RUNNING A RETAIL BUSINESS


This article is not about starting a business.  The information presented here assumes your business is already up and running and you’re looking for tips on how to keep your business running smoothly.  While this article is oriented toward small businesses, the same principles apply to most businesses regardless of size.

While starting a new business is difficult enough, running it efficiently presents even more challenges, especially during tough economic times.  These ideas are common sense and fairly easy to implement, but sometimes get lost in the heat of the battle.

Inspiration
No one knows your business better than you since you’re the brains and inspiration behind it.  It’s
important that this fact comes across when dealing with suppliers and customers.  Your business has value, and you want everyone you deal with to understand the value you bring to the table.  How your business is perceived by others is critical to your success.  View your business through their eyes without your emotional attachment, and make sure they appreciate what creates the real value in your business and how that benefits them.

Connections Give your customers reasons to come to you.  Make your business the ideal place to get what they’re looking for.  The key to this is an intimate understanding of the customer base you serve and their personal obsessions.  You can tap into those obsessions by creating a website and marketing campaign that caters to them on a personal level.

The Internet is a dynamic environment so you can’t simply build a website and assume you’re done.  Keep it fresh by updating frequently and integrating social media into your communications strategy.

Delegation
If you’re a sole proprietor who built your business on your own and works alone, delegation may not be an option.  If you find yourself pressed for time, especially around the holidays, consider outsourcing some of your work if you don’t want to hire anyone.  This allows you to focus on important things while others take care of the more routine tasks.  Possibilities include bookkeeping/accounting, administration, tax preparation, and other tasks suitable for contract labor.There’s a temptation to think that if you want something done right, you have to do it yourself.  That approach won’t work if you want to grow your business beyond a one-person operation.

Branding You want to own the go-to brand, and that extends well beyond a great logo and catchy sales pitch.  You want your brand to stand out, and you should view the price of accomplishing that as an investment, not a cost.  Your brand may be your most valuable asset, especially during difficult economic times.  Keep your brand relevant and updated to changing consumer tastes, and include money in your budget for sufficient advertising to carry your message.

Protect your brand with appropriate patents, trademarks, and copyrights.  This may create downstream opportunities to exploit your brand through co-branding and licensing of rights.  The potential financial rewards from this type of exposure can be immense.

Finances
Your company’s survival depends on good financial planning and fiscal discipline.  Create a monthly budget and track your progress against it.  If you’re missing your financial goals, don’t wait to analyze what’s causing the variances.  The longer you wait, the harder it will be to dig yourself out of trouble.  It’s important to understand everything from cash flow to return on investment.  If you’re not already thoroughly familiar with those terms, enrolling in a basic finance course.
Develop a close relationship with a local bank.  Make sure the bank executives understand your business and your operating plan.  The time may come when you need their financial support, and a solid personal relationship may mean the difference between securing that support or not.

Technology & Automation
Stay up to date on the latest technology trends and don’t let your suppliers, customers and competitors get ahead of you.  If you fall behind, you’ll find it difficult to maintain strong business relationships.  If you’re not tech-savvy, consider hiring an IT consultant who can recommend an optimal design for your automation suite.  This should include computers, networks, software, website design & hosting, telephone system, information security, and a top-notch mobile strategy.

Getting the most out of technology is key in today’s competitive marketplace.  Use online training
resources such as Media Bistro and Grovo to improve your knowledge and expertise.  Use analytics to
monitor website traffic and create benchmarks to measure the effectiveness of your marketing efforts.
Figure out what’s working and what isn’t.  Understand the importance of Search Engine Optimization
and update your website as needed to achieve the best search rankings possible.

Monitor your competition
You’re not paranoid if you’re up at night wondering what the competition is doing.  It helps to be aware of new innovations, price changes, and other developments at companies offering products and services similar to yours.  Use this information to fine tune your product and marketing strategies.
If something is working for your competition, consider emulating it if it fits into your overall strategy.
Improve on it if you can.  Perhaps more importantly, learn from their mistakes.  Do whatever it takes to raise customer satisfaction to the highest level possible.

Bottom Line
Consumers are still feeling the pain of the recession and they’re spending their money more wisely than ever.  They have their own technology that enables them to comparison-shop, find the best deals, and
negotiate discounts.  If you want their business, you need to understand how you can position your
company as the preferred source for what you’re selling.

