photo by Bast 

I’m going to date myself here, but my parents had an 8-track tape that I used to listen to when I was growing up – it was the soundtrack to Lost Horizon (a 1973 remake of a Frank Capra 1937 film).  I don’t really remember the movie being worthwhile, but I remember the soundtrack and several of the songs really well – it’s the kind of music that sticks with you.

One of the ’stickier’ songs is “Question Me an Answer“.

Question me an answer bright and clear.
I will answer with a question clear and bright.
Even though your answer may be wrong my question will be right.
Question me an answer.
Answer with a question.

It was written by Burt Bacharach and it’s catchy to the point that you’ll regret having listened to it (consider yourself warned).

What does this have to do with anything?  If you’re trying to close a sale, then questions are the answer.

Depending on the source of your sales training, this concept comes up quite a bit – it’s the essence behind SPIN selling, it’s a key part of Sandler Training and it shows up in a lot of other sales books.

The basic idea is that if I tell you how great I am (or my product is) then I’m just selling you (and you’re not likely to buy).  However if I can ask the right questions and get you to acknowledge that you have a problem that I can solve, then you’ve sold yourself (and you’re much more likely to buy…assuming everything makes sense, you’ve got money, etc.).

What’s Your Question?

This topic came up in one of my Peer Group Advisory Boards the other day (by the way, as a business owner, where do you get your accountability and inspiration?). 

I kicked off the discussion with a challenge around the table on what question they could ask their best prospect that would highlight the benefits they bring to the table.  It’s a challenging exercise and realistically in a sales discussion you are going to lead up with several questions that are linked together but if you can simplify it down it can become a good touchstone to help get you focused on letting people buy!

As an example, I might use something along the lines of:

What are you currently doing to make sure that you are working ON your business every week (instead of just IN your business)?

Ideally you want the question to be open ended – not something that’s going to generate a quick yes or no.  You want the question to generate some uncomfortable response that’s relative to the benefit that you deliver.

I thought Sarah’s response (Sarah is the owner of Dog Eared Pages, a marketing and writing company) was really good:

What’s holding you back from doing the marketing that you should be doing?

Sarah knows that most business owners aren’t doing as much marketing as they should be doing and she offers a cost-effective way to take that off their plate.

It’s not an easy process to come up with questions that really pinpoint the issues that you can solve, and realistically you will have different questions for different people (since they likely have different issues). 

However It’s still a worthwhile exercise to come up with some good examples – it will help you starting thinking differently and it becomes a great piece to add to  your Elevator Pitch (i.e. I work with business owners that are trying to answer the question “How can I make more money?“).

Share your questions here – I’d love to get other ideas on what people are doing or how they develop their questions.

Shawn Kinkade  Kansas City Business Coach

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There are some things that you take for granted, sequels are almost never as good as the original, Stephen Colbert is funny and when you hit the power button your computer is supposed to turn on, not give you the dreaded Blue Screen of Death…!

Unfortunately the unthinkable happened to me and it’s been a painful couple of days (so far).  I was initially hoping that it might be something minor that could be fixed (although after a couple of hours of trying, it was clear that it wasn’t going to be fixed by me!).  So I called my friend Tim New over at Onsite Logic and had them take a look at it.

It’s never a good sign when the conversation starts with “Did you notice that burning smell?”.  It turns out that my hard drive had fried (literally) and short of a really expensive procedure all of that data was gone forever – Old Reliable had failed me.

The good news is that not all was lost – I had done a few simple things that kept it from being a major issue.

Back it up!

There are quite a few cool online services that you can use to back your stuff up that I might look into going forward, however my approach was a little more ‘old school’.

I used a combination of an external hard drive and my Dropbox account which I wrote about a few months ago.  The external hard drives have really come down in price – I think you can find a 500 Gigabyte drive for about $100 and it just plugs into your PC with a standard USB cable.  The drawback to the hard drive for backup is that you need to consciously remember to move your stuff there on a fairly regular basis (if it’s changing).  I hadn’t updated for several months, so I will end up losing a few things.  Primarily it impacts my music collection (just the few CDs that I added since this spring that I can re-add) and a few other things (mostly photographs, but I still have the original files).

