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Working "on spec" is work done for free to try to gain a contract or job. It's a common technique for young or inexperienced freelance graphic artists, yet professionals in growing numbers are arguing that no work should ever be done on spec.
Their argument is this: If you work for free, you are devaluing not only your own work, but that of all creative professionals. Good creative work requires custom solutions that meet the client's unique needs -- and those solutions are worth money.
If a customer cannot afford to pay competitive rates for freelance design work, then that is a customer you do not need. Focus your sales pitches on customers who already have budgets for design.
Working on spec is not the same as working "pro bono," that is, providing free services to a charity or other nonprofit organization, usually in exchange for promotional value. This can be a valuable way to build your portfolio and market your services.
Another way to build up a freelance design portfolio is to barter your design services. You might do $400 worth of design work for a clothing store, and receive $400 worth of clothing in return. Such arrangements are often hard to negotiate, but can result in win-win situations.