One way to do that is to frequently survey your customers and encourage their feedback, whether positive or negative.  Find out what scratches their itch and take appropriate actions to respond to their suggestions.

Understand your customers intimately as their complete satisfaction is paramount.  Work hard for their
dollars and you’ll be rewarded.

Geoffrey Michael (www.geoffreymichael.pro) is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, entertainment, travel, and political analysis.  He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire.  Geoffrey wrote this feature article exclusively for DebbieMay.com, an organization dedicated to helping small businesses succeed.

HOLIDAY REJUVENATION TIPS FOR THE BUSY ENTREPRENEUR


When we go into business for ourselves one of the primary goals is to create freedom; financially and personally. So how are you doing so far?

The quest for freedom is certainly an uphill battle at times. Small business owners sacrifice more time and energy in exchange for flexibility and the opportunity to make their own choices on their own terms. And life balance, what’s that?

Yet, just as we give of ourselves to those we love, we continue to invest wholeheartedly in our dreams. This investment can take a toll, however; especially when we add the stress of the holidays to an already demanding schedule. And when entrepreneurs forget that it takes a healthy body, mind and spirit to bring their dreams to fruition, they often fail – or pay a very high price.

So begin this holiday season with a gift to yourself: a commitment to yourself to indulge in a few small, yet manageable, rest and relaxation practices. Not only will these R&R tips help you to feel a step closer to the freedom that you are working hard to achieve but they will actually make you a more effective and productive entrepreneur and help you to enjoy life that much more!


Take naps.I know, I know. Who has the time? I once interviewed ten highly successful business women to see what they all had in common and I wasn’t surprised when most of them confessed to a ten to fifteen minute afternoon nap on a daily basis!  It clears the mind, helps to minimize challenges by allowing a fresh perspective, and physically energizes the body. A great habit to pick up on going into the New Year.


Bonus: Not only will you feel better after a quick nap, you will look more relaxed and in control; a sign of a true leader.


Take the time to look good.People often make the mistake of believing that it’s only what’s on the inside matters. Wrong! Human beings are highly visual creatures by nature; like it or not, people respond to your physical appearance.  If you want to be successful you must look and feel the part. Take a little time to get a new look at the hair salon. Do your nails for the holidays, and toss out those old “mom” jeans!


Bonus:  When you feel successful your confidence and productivity levels will rise. The few extra minutes that you spend on yourself in the morning will easily find their way back to you later in the day.


Eat breakfast.An interesting fact about metabolism: If you don’t eat a bit of protein shortly after you wake up in the morning your body will begin to store fat. This makes you sluggish and can add to your waistline. Guess how bears gear up to hibernate; they stop eating breakfast! Try a few bites of protein (animal protein is the best) within 30 minutes of opening your eyes every morning and add energy to your day.


Bonus:  A touch of protein will make weight loss easier if you want to keep those holiday pounds off!


Take a few extra steps.Business owners are notorious for rushing everything, even things that are supposed to be fun! Purchasing holiday gifts is meant to be a meaningful experience and if you’re going to take the time away from work you may as well slow down and enjoy it!  Give your shopping excursion some extra oomph by adding a little workout routine instead of taking short cuts. Try walking across the long parking lots instead of moving your car from store to store. Also, take a stroll around the entire department store instead of the shortest path to your destination.


Bonus:  Some of the most interesting gifts are found where you least expect them. You may find a little store that you didn’t even know exists or the most fabulous present for your husband in the ladies department!


Forego the shower for a lovely bath.There is something about relaxing in or around water that brings out the most creative side of us. Instead of rushing through your morning shower, lock the doors, add your favorite essential oil and soak in the tub for twenty minutes. Allow your mind to effortlessly wander; you may be surprised at the ideas that pop up!


Bonus: Beginning your day with a bit of relaxation will change your state of mind from the intense,
problem-solving mode to the creative, allowing mode. The creative brain actually excels at resolving challenges with far less stress so don’t think you are slacking off when you calm your mind! 



Marla Tabaka is an entrepreneurial coach who inspires entrepreneurs around the world to attain what she calls, The Million-Dollar Mindset. As a result, many of her clients have achieved – even surpassed – the million dollar mark in annual revenues and are living the life of their dreams. In addition to running a thriving practice, Marla is a columnist for Inc. Magazine on-line, and hosts two international on-line radio shows, The Million Dollar Mindset and Million Dollar Mindset Tapping. Marla wrote this feature article exclusively for Debbie May.com (http://www.debbiemay.com/), an organization dedicated to helping small businesses succeed. If you would like to consult with Marla to learn how she can help you grow your business and better your life, contact her at Marla@MarlaTabaka.com.