What did work well was that I had recently moved almost all of my active ‘work’ files to my free Dropbox account.  It automatically syncs and updates in the background with any changes that are made.  It’s free and it’s easy to set up (and it synchs between my laptop and desktop (at least when I had a desktop).

Use web tools!

I was able to configure my Gmail account very quickly so I could get access to my email without really missing anything.  I think I would like to mapmy Gmail inbox to my Outlook setup, but I haven’t taken the time to figure that out yet.

I play some games through Steam (an online game repository) so when I reinstall my steam account it will automatically reinstall any games that I might want access to (although any offline save games will be gone…).

Finally – I should have been synching my calendar with Google Calendar, that’s probably been the biggest issue that I’ve had to date, trying to recreate a busy calendar (so if I miss a meeting with you, that may be why…!)

What about you?

Are you covered?  When’s the last time you backed up your stuff?  Old reliable could burn out at any time, are you prepared?  Share your thoughts in the comments below.

Shawn Kinkade  Kansas City Business Coach

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   photo by peasap 

Leaky buckets aren’t very efficient (and it’s really hard to find a good leaky bucket picture…). 

One of my clients has long been having a proverbial ‘leaky bucket’ problem with their revenue and they’ve been unfortunately leaving a lot of it on the floor.  When times were good that revenue leak wasn’t perceived as that big of a deal – they were still making money, still growing…everything was good.  However their business (like most) has been impacted by the economy and when things started to tighten up, those leaks really started to be an impact.

Where were the leaks coming from and what could they do about it?

This particular client does a fantastic job on delivering their product – they are very professional and when it comes to creating what their clients want they have really strong processes and procedures and people that know what they’re doing.

However…(you knew there was a however), when it comes to the business aspect of the transactions, things aren’t quite as polished.  We did a quick review of 3 different jobs that happened in the last couple of weeks and found that they were ‘leaking’ around 20% of their revenue, maybe more – where were they losing it?

Lack of Clear Expectations

Because they enjoy what they do and the love to help their clients, they will often jump into projects with a just a handshake and start doing the work.  They might throw together a quick Statement of Work, but it’s generally not comprehensive and they feel like they know what the client wants.

A lot of times that might turn out fine, but at least in the examples that we reviewed, the clients came up with additions and changes after the work had been delivered.  Since there wasn’t a clear understanding on both sides on what was to be delivered, my clients would go back and do the extra work the client wanted…for free.

Lack of the word ‘No’

In addition to the problem above, there’s a strong culture of wanting to please the customer and do a great job.  If that meant going over budget by 20%, 30% or more, then the people doing the work were okay with that. 

Of course the people doing the work aren’t the ones that are ultimately responsible for the bottom line of the company, overall profitability and the trying to figure out how to keep the lights on during difficult times.

There’s a distinction between great customer service and giving things away inappropriately.  If you’ve got a customer that expects that you should take a loss on their business, then they’re not a good customer – you’re not going to make that up on volume.  You can still do a great job for your customers without giving away the farm.

How to fix the leaky bucket…

Here’s what my client is doing – it sounds simple (and it is) but it’s a pretty profound change that will make a big difference.

Process and Gatekeeper

The first thing they’re doing is putting in a gatekeeper when it comes to starting work.  They are no longer allowed to start a job without having a complete and thorough Statement of Work that’s been signed off by the client and by an officer of the company.  There may still be disagreements on what’s in and out, but it should cut down on a lot of misunderstandings – and ultimately the clients should be more comfortable knowing exactly what they’re getting (and not getting).

Contingency

The second thing they’re doing is to implement a contingency fee on all of the work.  By adding a 10% buffer into the original estimate, the people doing the work have the leeway to do the little things that might have been missed up front and not have to worry about being perfect.  If the contingency isn’t needed, then it goes back to client – who’s thrilled that they’re getting what they wanted and some money back.

