Core Concepts: Economic Value Estimation (EVE)
By Gregory Ronczewski, Director of Product Design at Ibbaka. See his skill profile.
Definitions
Economic Value Estimation (EVE) is a modelling framework introduced in the classic 2013 book The Strategy and Tactics of Pricing by Thomas T. Nagle. It looks at a monetary value created by a product or a service for a particular customer versus their next best alternative. It is one approach to building a value model. The terms have been
There are four components that most EVE models contain:
Competitor Reference Value. It is the price customer pays for the next best alternative.
Positive Differentiation Value. The monetary value an offering creates for the customer, which exceeds the next best alternative (these are based on the six types of positive value driver).
Negative Differentiation Value. Additional costs that the customer incurs with the offering, switching costs, training, or any positive differentiation value of the next best alternative.
Net Differentiation Value. The sum of Positive Differentiation Value minus Negative Differentiation Value. When this sum is positive, it represents the range of possibilities for setting a value-based price for the offering.
B2B enterprises often use the Economic Value Estimation models to compare alternatives. Economic Value Estimation helps to show the differentiation between products or services and what value each offers brings. For example, here is a good article published on LinkedIn by Mark Stiving, Ph.D.
Value-based pricing is based on the Economic Value Estimation (EVE) method. is used to understand the economic impact on a customer's business relative to their next best competitive alternative. There are two key points here:
Value is for a specific customer or group of similar customers (a market segment)
Value is relative to the alternative
Here is a post by Steven Forth titled Why value-based pricing means something and another one by the same author published on Open View Blog. When the sales team uses the EVE approach with the focus on the value of each part of the offer rather than the price, they will be able to present different alternatives of the offer, for instance, less expensive with fewer features. Also, it is worth noting that EVE is not the same for each customer so applying price segmentation will be beneficial.
EVE style models are built up from value drivers. There are six types of economic value driver used in EVE models. Value drivers can
Increase revenue
Decrease operating costs
Decrease operating apital
Decrease capital investment
Decrease risk
Increase optionality
See Core Concepts: Value Driver (which also looks at Emotional and Community value drivers).
Here is another post by Steven Forth on how we design value models.
More reading for you
Core Concepts for Pricing and Customer Value Management
Economic Value Estimation (EVE) (this post)
Coming soon …
Community Value Driver
Connecting Value and Pricing Models
Cross Price Elasticity
Customer Value Journey
Customer Value Management
Economic Value Driver
Interactions of Cross Price Elasticity and Price Elasticity of Demand
Package Design
Pocket Price Waterfall
Price Elasticity of Demand
Pricing Design
Pricing Model
Value Based Market Segmentation
Value Ratio
Value to Customer (V2C)
