If you want to be successful in business, then there are some lessons that you just need to learn in order to be successful.

One of the most important lessons is understanding your value.

Understanding your value is key to differentiating yourself from your competitors and also for getting your pricing correct and creating a profitable business.

This was something I learned the hard way.

Several years ago I was asked by a major Utility company to come in and work with them on reducing the cost of testing for their customer billing system.

Each quarter they had a news release and the testing was costing them $500,000 per quarter, which in total was $2m per year.

They asked me to come in for a 20-day consulting period, and to look to analyze their systems and to make some recommendations on how they could reduce their costs by 20 percent, but without impacting the overall quality of the system releases.

They said they knew it would be difficult, as the systems were very complex, but they were keen to at least try and find a solution.

When they asked me what my rate was, I was very happy.

Here was a client who had a complex problem, one that they couldn't solve but thought I might be able to help with.

At the time I was charging $800 per day for my services, and I thought given the complexity of the task and their lack of expertise, I would increase my rate to $1000.

To my pleasant surprise, they agreed.

I told them that the first thing I would need would be the reports they had relating to the number of testing phases, the cost of each phase and it's effectiveness. I was big into data analytics, as a mathematician, you always know value and importance of data, and what it can tell you.

The CIO told me that they didn't have any reports that showed that information, but they could provide me with the raw data, and I would be able to create the report myself.

Two hours later I had the report.

There were five phases of testing.

  1. System Test
  2. Regression Test 1
  3. Integration Test
  4. User Acceptance
  5. Regression Test 2

When I studied this simple report what was glaringly obvious to me was that Regression Test 1 phase cost 20 percent of the total budget and only found 1 percent of the defects.

I thought brilliant if they just stop doing Regression Test 1, they will save the 20 percent they are seeking, which would equate to a $400,000 annual saving for them.

There would potentially be a small drop in overall quality, but that will probably be picked up in Regression Test 2 which is a fill month end billing run of 10 million customers, but this was a small risk for a $400,000 annual saving.

And best of all? The cost of doing this would be zero.

Excitedly, I arranged a meeting with the CIO, who was surprised I wanted to speak to him so quickly, but he agreed.

When I presented him with my findings, he said "brilliant! Thank you very much, we will move ahead with that recommendation."

Then he added, "and I'd like to thank you for all your efforts, of course, we will pay you up to the end of the day, but you don't have to stay the whole day."

As what he said to me sunk in I realized that I had just saved them $400,000 in operating costs, and had yet only charged them $1000.

My contract wasn't a fixed period; it was just a simple time and materials contract.

Although I thought I had done a good thing by increasing my charge rate by 25percent, from $800 to $1000, I had completely undervalued the service that I had provided.

If I had received just 1 percent of the saving that I had helped them achieve, then I would have earned $4000 for that day's work.

That would have represented whopping a 500 percent increase in my charge out rate, and yet it would still have been a bargain for the service that I had provided.

For me, that was a painful lesson, but a was also a great learning.

Like many entrepreneurs, I had priced the services based on the cost to me of providing the service, rather than on the value that it brought.

Which is like basing the price of a cake just on the costs of the eggs, flour, butter, etc.

When you do that it can result in drastic under pricing of the services; it can also deter potential customers who won't see the real value that you can bring to their companies.

It also shows a lack of confidence in your abilities, which is never an attractive selling quality.

If you want to be successful providing consulting services, then you need to understand the value of your service you that bring, rather than the cost.

The sooner you learn and understand that, the sooner you will be able to charge for your value, rather than your costs, which will dramatically increase your revenue, and your profits.