The Sunk Cost Fallacy

You have heard the phrase “don’t throw good money after bad.” Why do we do it?

When we commit to something that costs significant money and it doesn’t work out most people are unwilling to pull the plug. So, good money continues to go toward a loser. Not long ago a senior executive called me and asked if I knew anyone in the pet cremation business who was making meaningful money. I told him I didn’t know anyone who was making ANY money much less meaningful money including the guy who started it. But I do know a lot of people who have created some really innovative excuses for keeping it going. He responded that he couldn’t find anyone either and that were considering shutting down their efforts. Yet, that effort had gone on for a long time and, for all I know, still is.

 

Screen shot 2012-07-02 at 8.03.03 PMThis sunk costs situation happens much too often in business.  We insist on getting value out of the money we’ve already spent.  We become determined NOT to lose money.  We can’t — we won’t — let go.

However, by not letting go when something isn’t working, we can end up losing a lot more.  We keep pouring money, time and effort into something that has no chance of working or would lead to a poor result at best.  The project or initiative  keeps costing more and more.  Instead of cutting our losses, we compound them by hanging on.  We make our losses worse….More at What Are Sunk Costs? – Small Business Trends

My opinion? I admire people who can admit mistakes and move on. Don’t you? It’s far more embarrassing to keep betting on a loser.

S-Corp Owners Get Hit With Higher Tax

So many DeathCare businesses are S-Corps this is important news.

the President’s tax plans would affect different types of small business owners differently. Many more small business owners who run partnerships and Sub Chapter S corporations will face higher taxes than small business owners who run sole proprietorships….More at Successful S-Corp Owners: Watch Out For A Tax Increase

What I would do:

Make sure you do your tax planning early.  I think it takes 10 years to unwind a Subchapter S-Corp.

“Price-Led Costing” the Wave of The Future

A few weeks ago in the Creedy Commentary I contrasted the conventional and prevailing DeathCare pricing strategy that is now outdated: Cost-Led Pricing with the more customer-centric Price-Led Costing favored by more and more B2C companies and, more recently, B2B companies.

As our profession relentlessly marches toward commoditization and price becomes the sole determinant of choice in more and more markets the need for a change in our approach becomes glaringly important.  Who will survive?  It is likely to be those that master this aspect of market strategy in spite of its complexity.

There is a long history of companies that became obsessively focused on cost at the expense of providing a product or service of value to the customer. The fact is, you can make a pizza so cheap that no one is willing to eat it.

Here is an article from the Pricing Society that does a better job of explaining Price-Led Costing than I did.

The more usual way is to take the costs and then determine the price; and although that method may be scientific in the narrow sense, it is not scientific in the broad sense, because what earthly use is it to know the cost if it tells you that you cannot manufacture at a price at which the article can be sold?

[price-led costing] explicitly understands that … price determines … costs, and does not let … costs dictate… price. You must do your cost accounting BEFORE providing the service (what Toyota calls Target Costing). Historical costs don’t matter, it’s only future costs that count.  Click here To Read The Full article “Price-Led Costing: The Wave of The Future

What I would do:

Go back and review the articles relative to pricing strategy on the Creedy Commentary.  Begin working with your team to really try and decide which parts of your organization represent “the baby” and which are really only bathwater and start throwing the bathwater out.

Here are links to The Creedy Commentary Articles you should review.

A Broken Business Model

A Competitive Fortress

Licensing Laws: Barrier to Survival