The sunk cost fallacy is simple: once someone has spent something unrecoverable, one should avoid throwing more after it in an attempt to “honor the cost” or “try to make the best of it” if the potential benefits outweigh the new cost. In everyday life, trying to repair an old car can often fall into this category. “I’ve already spent $20,000 trying to fix this,” one might say, “I can’t just give up.” If the car’s still not working, giving up is indeed the smart thing to do; nothing will get that money back, and there may be a better way to invest the remaining funds.
Businesses are just as susceptible to falling prey to the sunk cost fallacy as car enthusiasts, and very often management can make costly decisions that compound upon themselves as some sense of loyalty or tenacity overtakes business sense. Keep reading to learn some ways in which the sunk cost fallacy might be affecting your business and how to mitigate them.
Be careful with training.
Though training can drastically increase the value of a sales team or a manager, that’s time and money that can’t be gotten back. The only way to recoup the value of training time is to have those who receive training perform the tasks they were trained to do. If you respond to a continued deficiency or other issue with more training, you may be rendering those personnel even less capable of pursuing their current tasks.
Monitor which of your lead generation efforts are succeeding.
Some lead generation efforts, such as blogs and podcasts, can take a while to start showing results. Accordingly, these can feel like they involve throwing good money after bad very quickly; there is a point, however, at which they really do require more effort and money than they’re generating for your company. If the value these lead generation tools add to your process stays low for months or even years on end, sometimes it’s best to just write them off as a loss and move on.
Don’t be afraid to cut off ties with a problem customer, even if they were hard-won or initially bought large amounts of product.
Just because two companies do strong business with each other once, or even for a few years, doesn’t mean the trend will continue forever. Those who ultimately start to generate more problems than revenue, as indicated through frequent support requests, order cancellations, and other time-wasting activities, should be cut off regardless of their past relationship with your organization. Though there are other tactics for dealing with such problem customers that should be employed first, sometimes losses just need to get cut.
Once the hiring search is over, stop thinking about how much the process cost.
It can be tempting, when evaluating managers and other personnel who require greater resource expenditure during a talent search, to factor in the total cost of hiring them when considering their performance. Even major sports teams fall prey to this, with costly players often outstaying those who offer comparable performance but who cost less to obtain.
Sometimes, a market segment just won’t bite.
You might want to throw more money after an initial unsuccessful marketing campaign, but sometimes the message just isn’t reaching the market that it’s trying to court. Know when to say “this isn’t working,” and just move on and try a different tactic entirely. Sometimes, a product just won’t meet the needs a market segment perceives in itself, and trying to create a new need can backfire or simply not take.
Watch your budget closely, as careful monitoring can make it much easier to tell when you’ve started sacrificing the future for the sake of the past. Let us know in the comments if you’ve ever caught yourself throwing good money after bad, or had to make significant adjustments to a company’s spending practices to avoid this common mistake.
Is the Sunk Cost Fallacy Actually Smart Business?, Kellogg School of Management
Meditating on Those Sunk Costs, Freakonomics 2014