Letting go and losing a little is much better than losing a lot later
If you’re a regular reader of this column you may recall me talking about the principle of working out a way of testing ideas cheaply and then putting investment behind them if they are working.
The key to this is to test lots of things, however there are a few things that often derail the strategy: Customer confirmation without action, modest success and honouring sunk costs.
I once worked for a company that made add ons for networked printers in the Jurassic times before broadband or Wifi. Just to explain for those of you under 40, you used to print virtually every communication both with clients and internally and when you wanted to print you had to select which printer to use on the network. The trouble was people would forget which printer they last used and send the print to another location – Senior managers would be seen tearing through the office to get a disciplinary letter they had sent to the meeting room printer. On several occasions I printed things out in the Copenhagen head office where I’d been the day before and most of all every printer would have piles and piles of uncollected printouts.
One day there was a meeting to show us the latest device on the way – a simple plug in with a card reader for each printer so you just pressed print then walked to your nearest printer which would produce the document when you put your card in. You could send everything to print and collect it on arrival in Denmark and if you didn’t collect, it was never printed, saving waste and ensuring confidentiality. I can still feel the excitement now and our customers shared it. One senior executive defected to a competitor who produced the same thing in record time to compete with us at the launch.
When we finally got the product it was brilliant except for one slight issue – nobody bought it. To this day I still don’t understand why, it wasn’t even that expensive but when it came to parting with the cash it just didn’t happen. You can consult all the focus groups you like and get online votes but a test is only a test if people have to pay. It’s even more important to test an ideal that most people think is rubbish because if it works you’ll get a free run at the market.
Modest success is actually much worse than abject failure – you try something and a few high profile people go for it so you double down on the marketing but after an initial flurry uptake fades but doesn’t die. It’s very hard to decide at what point to give up and if you’re a deluded optimist like most entrepreneurs there’s always something on the horizon that could make a difference – Christmas, spring, the budget, interest rates, my capacity to think of things is almost as unlimited as number of new ideas I have every day.
This brings us neatly on to one of the biggest issues in business and in life – honouring sunk costs. Once you have invested some money in something there is an almost overwhelming compulsion not to waste it. We see this in everyday life and our minds simply won’t accept that money spent is gone regardless of what we do next. You’re on a diet but you have a cake that won’t last so you eat it rather than throw it away which costs the same. The value of a share is dropping and you should sell it but you don’t because the price is less than you paid for it, yet if you were in profit you would sell immediately – this makes no sense, either the decision to sell is right or not regardless of what you paid.
Many businesses take advantage of this effect, even a tiny deposit of £10 will dramatically reduce the number of bookings cancelled at a restaurant and it is a cornerstone of multi level marketing schemes. If you’ve spent money on a course or filled your garage with stock then you keep on trying to sell things long after it’s apparent that the income isn’t there.
As a business owner you have to develop a cast iron will to look forwards not backwards. Will this initiative earn enough money for the effort and expense in future regardless of what you have spent already? If the answer is no then it is always cheaper to cut your losses and apply the effort to something more promising regardless of how much you have spent already.
Simon Tolson owns Rumsey of Sandbanks, a holiday letting agency. Contact Simon on
01202 707357 or simon@rumseyofsandbanks.co.uk
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