Escalation

Along with the contingency, they are also adding in a new process that if additional work is needed / wanted by the client and it’s going to throw the estimate off by 20% or more, then they have to get approval from company management.  This position someone in the company that isn’t working directly with the client to be the enforcer.  The reality is that most customers understand when they’re asking for more and either don’t mind paying for it or agree that they don’t really need it.  However if they can get it for free they’ll take it.  By making it a clear open discussion, then that leak can get plugged pretty easily.

Communication

Finally – the last thing they’re doing is clearly communicating these changes and expectations to their clients up front.  Unfortunately they’ve been training their clients for years that all of the extras are ‘free’ so there is some risk that this comes across as a negative impact compared to what the clients have been used to.   However by explaining that they don’t want to raise prices but they do want to make sure everyone is getting what’s agreed to up front, most customers should be fine with it.

Profits

The really cool thing about these changes is that all of that recovered revenue will go to the bottom line – it’s found money that they weren’t getting yesterday and it will dramatically help their profitability and at the end of the day it’s not how much you make, it’s how much you keep.

Do you have a leaky bucket?  Have you checked to make sure that you don’t?  I’d love to hear other stories about this – share your thoughts in the comments below.

Shawn Kinkade  Kansas City Business Coach

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  Photo by loomingy1 

Happy belated 4th of July / Independence Day!  This is a holiday that always gets me to thinking about things – what a great country we have and about all of the people that have sacrificed themselves over the last 233 years so that we can enjoy the freedoms we enjoy (and often take for granted).

I find it all very inspirational and inspiration is such an important part of what makes us tick.  In fact why we do things, why we’re inspired can be every bit as important as what we do.

One of my Peer Group Advisory Boards is having a discussion on Michael Port’s Book Yourself Solid – it’s an excellent book that covers marketing with a practical approach, but also challenges you to shoot higher and do more than just make money.

Chapter 3 covers the idea of your Personal Brand – not the touchy feely personal branding that some people talk about, but a very practical tangible view of a personal brand, kind of a foundation for everything else.  Specifically he boils it down to two key points:

1. Your Who and Do What Statement and
2. Your Why You Do It statement

Both of them are important, but in my experience the ‘Why you do it statement’ tends to get overlooked and it may be the more important of the two.

Your Who and Do What Statement

You’re probably familiar with the idea of a Who and Do What Statement – it’s really the basis for most elevator pitches or 30 second commercials.  The idea is to simply let people know who you work with and what it is that you can help them with.

The purpose of the ‘Who’ is to clearly indicate your best target market and to narrow down the focus as much as possible – ultimately you want to attract the attention of prospects that you really want to work with, not just people that you could work with.

The ‘Do What’ portion of the statement is a clear summary of the benefit that you can provide to people.  What would they get if they worked with you.  As an example, here’s a variation of my Who and Do What statement:

I work with small business owners that have hit a ceiling and I help them figure out how to grow their business.

Hopefully that’s appealing to business owners that are doing well but feel like they’ve hit a plateau and they need to find a way to keep growing their business.  Notice it’s not about How and I don’t use labels (business coach) – the focus must be on your client.

Your Why You Do It Statement

As Michael Port points out in the book, it’s likely that you’ll run into a lot of people that share your Who and Do What statement – which makes the ‘Why’ statement an important opportunity to differentiate yourself.

We all probably know someone that’s in a business primarily because it’s a good way to make money.  Their ‘Why’ is because they know there are a lot of opportunities for making money in their industry.

However contrast that with someone that’s doing something because they enjoy helping people learn…or they genuinely are driven to help other people succeed…or they get excited about the opportunity to learn new things and help their clients put them into play.

Would you rather work with someone that’s strictly motivated by the money they can make or someone that’s genuinely excited and motivated by something…bigger?  It’s not much of a choice is it?

So what’s your inspiration?  Why do you do what you do?  Do you share that information when you’re talking to people?  Share your thoughts below.

Shawn Kinkade  Kansas City Business Coach

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Plan for success photo by WorldIslandInfo at FuturistMovies

About 1/3 of Small Businesses fail in the first 2 years, and just over half fail within 4 years (according to an SBA Study done in 2005).  These are always controversial studies – how do they define Small Business?  How do they define failure?  Wouldn’t there be a big difference (higher?) failure rate in the last 2 or 3 years?  All great points, but in general we can agree that there are a lot of businesses that don’t make it.

