your income.
This article was adapted from Think livelihoods! See Resources page for details.
To read a case study on how an organisation in Kenya used value chain analysis with local farmers, click here.