4 WAYS TO CAPTURE HOLIDAY CUSTOMERS


Holiday shoppers are low-hanging fruit—if you take the steps to capture their dollars. Here are four ways to attract more holiday shoppers to your business. 

Plan your creative for the whole holiday season. Use template-style designs to create holiday-themed landing pages and emails that allow you to easily adjust promotional messaging, and allot additional space to address customer service issues like out of stock products, or shipping deadlines so you can focus your energy on providing the valuable customer service that makes customers refer you to others, and come back for more. Record a few short and simple “how to” videos that you can post on your website, on YouTube, and on Pinterest, that offer holiday- smart tips and techniques to generate traffic to your site. Remember that the holiday spending frenzy lasts even after the gifts have been opened and ornaments packed away . According to Jim Davidson, manager of marketing research for Bronto Software, major retailers in 2011 didn’t stop marketing holiday-related promotions until well after the New Year.

Take a cue from the top dogs. You may have limited marketing resources, but there’s nothing wrong with imitating the winning strategies of major retailers to promote your business. According to Davidson, retailers had success in 2011 by  sending customers emails in the middle of the night before key shopping days, using a landing page to entice sign ups for “VIP only” holiday offers, and visually previewing merchandise with dates of  sale promotions.  Keep interest alive in social media channels with sweepstakes, special social media-only promotions, and fun holiday-themed events that encourage interaction. For example, crafters might invite social media followers to post images of their holiday d├ęcor and vote for favorites, offering a grand prize of a gift certificate to a major retailer to help ease holiday spending. 

Give them a reason to buy. Holiday shopping season is not the time to hold back on promotions. Include premiums like free shipping on a minimum order amount, rush shipping at a discount, free gift wrapping, or a free stocking stuffer. Make sure all messages have a sense of urgency and relevancy to help cut through the barrage of holiday marketing messages.

Get creative with media coverage. Think creatively about what your business does and how you might spin your product or service into some holiday media coverage. For example, you might pitch your local news station on airing a segment that uses some aspect of products you sell or services you provide to help consumers save money or time on holiday spending or party hosting (or recovering from it)! As holidays draw near, think about how to tie your products into new habits that coincide with common New Year’s resolutions, like improved health, stress-reduction, and organization.


Stephanie Taylor Christensen is a former financial services marketer turned stay at home working mom, yoga instructor and freelance writer covering personal finance, small business,consumer issues, work-life balance and health/wellness topics for ForbesWoman, Minyanville , SheKnows , Mint , Intuit Small Business, Investopedia and several other online properties. She is also the founder of Wellness On Less and Om for Mom prenatal yoga. Stephanie wrote this feature article exclusively for Debbie May.com (www.DebbieMay.com), an organization dedicated to helping small businesses succeed.

Creating PR for Your Small Business


Public Relations consists of current, consistent, and accurate communications to your target customers and beyond.  The goal is to create and convey a message that convinces your audience to trust you and ultimately buy your products.

Many companies hire professional PR firms to supplement their in-house communications staff, but it’s possible for you to do your own PR if you have the time and know what steps to take.

Years ago PR focused on publicity stunts, free samples, surveys, and catchy advertising.  Today it’s more sophisticated and employs a variety of methods to get out your message, including: media commentary, bylined articles, community involvement, media relationships, and public speaking.


Create a plan
Your PR plan doesn’t have to be complicated or expensive to implement.  Here are the building blocks to be considered.


Goals – Define what you want your PR to achieve and set measurable objectives that you believe are achievable.


Perception – How you initially position yourself in the marketplace will have a lasting effect.  How do you want your business to be known in the community?  Are you the low price option, or are you going for a high-end clientele?  Is excellent service your number one priority?


Messages – Outline and prioritize the most critical facts that you want people to know about your business.  Refine the top three into short, crisp bites that are easily communicated and remembered.


Audience – Don’t think of potential customers as your only audience.  Broadly defined, this should include any person or entity that may have a stake or interest in your business.  Since word-of-mouth is one of the best forms of advertising, your audience should encompass current and former employees, friends, neighbors, suppliers, local and national media, civic organizations, and government officials and agencies.  Even your competitors have the power to spread a message about you, friendly or not.


