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Building a new business? Working for free may be a mistake

When you start a brand-new business, you have to make sacrifices. You’ll be working a lot, naturally. You’ll be networking and building up the connections that will serve you in the long term. There may not be a lot of money at first, even if you secure significant startup funding.

That does not mean you shouldn’t pay yourself a salary. It also doesn’t mean you should work for free or at a low rate to get your foot in the door.

Why you should pay yourself fairly

There are sound reasons you should pay yourself a decent rate. For one thing, if you don’t pay yourself a rate that is commensurate with your duties, the IRS may audit you or even adjust the income and expenses on your tax return to account for the missing pay.

Just as important is the idea of pricing theory. People value goods and services based on many factors, and one of those factors is price. Consumers will often bypass products and services that they perceive as “cut rate.” Even if they agree to work with you, they may not appreciate your value.

Even worse, they may perceive you as inexpensive enough that they can make unreasonable demands. If you’re working for free or a low rate, the customer doesn’t have to worry about running up a costly bill.

“Underpricing is probably the biggest mistake most companies make,” according to a business consultant interviewed by the Associated Press. “The perception is that your product doesn’t have any value.”

Likewise, underpricing your product or service can encourage customers to use you for an ever-growing list of things that you’re not really interested in.

A cautionary tale

One Chicago small business owner was trying to sell her services helping companies create internship programs. She agreed to work without pay to build her portfolio and make connections with paying clients. Instead of building a portfolio in the area she wanted, she found herself bogged down in helping companies choose and hire their interns.

The volume of work can be unpredictable

One of the sacrifices you may have to make when building a new business is the continuity of full-time work. You may go through time periods when you have no customers, but that shouldn’t necessarily convince you that you’re charging too much.

Fundamentally, if you are to have time for the business you want, you will have to say no to paying clients that you don’t want. Focus on connecting with the clients you do want.

If you’ve started a new business in the midst of a pandemic, you may face an uphill battle to get profitable. Make sure you’re going up the right hill.