Imagine a gambler having lost tens of thousands of dollars at a casino and still playing in the hope of "recovering" the lost money. Sounds far too familiar doesn't it? Common sense would say that the fact the money has been lost should have no impact on the gambler risking more money but he/she still does. The age old gambling thinking is the simplest example of why businesses need to understand sunk costs.
Sunk costs by the very definition are those costs that have already been incurred and cannot be recovered. If no matter what you decide to do, the sunk costs are gone, you should deem them irrelevant for the future decision making.
It's a norm for a business to spend thousands of dollars in developing a product, service or an idea. If even after trying its best the product/service/idea is not profitable, then it would make sense to cut your losses and drop the idea. The fact that you have spent thousands of dollars (sunk costs) to get to a certain stage does not give you the license to waste many more thousand of dollars in the hope of turning things around.
Don't sink your business further to recover the sunk costs!
BY SURESH RAJANI
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