Sunk costs, like a sunk ship are better left on the shoals to rot…
Actually, a sunk ship is a good analogy for sunk costs.
Is it better to raise the ship and restore it or buy a new one?
A car analogy works great too. We all know how little it takes to wipe out a car, making it cheaper to buy a new car than repair even a mildly bashed one!
With your business, we forget this concept completely.
Even in our personal life, we ignore this distinction all the time.
A Personal Example
Recently my wife and I booked 5 nights at an Airbnb.
After 3 nights we wanted to get home for several reasons.
Did we lose 2 nights?
We paid for those 2 nights, right?
Even in my mind I think that I did!
Though, the logic is different.
If we stay the full 5 nights, we get what I paid for, yes? Yes, true.
However, we would spend a lot more eating out in those two days.
So, we will save the extra food money by going home early.
Even knowing that it occurs like we are losing by leaving early!
And then there is the subjective component of sunk costs.
The bed in the Airbnb was not that comfortable. We were not getting a good night sleep. There was street noise to deal with. It was a bit small.
You get the picture.
I share all this to demonstrate the powerful pull of how tenacious the sunk cost mindset is.
We are invested. We feel cheated if we do not get something back for what we invested.
Sunk Costs in Business
In business, it works the same way. I see it all the time. Our clients invest in a particular project, and they are all in.
Perhaps it is a marketing program. Could be a software development unique to their business.
They invest a lot of money.
They stop looking ahead at the future costs.
They are emotionally invested.
In fact, the more money sunk, the more attached they usually are.
Getting them to even think about letting it go is excruciating.
How To Evaluate a Project with a Lot of Sunk Costs
Start by looking at what your original intention was.
Why did you start this project initially? What was your intended outcome?
Now look – what is the project costing you now? List the actual dollars plus the frustration of missed deadlines, missed outcomes, and false starts.
Next, ask these questions:
- What will it cost to complete the project?
- What are the emotional costs for you and your Team from missed deadlines and broken promises?
- Can you complete it in a reasonable time frame?
And the kicker question is this – is there a cheaper, better alternative?
An Example in Business
I remember a client we engaged many moons ago who had invested over $100,000 in a software program for manufacturers.
Promises were broken.
Modules were dysfunctional.
The owner of the company was now at a decision point – walk away from an over $100,000 investment or keep going?
We presented him with a much less expensive, tried, and true software solution.
It took courage, and he walked.
Back to my Airbnb story…
We left those 2 Airbnb nights as a gift to the owner. We saved money on food, slept better, and were happy to get home!
Thanks for reading…