On the other hand, there are also lots of examples of businesses that are still in business but aren’t really making it.  I ran across an interesting article in Fortune Small Business that initially caught my eye because it was about a local Kansas City business.  The article on ‘Why Small Businesses Fail‘ is about a home furnishings boutique in Prairie Village called the Curious Sofa (caution the site loads with music on).  If you haven’t been, Curious Sofa is a great store with lots of interesting stuff  to look at.

Here’s the part from the article that I thought was really interesting:

Dusenberry’s financials explained clearly why her business has potential – and why she’s in trouble….But here’s the thing: Her statements show that she’s lost money eight years in a row.

Every year, Dusenberry said, she told herself that she was going to work harder and sell more stuff, but working harder doesn’t fix a broken business model.

Working hard, loving what you do, and having a skill or product that other people want enough to pay for are all part of the puzzle, but there are other things that are even more important and if you don’t figure them out, it can be a long way down.

Part of why this story caught my eye was because I had a very similar conversation with a business owner last week.  They had been in business just over two years and had started out of the gates with a lot of money in their personal bank account.  Their operation grew quickly, had a lot of happy customers and is generating decent monthly revenue.  The kicker is that the owner has yet to take a salary and is now out of money in the savings account – they have lost money every month for 2 years!

What are the missing ingredients?

Every business is different (which is why my job is fun), but I think you can summarize the biggest missing ingredients into 3 areas – People, Systems and Planning.

People

One key area that small business owners often overlook is the importance of the people around them – employees, vendors they buy from, advisors, people they network with – all of these have a huge impact on overall success.

If you’re not going through a thorough process for most of the people that you hire, you are probably destined for a rough ride.  Small businesses don’t have the luxury of easily handling a bad hire – best case it’s an expensive mistake (to the tune of $30,000 or more depending on the position – see this calculator from ADP).  Potentially it can sink your business.

Equally important are the people that you are networking with and getting advice from.  If you are not routinely being challenged, receiving candid feedback and brainstorming with people that have a different background than you do, then you are not performing up to your potential.  There are a lot of ways to a address this – whether it’s meeting with a group or with an advisor, I have some suggestions that might be worth considering.

Action Point – What are 3 things you could start doing to improve the people that you’re hanging out with or working with?

Systems

A system is a set of steps and procedures that you or your employees follow to get things done.  You can (and should) have a system for how you order office supplies, how you market your company, how  you create your product, etc.

The benefit of a formal written system is that you can easily get other people to operate the system once it’s created (so you can move on to other things) and by having it documented, it becomes possible to incrementally improve the system over time – which is where the real long term benefits come in.

I wrote a post last fall that spelled out how to get started with systemizing your business – it’s not rocket science, but it is amazing the number of businesses that don’t routinely use documented systems and just make things up as they go.

Action Point – What are 3 processes that you or your team do routinely but isn’t documented?  How could you get started implementing some system improvements?

Planning

I probably have these in the wrong order because Planning needs to come first.  The single biggest issue with 2 examples above is that neither business had a clear plan on how they make money.  One of my coaching colleagues in the PBCA is Adam from Cleveland and he recently wrote a great article on the Profit Planning approach they do with their clients.

The Profit Plan is the answer to how to make money in your business. If you can’t plan it out on paper, chances are you won’t be able to do it in real time with your hectic business.

I’ve been working with my clients on this approach for quite a while as well, but I really like the terminology of the Profit Plan (thanks Adam).  The key point is that you should be able to clearly state your plan for how much money you are going to make (and spend) in the next 12 months and just as importantly, where that money is going to come from.  If you’re in early growth phases or if you are launching a new product, then you may have to guess more than your comfortable with, but a guess is better than not having a plan at all.

The other important point of the plan is to remember is that it’s not how much you make, but how much you keep that really matters.  You might have great revenue coming in, but if that’s not translating to profitability, you are still destined to fail (it just might take longer).

Action Point – Can you create a monthly projection through at least the end of the year that includes costs and revenue (and where that revenue is coming from)?  If not, what would it take to do that – contact me if you’d like help on that.