Strategy & Tactics – Develop a blueprint for accomplishing your objectives.  This should include steps you’ll take to establish your position in the marketplace.  Tactics are the specific tools you’ll employ to
communicate your message to your audience and should include community outreach and selected media outlets.  Performing public service and participating in charitable events are excellent ways of obtaining free publicity.  Consider donating products and services to worthy community organizations.


Local Media – The local media can make or break a business.  Newspapers, community papers, radio
stations, and local cable channels are always on the lookout for a new angle or story, and fresh
approaches to business concepts.  Make sure you invite them to grand openings, open houses, anniversary events, and special promotions.  Let them know when you secure an important customer, solve a community problem, or win a business award.  Don’t be intimidated by reporters as they can help carry your message in exchange for your time and expertise.  That message can be as simple as what you know and what you do better than anyone else.


Implementation
While the internet has dramatically changed the marketing and advertising landscape, there’s still nothing more valuable than a positive mention of your business by an unbiased third party.  If that third party has tremendous trust and reach to millions of potential customers, it can be a life-changing event.
A great example of this is the recent hit song recorded by Carly Rae Jepsen of Canada.  When Justin Bieber tweeted to his millions of followers that Jepsen’s Call Me Maybe was “possibly the catchiest song I’ve ever heard,” it became an instant mega-hit.  While most of us will never enjoy that kind of superstar endorsement, you can mimic it on a smaller scale through energetic self-promotion of quality products.
If you open a new restaurant, an enthusiastic write-up by the local newspaper’s food critic can provide you with a jumpstart that paid advertising can’t easily duplicate.  The key is to capitalize on it and make sure that positive news gets the widest possible dissemination.


The List – Find the best five to ten journalists and bloggers who write about your type of business or your city.  Put Google Alerts on each one, read their articles, and find out their individual expertise.  You can demonstrate your expertise by commenting on their writings and make a name for yourself in the process.  This is one way to present yourself as a go-to expert should they need one.


Networking – The internet provides a simple and inexpensive way to insert your business into the forefront of other people’s minds.  Build online relationships by sponsoring Facebook promotions, engaging in online forums, trading links through Twitter, and maintaining your own blog.  Social media provide you with unprecedented access, and demonstrating your expertise will get you noticed
as a potential resource for future journalistic needs.


Press Releases – These allow you to control the message and frequency of your formal announcements.  Issue them to highlight important news and events, but don’t overuse them to the point where they become irrelevant.  Online distribution resources include PitchEngine and PRWeb where your releases will be picked up by search alerts and news aggregators.


Self-promotion – Suggest stories to your list of journalists and bloggers that show how customers are
benefiting from the products and services you provide.  If you’re having a positive impact on the community and its citizens, take the initiative to get that message out.  Cultivating the trust and respect of journalists is very important, so take the time to do it personally and professionally.


Online presence
Your website should include an online newsroom where you can direct the media to go for information.  Provide easy access to professional photos, videos, logos, press releases, product announcements, and multiple contact options.  Include links on your website to other resources and trade articles related to your business niche or industry.  The media need this information for researching potential news articles.
Put together a prepackaged media or electronic press kit that contains background information on your business, timelines, and important facts and figures.  Such a kit will save you time in the long run, make it much easier to respond to media inquiries, and ensure your message is clear and consistent.  Make sure the kit shows off your products in a compelling way that’s designed to generate maximum buzz.
Show off testimonials and positive customer feedback regarding your products.  Include a real simple
syndication (RSS) feed on your website that updates company news and product developments.  It’s free and easy to set up.


Summary
If you don’t have the money to spend on professional PR, don’t ignore the need for it.  It’s critical to creating lead generation for your business and building customer and brand loyalty.  Apple didn’t get where it is by being shy about promoting itself.
If you have a company vehicle, add professional graphics with your company name and contact
information.  Other important assets include convenient hours and a commitment to customer service.  If you don’t work from home, maintain a polished office to meet customers.Be an expert in your field and invite interviews from the media.  Before you know it you’ll be sitting on industry advisory boards and enjoying your business success.


Geoffrey Michael (www.geoffreymichael.pro) is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, entertainment, travel, and political analysis.  He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire.  Geoffrey wrote this feature article exclusively for DebbieMay.com, an organization dedicated to helping small businesses succeed.

