Sunk Costs Don't Make A Great Strategy

Jan 13, 2012 | Skip to comments » | Share | |

As a recovering and former accounting major, one of the best lessons I learned in school was the concept of a sunk cost. As our friends at wikipedia describe it:

Definition for sunk cost:

Web definitions:
In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered.

The trap of the sunk cost is to throw more money at a misguided investment hoping that more investment on top of a bad investment will make it better. That's called throwing good money after's not wise to do such.

In our world, it typically looks like this:

"We don't want to redesign the website [which doesn't get results]. We just want to freshen it up."

"We have too much money invested in this system [that doesn't work], so we need to stay with it. Can you just work with it?"

Heard this one today: "I know you guys know what you're doing and your proven to get results, but [Big Vendor who sold me really expensive software that doesn't work] says they have a new service that can fix it. Since we've spent so much money with them, we have to [spend more money with them] see if they can make it work."

Move on. If it doesn't work, scrap it. If you invested 10's of thousands or even six figures and it doesn't work, pouring another $50,000 into it probably isn't going to fix it.

Stop investing in a system or a website that doesn't work. You know the adage: insanity is doing the same thing over and over again but expecting different results.

The Digital World is moving so fast that the shelf-life for major technology investments are becoming shorter and shorter. For instance, 24 months ago Merge bought a brand new file server for the office, complete with Microsoft Exchange and the works. Guess what? Hardware and software that should have 3 more years in it is now obsolete. I can move our entire infrastructure to the cloud for about 1/3 the cost that I bought the system for. Do I pour more money into this obsolete system because I made a significant upfront investment.

No, because it's a sunk cost! It's time to get a new virtual server, move on and write the investment off. Putting more money in it won't accomplish our goals.

The bottomline is this: Sunk costs are investments that cannot be recovered. Acknowledge when it's a true sunk cost and move on when it's time for a new solution--don't be the fool throwing good money after bad.






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