What are other key ingredients to business success?  Do these match up with your experience – share your comments below and start a conversation!

Shawn Kinkade  Kansas City Business CoachSimilar Posts:

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In case you’re wondering – this is what it looks like…it’s a meatcard, more specifically it’s a business card made out of meat.  I was just in the process of ordering new cards, but decided these weren’t really what I was looking for (although they would generate a lot of attention…).

I’ve needed to order new cards for quite a while and finally last week I managed to get that done.  The actual ordering part isn’t hard, but I knew that I wanted to make some sort of change to my cards and I wasn’t sure what I wanted to do.  The Meatcard is too much for me but it is important for your card to stand out in some way.

If you’re like me, you likely have a stack of business cards somewhere near your desk from past meetings that you’ve had.  If you spread all of those cards out, how many of them actually stand out?

More importantly, if you threw your own in the pile, would it stand out?

So what should you do for your cards?

You don’t need to be Gimmicky!

When I say stand out, you don’t need to go super creative and come up with something really quirky.  Although those that can pull it off deserve a lot of credit, it’s clearly the exception rather than the rule and a tough idea to shoot for – as an example, here’s one that’s clever:

It’s for a divorce lawyer and the card splits apart so both parties have the contact information (handy and clever!).

Does that mean that this lawyer is generating a lot more business than anyone else?  Not necessarily, but I imagine that people tend to remember the card (and therefore the lawyer).

If you’re looking for more gimmicky ideas, I did find a great site that has a lot of different cards that you can check out – I especially like the other divorce mediator cards that were designed to be left at certain types of hotels!  Go to where your target market is hanging out!

It does help to have a point

More important than gimmicky is to use the valuable real estate of the card to give people some idea of what you’re about. 

You should only be giving out cards to people that have requested them and have some sort of interest in what you do, but even in those situations, it’s a good idea to reinforce a key point or two on what you really do (as opposed to your company name or profession).

This one is still a little gimmicky, but I really like the emphasis on the tag line.  I know they have something to do with Search and my expectations are set that they are doing something different than everyone else.

Here’s what I ended up with

I decided to not particularly rock the boat with a new design – the front of my cards stayed the same and is fairly traditional, with my logo, name and contact information and website listed with a lot of white space. 

The tag line on the front of my cards has been helpful when I’m having introductory meetings – “Work ON your business, not IN your business”.  It’s cliche, but it does resonate with people that are frustrated with not being able to move ahead.

I did change the back of the card – most people tend to leave the back of the card blank (and there is some benefit to giving people a place to write) but I wanted to reinforce one of the themes that I see a lot with business owners, so I went with this as the back of my card:

It’s really difficult to make changes, but the reality is that your results are based on what you’re doing – if you want to change the results, then you’ve got to change the other stuff!  I have a variation of this conversation almost every day with a business owner, so I thought it would be worthwhile to include with my card.

I thought about going with an image or an outline of the process that I use, but with limited space I thought this quote would be more effective.  What do you think of it?

I’d love to hear what you’re doing with your cards (or what you’d like to do).  Share your thoughts below.

Shawn Kinkade  Kansas City Business Coach

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  photo by Per  Ola Wiberg 

Although it’s starting to get too hot, it’s still gardening season and my wife has been doing a lot of work on our yard and flowers.  Some of it’s clean-up and the stuff you have to do every year, but a lot of it is finding new plants and flowers and figuring out what’s going to live and what’s not (and why).

We’re within a 5 mile drive of at least 1/2 dozen places that sell plants – several big box type of stores and a few local nursery operations.

The big corporate stores compete almost entirely on price – although they’re not necessarily the cheapest across the board, they are generally going to have lower prices.  However the overall quality is pretty suspect (unless you get there the day of a new shipment) and you are unlikely to get any real help or service.

It’s tough competition for the local stores…or is it?

Earning the business

We were joking last night that the local nursery has become a daily stop, but the truth is that we have gone there a lot lately – partly because it’s that time of year, but mostly because they’ve really earned the business.