How to Build Your Business Using Social Media (and Keep It Organized!)


You’ve heard of the benefits of using social media to market your business, but how do you execute an effective strategy that doesn’t require you to be a web guru—or consume your time? Here’s the lowdown on how to support your business with social media effectively, and strategically.

Facebook. Creating a Facebook page for your business, and building a fan following by suggesting that email contacts and existing Facebook “friends” like your page is the first start to a business presence on Facebook. Additionally, you should direct your website visitors to your businesses’ Facebook page with the “official” Facebook button, to build traffic to your page. With the fans you’ve secured, you next job is to stimulate your audience to “like,” comment on, and share your posts with others. The more fans interact with your page, the more you’ll show up in their newsfeeds, and in those of their friends via shares. Give your fans a reason to respond: Ask questions, offer “fan only” promotions, contest, and sweepstakes, and post images and ideas that strike an emotional chord. According to Facebook user engagement research by Buddy Media, posting between 8 p.m. and 7a.m., will increase the likelihood of“ shares,” too. To schedule posts automatically, select the clock icon to the left, when you’re in the status update tool.

Twitter. Unlike Facebook, Twitter is public information, but you should add your Twitter account to your businesses’ website, to gain followers. Though Twitter provides space 140 character updates, limit yours to 120 characters so others can easily retweet your message. Use bitly to bookmark and shorten Tweets you want to share.  To market your business on Twitter, become familiar with its basic functionalities: Hashtags (# followed by a word or phrase), and @ symbols. Twitter hashtags categorize information to help users find information relating to a specific topic, and to connect to users with similar interests. They’re also a great way of networking with other businesses, and their followers.  Unless you are specifically trying to promote a contest, sweepstakes or trend for your business (a great way to engage users on Twitter), keep hashtags to the point, and general. The @ symbol is used to direct messages on Twitter-- but placement is key. If you want to broadcast a Tweet to a specific person, place an @ followed by their username in the front of your message; it will be seen only by people who follow both of you. To broadcast to the “Twitterverse” including a specific person, place the @ username anywhere BUT the front of the message. If you want to retweet a message, use RT@ followed by the orginator’s username. Install TweetDeck to your desktop or smartphone to organize Twitter activity, and automate Tweets.

Pinterest.  The more interesting your “pin” (image) is on Pinterest, a virtual pinboard, the greater your odds of reaching the 24 million unique Pinterest users who might “like” or “repin” your pin to their own boards. Such sharing is the key to building your “pin” exposure on Pinterest.  Focus your pin on interesting and appealing images of products, ideas and tips that are natural extensions of what your business is about. Pinterest images should ultimately link back to the original source (which is your site, if you originated the pin), but you can also reference your site link in the pin description to ensure you get the credit you deserve. To market products you sell on Pinterest, type a $ symbol followed by the number amount in the description. 

Stephanie Taylor Christensen is a former financial services marketer turned stay at home working mom, yoga instructor and freelance writer covering personal finance, small business,consumer issues, work-life balance and health/wellness topics for ForbesWoman, Minyanville , SheKnows , Mint , Intuit Small Business, Investopedia and several other online properties. She is also the founder of Wellness On Less and Om for Mom prenatal yoga. Stephanie wrote this feature article exclusively for Debbie May.com (www.DebbieMay.com), an organization dedicated to helping small businesses succeed.

Taming the Bully Within


Taming the Bully Within

Most of us have witnessed or experienced the affects of bullying or being bullied in children; it can be devastating.  But the bully experience is not limited to children; adults are bullied too. It happens in the workplace as well as in personal relationships. 


An adult bully will attempt to gain power over another person to make himself the dominant adult. The bully may come to you in form of the customer who refuses to play by the rules, always pushing the limits by demanding more and paying late. Or he may be the guy in bumper to bumper traffic who beeps at you incessantly even though you can’t possibly get out of his way. Hopefully, you don’t experience this behavior in others and surely you do not treat others in this way – but how do you treat yourself? Is it possible that the bully in your life is – you?


