During the Economics module of my MBA program (Go Wildcats!!) I found that in the midst of a lot of very interesting information and principles – one really stood out. This one core economic principle gave language to something I had observed and already believed to be true. When I saw it in economic terms, it helped me better understand why I felt the way I felt about it. In fact, it reinforced it and codified it as an operating principle in my business thinking. This principle even applied to life in a broader sense. It is also a principle I have seen violated time after time in large and small companies. I think this happens because it can seem a bit counter intuitive.

Let’s look at a typical response from a manager about an employee who is underachieving- and ultimately can’t be brought up to speed, “we have already invested so much money into this person, we have to make this work”. How about the product development manager: “we have already put in a million or a hundred million or a billion dollars into this- we can’t kill it now”. And of course the marketing campaign: “we can’t just stop it because we’ve already invested so much money.”

The economic principle?
Every business decision should be made at the margin.

Among other things, “at the margin” simply means that sunk costs can never be recovered. At least not by simply putting more money into the same decision and process that lost it. The money that’s left the building will never come back by doing more of the same. That is to say that the money you have invested in Project X or Person Y or Initiative Z will never just come back to you.

The only question that needs answering is:
What is the best use of our next dollar?

If you have put 5 million dollars into this ad campaign, and it has failed to generate results, will another million dollars applied the same way produce better results?

With today’s highly measurable advertising, primarily but not exclusively via the web - it’s hard to justify an ad campaign’s continuation simply because you have organizational momentum.

Can you trust the results? Whatever the investment – increasing it (“doubling down”) will not magically change the results. So if a dollar in only generates fifty cents out, then another dollar in will generate the same fifty cents! This is madness and a lose-lose situation – you are better off cutting your losses and just saying, “At the margin, the next best use of a dollar is either back into the budget for another purpose or reconfiguring, redeploying or rethinking what it is that we are doing”. It is never to just continue down the same path.

This is liberating!

Many managers and owners would benefit greatly by embracing this truth because it is always true.

How about you?

Do you made decisions at the margin?

Or have you been captivated by your past investments and felt compelled to justify that investment by continuing it?

Tagged as: Economics, Strategy, Value Proposition