Sunk Cost Is Not Hidden Treasure for Your Startup - Know When To Cut Your Losses

"I'm not giving up on this idea now, I've spent thousands on it!"

"It's been a year, but I'm sure with just a little more time it will succeed!"

Have you ever used these type of arguments to rationalize a decision? Have you only looked at what you have already invested, while failing to consider the likelihood of future success?

This mistake is made by companies big and small. Experienced corporate big wigs, and wet behind the ears entrepreneurs alike have been known to hunt this end of the rainbow illusion.

How can you avoid the sunk cost sand trap?

It's time to Stop, Drop (Your Preconceived Notions) and Analyze the current situation!

First let's define Sunk Cost. According to Wikipedia, Sunk Costs are past costs that have already been incurred and cannot be recovered. In other words you can't get that money back.

Sunk cost depends on each unique situation, and must be analyzed accordingly. In today's post, I've created a few examples, and will cover why they are sunk costs.

They are: a) the money you've spent on an ad campaign that has already run, b) the time you've spent to design and create your website, or c) the money you've spent on a splashy new customized trade show display.

1. Revisit Your Key Success Metrics

If your first reaction is "what metrics?" then I suggest you review your business plan and determine what 3 things drive your revenue and profits. Bottom line don't spend money until you have determined the expected outcome. Otherwise how can you measure success?

Key Success Metrics / Actual Experience

Scenario A The Ad Campaign:

1,000 Warm Leads / 15 Warm Leads

10 New Clients / 0 New Clients

$100,000 Revenue / $0 Revenue

Can you get your money back? No.

Any insights on why the campaign did not succeed? The few leads generated were not the appropriate target market. Best guess is that the venues selected were not in line with the company's target market.

Is there a possibility of meeting the success factors without investing more time or money? No, it would cost more money to rerun the ads.

This scenario clearly qualifies as a Sunk Cost. Not a success, can't get money back, and no real expectation of turning it around without spending more money. Don't despair, you can learn from this and other sunk costs. We'll discuss that in the next section, Salvaging Value.

Scenario B DIY Website:

50,000 Monthly Visitors / 20,000 Monthly Visitors

1,000 Warm Leads / 200 Warm Leads

100 New Clients / 20 New Clients

$100,000 Revenue / $10,000 Revenue

Can you get your time back? No. (If you said yes, please call me with details!)

Any insights on why the metrics were not met? Visitors and trusted colleagues alike indicated that the website looked amateur, was not well laid out, and made it difficult to make a purchase or contact a salesperson. In addition, it became apparent that none of the pages were optimized for search engines. Bottom line people bought in spite of the website, not because of it.

Is there a possibility of meeting the success factors without investing more time or money? No, the website needs a serious overhaul.

While some value was derived by the time invested in your DIY website, it is falling far short of your success metrics. The time was not wasted, and we'll discuss how to get value from your experience.

Scenario C Trade Show Display:

1,000 People Trade Show Traffic / 50 People

500 Warm Leads / 1 Warm Lead

50 New Clients / 1 New Client

$100,000 Revenue Per Show / $5,000 Revenue Per Show

Can you get your money back? No, because its a custom display.

Any insights on why the metrics were not met? After purchasing the display, attending a show, and market research, you discover that Trade Shows are not the place to meet and sell to your target market.

Is there a possibility of meeting the success factors without investing more time or money? No, because the company will not be attending trade shows in the future.

Clearly a sunk cost because you will not be attending Trade Shows in the future, and given the customization of the display it is not something you can resell.

2. Is There Anything You Can Salvage?

Yes! This may be sunk cost, but you can walk away with insights to spend money wiser, or certain tools to redeploy.

Scenario A The Ad Campaign

You may be able to reuse some, or even all, of the copy from the campaign. That would create a big savings for the next ad run you do.

You have an idea where not to reach your Target Market. Before you launch your next campaign be sure the projected audience is targeted, and in line with your message.

If you used an outside firm, consider what you felt that they did not do right. Be sure to discuss these issues with any future potential ad firm that you may use.

Scenario B DIY Website

In your DIY struggles you've learned a great deal about website design. Use that knowledge to test your potential vendors. Ask technical questions, ask traffic questions, and ask about any other issues you faced.

You've developed the content, that is a huge part of the process. The outside firm only needs to give it structure and presentation pizazz.

You have visitors, and online clients. Use them! Get their feedback on their likes, dislikes, and suggestions for improvement. It's free market research.

Scenario C Trade Show Display

Test any venue before investing a large sum of money. Better yet, check out the venue first as an attendee. Speak with companies that have a similar target market, but are not in direct competition to you (if they are even there). Find out why they attend and their perceived value of the event.

Look for a low cost or entry level option to get your feet wet. In this case, why not rent a table, buy an inexpensive made to order display from Fedex | Kinkos, and evaluate the results.

Repurpose your display. Can you use it at your office for visiting clients? Would it make a training tool for salespeople or customer service?

3. Check Your Ego at the Door

I've got one, you've got one, any small business owner or entrepreneur worth his or her salt has got an ego! Usually that is a good thing, it keeps you going when others doubt your chances of success. Occasionally it can be a barrier to success.

It can be brutally hard to admit that your great idea, strategy or marketing technique just isn't going to work. Personally I hate, hate, hate doing it! If you have given this initiative every chance, and realistically cannot expect to even come close to your metrics, it is time to bow out gracefully. You can't run with dead weight tied around your ankles.

One final word of warning, this isn't an excuse to spend money willy-nilly and then write it off as a "sunk cost". A successful business takes calculated risk, it doesn't just go spin the roulette wheel. Otherwise you might as well just buy a lotto ticket and save yourself the stress.

And yes, willy-nilly is a word, I checked Webster's dictionary.

Sunk Cost Is Not Hidden Treasure for Your Startup - Know When To Cut Your Losses

By: Nicole Fende

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