Core Concepts: Economic Value Estimation (EVE)

Written By Gregory Ronczewski
Economic Value Estimation (EVE)

By Gregory Ronczewski, Director of Product Design at Ibbaka.

Definition of Economic Value Estimation (EVE)

Economic Value Estimation (EVE) is a modeling framework introduced in the classic 2013 book The Strategy and Tactics of Pricing by Thomas T. Nagle. It looks at the 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

4 Key Components of EVE Models

  • Competitor Reference Value. It is the price the 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 6 types of positive value drivers).

  • 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.

Applications in B2B Enterprises

EVE models are widely utilized by B2B enterprises to:

  • Compare product alternatives effectively

  • Highlight differentiation between offerings

  • Quantify the unique value proposition of each product or service

These models prove particularly valuable in various business functions:

  • Pricing professionals use EVE for strategic analysis and pricing decisions.

  • Product Development teams leverage EVE for customer segmentation and product development strategies.

  • Sales and Marketing professionals employ EVE models to communicate value propositions to customers effectively.

By providing a structured framework for value quantification, EVE enables businesses to make informed decisions about pricing, product development, and customer communication, ultimately driving more effective value-based strategies in the B2B marketplace.

For example, here is a great article published on LinkedIn by Mark Stiving, Ph.D. 

Positive Value Drivers and Negative Value Drivers

Value-based pricing is based on the Economic Value Estimation (EVE) method and 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:

  1. Value is for a specific customer or group of similar customers (a market segment)

  2. 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 OpenView’s Blog. When the sales team uses the EVE approach with a 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 6 types of economic value drivers used in EVE models.

The 6 Value Drivers in EVE Models

The 6 key value drivers in EVE models are:

  1. Revenue Enhancement: Offerings that can increase customer revenue or income.

  2. Cost Reduction: Products or services that help customers lower their operating expenses.

  3. Working Capital Optimization: Solutions that enable customers to reduce their operating capital requirements.

  4. Capital Expenditure Savings: Offerings that help customers minimize their capital investment needs.

  5. Risk Mitigation: Products or services that help customers manage and reduce their overall business risk.

  6. Flexibility and Optionality: Offerings that provide customers with increased flexibility, adaptability, and future options.

By focusing on these 6 value drivers, EVE models can accurately quantify the monetary value an offering creates for a specific customer, enabling more effective value-based pricing strategies and customer communication.

You can also read up on Core Concepts: Value Driver (which also looks at Emotional and Community value drivers).

Ibbaka’s CEO, Steven Forth, has shared another insightful post discussing the design of value models.

More reading on Ibbaka’s Core Concepts:

Gregory Ronczewski
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