*2.2. The Model of the Eco-Costs*/*Value Ratio*

The basic idea of the model of the Eco-costs / Value Ratio (EVR) is to link the value chain of Porter [32], to the ecological product chain. In the value chain, the added value (in terms of money) and the added costs (from Life Cycle Costing, LCC) are determined for each step of the product chain, cradle-to-grave. Similarly, the ecological impact of each step in the product chain is expressed in terms of money, the eco-costs. See Figure 4.

**Figure 4.** The basic idea of the Eco-costs/Value Ratio (EVR): combining the value chain with the ecological chain [33].

The theory of Porter, and so Figure 4, deals with the manufacturing of (physical) products for end-users (consumers). In a slightly more complex form, this theory can also describe the 'profit pool' [34] of a circular business model, or a service, since industrial services are bundles of products that deliver a function to the end-user. Street lighting is an example of such a service: its main function is light at night to provide safety, delivered by a bundle of products and services (lampposts, electricity, and maintenance). It is important here to realise that the value (of a product or service) for an individual buyer is not equal to the market price. The value is the Customer Perceived Value (CPV) [35–37], also called Willingness to Pay. The relationship between the costs, the price and the CPV is depicted in Figure 5.

**Figure 5.** The costs, the price, and the Customer Perceived Value (CPV) of a product.

In our free market economy, the costs should be lower than the price, to support the profit of the company without subsidies. On the other hand, a product can only be marketed successfully when the CPV is higher than the market price, since people tend to buy things only when the perceived value for them is higher than the price they have to pay. The CPV can be defined as the benefit (utility plus joy) that is expected after the purchase. We call the difference between the price and the CPV the Surplus Value for the individual buyer. In the free market economy, the (market) price is set at a level that attracts sufficient buyers in order to reach an economy of scale that keeps the costs low enough.

For a municipality, costs and price are the same (red dotted lines in Figure 5), because they do not have the goal of making profit. However, the surplus value (for its citizens) must be positive, otherwise a project will not be accepted by the public.

In fact, the EVR model entails multiple dimensions. However, to show the build-up of the product in the chain, it is better in most cases to display only two dimensions at a time (see the figures in Sections 3.1 and 3.2 as an example for the base case of streetlighting) to avoid complex 3-D charts: the eco-costs at the y-axis, and one of the financial dimensions at the x-axis.

Under the assumption that most of the households spend in their life what they earn in their life (the bank savings ratio is <5% in most countries), the total EVR of the spending of households is the key towards sustainability. Only when this total EVR of the spending is consistently lowered, the eco-costs related to the total spending will be reduced (even at a higher level of spending). This issue is explained by a short macro-economic analysis on what happens in the European Union. Figure 6 shows the EVR (= eco-costs/price) on the Y-axis as a function of the cumulative expenditures of all products and services of all citizens in the EU25 on the X-axis. The data is derived from the EIPRO study of the European Commission (EIPRO = environmental impact of products) [38].

**Figure 6.** The EVR and the total expenditures of all consumers in the EU25 (from the environmental impact of products (EIPRO) study [38]).

The area underneath the curve is proportional to the total eco-costs of the EU25. Basically, there are two strategies to reduce the area under the curve:


The question is now how designers and engineers can contribute to this required shift towards sustainability. Key is product innovation that fulfils the double objective of a higher CPV, and at the same time a lower eco-burden. To achieve this objective, it is an imperative that the designer must look at the CPV as well as the eco-costs at the beginning of the design process (i.e., idea generation and concept development). Eco-efficient Value Creation is a structured design method to achieve this.