Self-bullying is one of the most negative, destructive behaviors to engage in, yet it’s not all that uncommon in the uncertain entrepreneur.  Do you demand perfection from yourself? Do you shoulder the burden of responsibility when things don’t work out quite as you’d planned? Do you sometimes call yourself names and entertain the voice within that constantly tells you that you “should have done this and could have done that”? Perhaps you negate your achievements and criticize yourself for not doing more, noticing the slightest imperfection in nearly everything you do. If any of these behaviors ring true, it’s time to have a chat with your inner-bully.  


But first let’s take a look at one of the reasons that this bully within you exists. Consider this: if you criticize your efforts, tell yourself that you “can’t” do something, and put yourself down on a regular basis, how likely are you to try new things or take further risks? For the self-bullying personality progress can be slow, if at all. But your subconscious mind doesn’t see that as a bad thing because it’s there to protect you from your worse fears. If your worse fear is failure, then your well-meaning subconscious mind will send messages to your brain to talk you out of taking risks; it will bully you into submission. It means well, but at a conscious level it seems counter-productive, doesn’t it?  

But your subconscious mind is only doing its job. It is protecting you from being let down and experiencing the failure that you fear so much. And to some degree that feels just fine because as long as you don’t take the risks associated with success, you still have hope – and hope is something we all want to hold on to. 

With that in mind, you have a new goal:  to teach your subconscious mind and your brain that the inner-bully is no longer needed and that hope is yours to keep, no matter what.  Here are some tips to curb that bullying voice within.

When the inner-bully gives you negative feedback or creates worrisome thoughts ask if it is real. For instance, if the inner-voice is telling you that you will only fail if you do x,y, and z, ask yourself if that’s true? How do you know it’s true? Can you state without a doubt that you will fail? Probably not. But if you are convinced that you will fail, move forward with this next question.

What will happen if it happens? Then what? 

Usually when we ask this question, we can come up with logical and reasonable solutions for the next step. It helps us to see that this “bad thing,” like failing, isn’t the end of the world. We can move on to the next empowering step. Lastly, identify and initiate one small step to challenge the inner-bully and achieve something that you can feel proud of. What is that next step? How will it feel to take a step toward your goal? Even if this step feels small and relatively insignificant, that’s okay. Each little step will give you more and more momentum and will get you to your vision much faster than doing nothing at all!

Marla Tabaka is an entrepreneurial coach who inspires entrepreneurs around the world to attain what she calls, The Million-Dollar Mindset. As a result, many of her clients have achieved – even surpassed – the million dollar mark in annual revenues and are living the life of their dreams. In addition to running a thriving practice, Marla is a columnist for Inc. Magazine on-line, and hosts two international on-line radio shows, The Million Dollar Mindset and Million Dollar Mindset Tapping. Marla wrote this feature article exclusively for Debbie May.com (http://www.debbiemay.com/), an organization dedicated to helping small businesses succeed. If you would like to consult with Marla to learn how she can help you grow your business and better your life, contact her at Marla@MarlaTabaka.com


Calling All Readers!


I’m asking all of Debbie’s readers to think about topics you’d like me to write about in the future.  While my past focus has been on business, marketing and finance, I can expand that to directly related subjects.

Submit as many ideas as you like.  I can’t promise which topics will be covered but I will promise that all ideas will be carefully considered.  The main criteria for selection will be:

1. Topic that hasn’t already been adequately covered on the website
2. Falls within the areas of business, marketing and finance, and directly related subjects
3. Oriented toward small business owners
4. Approved by Debbie as appropriate and beneficial for her readers

It really helps me to know what readers are most interested in because you are in the trenches every day running your businesses.  I’d enjoy hearing from you, no matter how off-the-wall your topics may seem to you.

Please send your ideas to socialmedia@wholesalesuppliesplus.com and put Business Article Idea in the subject line of your message.

Thanks, and I really hope to hear from you!

Geoffrey Michael (www.geoffreymichael.pro) is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, entertainment, travel, and political analysis.  He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire.  Geoffrey wrote this feature article exclusively for Debbie May.com, an organization dedicated to helping small businesses succeed.

Dealing with Sunk Costs


All of us have dealt with sunk cost at some point, but may not have realized it at the time.  Here’s an example.

You buy nonrefundable, advance tickets to a play that can’t be resold.  Your out-of-pocket cost is $50.  A few days later you hear from several of your best friends that the play is horrible and not worth seeing.  If you still go to the play, you’re faced with spending another $50 for a babysitter, gas for the car, and parking at the theater.  What would you do?

