Sunk cost is an investment that has been placed in a business and currently stands unrecovered. For a variety of reasons, these costs are generally considered doomed.
For example, if a business was investing in the production of a new technology but the prolonged period of research and development rendered the whole project obsolete, this will mean that the business has incurred sunk cost. Similarly, if a company invests on a software installation to update or better the working of the company but the project fails, it will again be counted as sunk cost.
Sunk cost fallacy
Many people believe that sunk cost is essentially a result of poor foresight, management and working on the plan. Further, they contend that the businessperson must abandon the project at the first sight of a red herring. This is just half the aspect of the scenario.
The best planning and strategy might fail in the event of unforeseeable events like natural disaster or obsolescence. Furthermore, leaving a project mid-way when the business has placed huge investments in it might not be a sound idea.
Then there is also emotional investment that is the sum total of time, financial investment and aspirations and expectations of the businessperson. The emotional aspect may make it difficult to wean a person away from the project and he keeps on investing on the project even to the end of total failure. This phenomenon is often termed the Sunk Cost Fallacy. Despite this, the sunk cost is more sinned against than a sinner.
Things to know before further investing in Sink Cost
- Know the risks
When the business has established that the investment made in a project is irrevocable, keeping aside the emotional mooring, he must evaluate and establish whether further investment in the project is justifiable. A business should be able to justify further investment. If an innovative technology is headed towards obsolescence or the competitors have already developed it, justifying further investments may be difficult.
- Knowledge and right direction
Do not pump in an extra million into a business just because you have already invested ten before. This will lead the businessperson into a cost trap, uttering the ultimate ruin of the business as a whole. In the end, with investment, a business can actually reverse the trend of getting further bogged down and actually come to make profits. A business will have to think innovative and out-of-the-box to give a fresh lease of life to the project.
- Sunk cost effect strategy in ecommerce sales
The sunk cost project can be a window of new opportunities for the business. With better services and new features on the product, the business can increase sales price of services and products. The buyer will certainly be ready to dole out some extra bucks for a premium service or a product that sets him a class apart. The business can then sell some add on features and accessories separately that cost it much less to produce but give out greater returns. Ultimately it all boils down to marketing and brand positioning of the product or service that the business created.
An increasing sunk cost is a huge risk to a business. Smart strategies can help turn the waves and make the purported sunk cost into an investment.