A common saying is that hindsight is 20/20, that it’s far easier to judge a decision in retrospect than it is before the outcome is known. We all make choices in our personal lives and in business without knowing all of the details; sometimes we decide with incomplete or even incorrect data. Does that mean we would be safer by avoiding risk? Well, there’s only so much risk-mitigation we can do without becoming so risk-averse that we become passive or purely reactionary to the world around us.
Rather than avoiding risk, we should accept it as the cost of doing business. (We should be wise, of course, and not do obviously foolish things like investing all our assets in clearly volatile situations like, say, cryptocurrencies.) But since nobody bats a thousand, mistakes will happen. So, what do we do when the inevitability of failure comes to pass?
A Famous Example
One of the most paralyzing problems a business owner can face is whether to keep running with the same products, services, employees, or policies because of a previous investment. Consider one of the most famous business debacles in history, the Concorde—you might remember the supersonic jetliner that could fly from London to New York in three hours. Unforeseen cost overruns and delays saw its total price swell to over $16 billion in the equivalent of today’s dollars. Think about how many plane fares just to overcome that, to say nothing of the costs of maintenance, fuel, personnel, and more. The factors drove the cost of airfare to 30× the price of traditional jetliners towards the end of its service! It’s no wonder that fewer and fewer customers chose it, despite its high-speed convenience.
The real problem wasn’t that the Concorde didn’t work out—it’s that the British and French governments continued to subsidize the program for many, many years because they felt like they couldn’t abandon it given the huge amounts of money already invested into it. This is the crux of the sunk-cost fallacy, the snare that tempts us to keep trying even when we should accept something didn’t work out.
Logic
A sunk cost is an investment that’s unrecoverable after-the-fact. Examples might include what you spent on marketing, or developing a new product, or training your employees. Once those dollars are spent, you’re not getting them back directly if the investment fails. (Contrast this with inventory, say, which you might recover by returning it to the manufacturer or by selling it wholesale to another business.)
Rationally speaking, a sunk cost is one which should no longer be relevant to future decision-making—like the Concorde situation above. The decision to keep that program going shouldn’t be affected by the amount of time and money already spent on it: it should only be decided by its potential to be successful now or in the future, balanced out against its prospective (i.e. future) costs.
Throwing Good Money After Bad
We all naturally consider our sunk costs when we evaluate whether we want to continue with a relationship, project, or anything else in our lives. But it’s a dangerous trap in business, as it often convinces us to throw money and time away on an endeavor just because we’ve already spent so much.
What should really matter is whether the endeavor has a reasonable potential to benefit us going forward, regardless what it has already cost us. If the answer to that question is probably not, then all we’re doing is throwing more money at the situation in the hopes that it’ll work itself out somehow.
That’s foolish; sometimes you have to cut your losses. Do you have a product that you’ve been trying to get off the ground, but you keep running into cost overruns, delays, or quality issues? Do you have a service that you painstakingly built, certain that your customers would love it, but they just don’t seem to care? Or do you have an employee that you’ve poured countless hours of training into, but he just can’t seem to get his act together?
Maybe it’s time to move on. Your capacity of money, time, and effort is limited—don’t waste it on the desire to turn a failure into a success when it’s clearly harming your business otherwise.
How We Can Help
One of the most unfortunate aspects of risk is that it can take a long time to realize that a particular endeavor isn’t panning out. As a business owner or manager, you might be trying to pay attention to a lot of moving parts, so these problems might go unspotted longer than they should. If only you had another set of eyes to spotlight the hitches in your otherwise well-oiled machine.
That’s where we come in. The Brandt Group uses mystery shopping services to uncover how well your products and services are working, as well as how well employees are following their training. We work with regular local consumers, the kinds of people that give your real-world feedback, to evaluate everything that matters to you about your business’s sales and customer service processes. Those regular people complete questionnaires that we design with you to identify what’s working well, and what isn’t, with laser focus.
Let’s keep you in the driver’s seat rather than past mistakes. If you want to make sure your business knows when to take risks and when to move on from them, reach out to us today.