Many people would decide to go because they feel they have to “get their money’s worth,” even if that means sitting through a show they don’t like.  If that happens they’ve compounded the monetary loss by losing a few hours of their time, an opportunity loss they’ll never get back.  The decision is rationalized by the need to avoid “wasting” the initial $50 investment, at any cost.  So they go, hoping their friends are all wrong.

Definition
The $50 for the tickets in this example is a sunk cost.  Once a cost has been incurred and can’t be recovered, it’s a sunk cost.  Whether or not you go to the show is irrelevant to that fact.  Sunk costs are completely independent of any event or additional expenditure that may occur in the future.

This concept applies to your business as well as your personal life.  There’s a significant psychological barrier to ignoring sunk cost when making decisions of all kinds.

Application
Once you invest money into something, there’s no reason to invest more money if recovery of the initial investment is unlikely.  Another way of saying this is that you should avoid throwing good money after bad.

In the example above, if you don’t go to the play you’ll lose $50.  Human nature dictates that most people will avert loss under almost any circumstances.  Instead of making decisions solely on the merits, they’ll consider a host of other factors that veer from a purely economic solution that considers only variable costs.

If you go to the play and don’t like it, you’ve now upped your loss to $100.  Does that make sense given the warnings from friends that have tastes similar to yours?

Distinguishing Sunk Cost
Some costs you incur may have no tangible benefit, but that doesn’t mean they’re sunk costs.  A good example of this is the premiums you pay for business insurance.  For many businesses, these premiums amount to thousands of dollars over a period of years without ever filing a claim.  You can’t consider that sunk because you gained the benefit of protection from potential losses.  Those fortunate enough not to experience such losses are not wasting their money by buying insurance.

Dilemma
Many homebuilders over the past few years have had direct experience with the sunk cost dilemma.  Assume that during the housing bubble, you started work on a new development with 30 spec homes.  You’ve done all the site prep and started construction on the first 10 homes when the market starts to crash.

By the time the homes are half completed, the housing market is collapsing all around you.  You’ve got several hundred thousand dollars invested in the project and now you’re faced with a critical decision.  Do you invest even more money and finish the project, hoping for a quick turnaround in the market?  Or, do you ignore your sunk cost, stop work and save the additional money it would take to complete the construction?

Most people would find it difficult to walk away from an investment this large.  The real-world dilemma posed in this case is a stark choice between certain loss and uncertain success.  If you stop work, your sunk cost is essentially lost forever unless you can find another builder to take over the project.  That’s not a likely prospect given the depth and breadth of the housing collapse.

If you ignore the sunk cost and keep working, you face the possibility of losing even more money it you can’t sell the homes fast enough to pay your bills.  Gambling on an economic recovery could lead to bankruptcy and possibly the loss of your entire business.  The only way to resolve the dilemma is to stop work or finish the project.

Making Decisions
Every business incurs sunk cost at some point.  When faced with a decision to ignore sunk cost, one approach suggested by many economists is to “act on the margins.”  The idea is to make a list of potential choices along with the benefits and additional costs associated with each, essentially a cost/benefit analysis.  This forces you to focus on the future and will help you choose the option offering the maximum net additional benefits. 

By basing your decision on the relative merits of each option, you’ve set the past aside and made sunk cost irrelevant to your decision.  The amount of sunk cost won’t change regardless of what you do.

Summary 
If decisions were entirely made on a rational, economic basis, sunk cost would be very easy to deal with.  The reality is that psychology and human emotion often play a large role in our decision-making process.  We’re tempted to ignore the numbers, take calculated risks and go with our gut instincts.  Sometimes this works, only serving to validate our belief that we know better than the facts staring us in the face.

Many business owners routinely face decisions that involve sunk cost.  The successful ones have adopted their own strategy for evaluating alternatives before they’re faced with a crisis requiring them to shoot from the hip.  You’re not the only one who’s determined to avert losses, but sometimes it’s best to cut your losses before they get worse.  Step back, regroup, seek good advice and then make a sound decision based on the best available data.

Geoffrey Michael (www.geoffreymichael.pro) is a freelance writer specializing in business, marketing, personal finance, law, science, aviation, sports, entertainment, travel, and political analysis.  He graduated from the United States Air Force Academy and is also licensed to practice law in California and New Hampshire.  Geoffrey wrote this feature article exclusively for DebbieMay.com, an organization dedicated to helping small businesses succeed.