When you’re first starting out, can be easy to undervalue your time and contributions. You urgently need clients and experience. You need to build your portfolio with professional work you have done for your own company. You may not have a sense yet of what types of clients will fit well with your business model. You may have untested contracts that imply extra work will not cost additional money. And, it’s easy to overlook red flags when those first few clients come in the door.
These issues can pressure you into pricing your products or services well below market value. You may think you’re only doing it for a short period of time, simply in order to build your address book and get the ball rolling on referrals. What you may be doing instead is setting unrealistic expectations for clients who could be with you for years.
The Associated Press recently published a discussion of whether you should offer cut-rate or free work when first building your business. The reporter interviewed several entrepreneurs who had done so, and they all agreed that it had been a mistake.
One big issue is that pricing carries meaning. If your prices are far lower than the market rate, people are unlikely to be excited that they’ve got such a good deal. Instead, they tend to conclude that the goods or services are underpriced for a good reason. They will undervalue your work as much as you let them.
When clients undervalue your work, they may ironically become more demanding than they might otherwise be. If you’re doing the work for free, they may take advantage because they know that their demands won’t result in a higher bill.
Do your contracts undervalue your work?
Many business owners draft contracts that seem perfectly reasonable. It’s good to be reasonable, but it’s also important to keep in mind that one purpose of a contract is to resolve situations where one party is not being reasonable.
When drafting a contract, think of the ways it could protect you from unreasonable clients. Be very specific about what work is included for the stated rate. Discuss what additional work will cost, if needed. Include provisions about when payment is due, what happens if payments are late, and how to resolve any disputes that arise. Working with an experienced attorney can help you ensure that your contracts cover everything and don’t leave the door open for exploitation.
Not paying yourself until the business is profitable? That could be an audit risk
Depending on how you’ve set up your company, you may be expected to pay yourself a reasonable salary instead of using all of your income to further build the business. In fact, the IRS may audit you to determine if some of your profits should have been put toward your salary.
When it comes to your business, begin as you mean to go on. Charge what you mean to charge, right from the beginning. This will set the tone for all your business relationships going forward, and you want to set that tone right.