On a typical visit, my wife will locate one of the several wandering employees and ask several questions (”The Coleus we planted 2 weeks ago is getting shredded by something, what’s doing it and what can we do?”, “We’ve got a dry shady corner – what’s likely to do well there?” – etc.).

Not only are the employees happy to answer her questions (even sometimes spending 15 to 20 minutes going into details) but they’ve all been very knowledgeable – clearly they enjoy what they do, they take it seriously and they like to help people.

So the prices might be slightly higher (although not always) but the service, the expertise and the selection make it a really easy choice to pay a bit of a premium.  And…not only are we loyal customers, but my wife has probably shared her experience with a dozen people (all of them interested and looking for a better place to shop for plants) in the last 4 weeks – I have to believe that’s helped their business.

What are you doing in your business?

When you look at how you interact with your customers, are you generating loyalty and stories they’ll tell to other people?  Are you training and incenting your employees to go out of their way and really deliver value and good will with every interaction they have?

I’d love to hear other examples or ideas of companies that are getting it right – share  you thoughts in the comments below!

By the way – in case your interested, it turns out that caterpillars love Coleus and about the only thing you can do about it is pick them off.

Shawn Kinkade  Kansas City Business Coach

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  photo by Blue.Steel 

Over this past weekend, Facebook launched the capability to claim your name as a vanity extension (i.e. www.facebook.com/yourname).   To give you an idea of what this means – Facebook had 200,000 names registered…in the first 10 minutes (launching at midnight).  Within an hour, over 1 Million names had been claimed and over the course of the weekend, more than 3 Million names were claimed.  Facebook has over 200 Million profiles, so they have a long way to go, but it’s still a big number!

Here are a lot more Facebook details from Mashable on how big this was from Facebook’s point of view (they were concerned the system might crash).

Google, LinkedIn, and Twitter also allow you to claim your name – the questions I’ve had from a few folks are “So – What’s the big deal?” and “How do I do this?” 

I’ll try to answer both of those here.

Building the brand of you

In terms of why you want to claim a personalized URL, it’s an opportunity for you to further your brand – whether that’s your name, your company name or some combination in between.

If you’re in the corporate world right now, then getting your name out there might not seem very important…right up until the point where you join the millions of other people that have had to start looking for their next thing (whether that’s due to a layoff, company going under or just time to move on).  The days of most people staying with one employer for most of their careers are over – it can happen, but it’s probably not a good idea to plan on it.

If you own your own business or if you’re out networking and selling then you probably understand the benefits of continually developing your Personal Brand.  Using tools like LinkedIn or Facebook are great ways to extend that brand.

Finally – think about it this way.  If you don’t claim your name, someone else will and as Social Media continues to grow you will find yourself being lost in the shuffle.

Getting Found

An even more practical reason to claim your name is that you want to be found when people are searching for you.  Google, LinkedIn, Facebook and Twitter all rank very highly when it comes to search results.  Here are the recent results for my name:

My blog and website are first (which is good because that’s where most of my effort is), but LinkedIn (with my name as part of the URL is next) and my Twitter profile is below that.

Do you show up on a Google search for your name?  Could people find you if they needed to, but didn’t actually know you?  If you have a common name, you might have a problem, but all the more reason to claim it (or something like it) as soon as you can.

How to Update Profiles

Google:  A few months ago, Google allowed a lot more information and personalization surrounding your Google Account, including the ability to claim a profile name that would show up on Search (at the bottom of the first page).  It’s a quick process – you can learn more from Googles at Google Profiles.

LinkedIn:  The LinkedIn process for creating your personalized URL is also straightforward.  It’s an option when you edit your profile – here’s a link that will give you more information on how to customize your LinkedIn profile.

Facebook:  I did the Facebook update over the weekend and it was very simple.  You can also ‘brand’ Fan Pages, but you have to have at least 1000 followers before you can do that.  Here’s the background on updating your Facebook Username.

Twitter:  The twitter process is simple, your twitter URL is directly tied to the username you select when you create the account in the first place (www.twitter.com/AspireShawn ).  Here’s a link to an earlier post I did that gives a lot of background on Twitter.

Other Social Media sites also allow you to claim or create your name (or they likely will soon).  You don’t need to belong to every social media site out there, but it will be important to be on at least a couple of them so you can be found.  You might also want to consider registering your name as a domain name (i.e. yourname.com ) – it would require you to build a blog or a website to really use it, but it gives you a ton of power and flexibility for branding.

What could you do to claim your name?  When’s the last time you Googled your own name (even better, set up a Google Alert for your name, your company name, any topic that you’re interested in).  Can people find you?

Other ideas or questions?  Share them in the comments below.

Shawn Kinkade – Kansas City Business Coach

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I’ve always been fascinated by the concept of Sunk Costs – it’s one of those discussions that intellectually most people understand – as long as it applies to someone else!  However when it comes to your situation, things aren’t always so clear.

Just so we’re on the same page, sunk costs are essentially old investments (time or money) that are now irrecoverable.  Logically they should have no bearing on any decisions going forward (they’re sunk costs that you can’t get back) however there is a very real psychological component that tends to impact decisions.

How often have you heard someone say something like:  “I can’t let Susie go, I’ve invested all of that time and money into training her”.   It’s not a rational statement, the only thing that matters is whether or not the business owner believes Susie is going to deliver more value than her future salary.  If the answer is no, then she should ‘let her light shine brighter elsewhere!’ as one of my old bosses used to say.

How do you catch yourself from getting caught up in the Sunk Cost trap?

Studies on the Sunk Cost Effect

A friend of mine – Wade Carpenter is the owner of Summit Wealth Advisors and he sends out a great weekly newsletter (you should ask to get on his mailing list).  Part of last week’s topic was on sunk costs – including an interesting reference to a Princeton study:

Sunk costs and mental accounting can be hazardous to your wealth. Let’s pretend that you just arrived at a theater and as you reach into your pocket to pull out the $10 ticket that you purchased in advance, you discover that it’s missing. Would you fork over another $10 to see the movie? Compare that to a second scenario in which you did not buy the ticket in advance, but when you arrive at the theater, you discover you lost a $10 bill. Would you still buy a movie ticket?

In these two scenarios, you effectively lost $10, but here’s where it gets interesting. Psychologists Amos Tversky and Daniel Kahneman of Princeton University conducted the above study in 1984. They discovered that only 46% of the study participants in scenario one said they would spend another $10 to buy another movie ticket. However, a whopping 88% of the subjects in scenario two said they would still spend $10 to buy a theater ticket.

According to the researchers, the reason for the huge discrepancy in behavior is that the participants in scenario 1 that lost the ticket mentally translated the cost of the movie as a $20 ticket which was not worth it to over half of them.

Wade’s newsletter was making this point because this type of thinking really comes into play when people evaluate stock performance.  I know I’ve been guilty of thinking “I’ll just hold onto this stock until it comes back to break even”  (as it turns out break even might never come…it can be an expensive way to look at things).

The other rational given by psychologists for Sunk Cost behavior is that people don’t like to admit mistakes.  People hate they idea that they ‘wasted’ time and money.  It’s not any more rational, but it does show up a lot.

What do you do about Sunk Costs?

Everyone’s at risk for getting pulled into a sunk cost trap, so what can you do to avoid it?

Do the math.  When it comes to financial impacts, you have to get into a habit of working the numbers based on where you are now.  Admit your mistakes, cut your losses, don’t throw good money after bad – all of those ideas apply and they’re a little more black and white when it comes to straight financial decisions.

Be mindful of why you’re choosing (or not choosing) to do something.  If it’s because you hate the idea of all the time and money you wasted on something.  If it’s because you’re hoping for a miracle turnaround so you don’t look like you failed, then you need to realize that you’re not making a rational decision.  It might be a blow to your ego, but admitting mistakes and moving on is how successful people get ahead.

Start at ground zero.  Approach difficult decisions as if you were just hired and handed a difficult situation to resolve.  You don’t care how you got here, you just want to make the best decision going forward.

What sunk cost traps have you run into?  How do you handle them?  Share your thoughts below.

Shawn Kinkade   Kansas City Business Coach

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