Photo CC by Joanbrebo

Guest post by Mike Humphrey, Japan

Skiing has been part of my life for as long as I can remember. I don’t know why my parents decided skiing would be our family sport. They were not avid skiers, and we didn’t live in a ski town. Whatever the reason, I was on skis at 3, and my love for the sport began. We would spend every weekend in the winter on the hill.

When I was 15, I became a ski instructor. Skiing is my passion. I love being out on the hill, and I love the mountains.

As I grew older, skiing was still part of my life, but it became a hobby. I went to university and got a job. I started a family, and things were going well. I would ski weekends at our small local hill, but it was slowly being relegated to an afterthought.

That all changed seven years ago when I left my corporate job. It was time for a life choice: continue with my career or make a change. With some savings in our account and dreams of powder turns, I leapt. I left my job and moved our family to a ski town in Japan.

It has been seven years since we moved to the mountains, and it has been filled with joys, challenges, and, of course, skiing. In that time, we have operated two hotels and a restaurant and weathered the storm of Covid. It has been a hell of a ride, and not without its difficulties. Despite the challenges, I would never return to working a corporate job.

Read on to discover the challenges we faced while building a business and our dream life in a small mountain town.

Photo CC by Cookie M

The Challenges of Running a Small Business in a Ski Town

1 – Seasonal Customers

The highs and lows of running a business in a seasonal destination, whether a ski town or a beach destination, are extreme. During the winter, the city’s population triples in size. In the span of 4 months, we get 400,000 tourists visiting our small village of 5,000 people.

The influx of customers is terrific for business but not always for sanity. Imagine the demand for your products skyrocketing for four months and then crashing back to almost zero as soon as the snow starts to melt.

As a business, you need to develop systems and processes to adapt to the extreme shifts in market demand.

Choosing a Business Model

There are generally two models to choose from when you decide what business to run. You can cater to tourists, or you can cater to residents. The best businesses are the ones that can manage to do both.

Catering to Travelers

With this model, you fully embrace the higher-paying tourists. You charge higher prices and focus on optimizing your returns for tourists. During the low times, you minimize your expenses and either shut the business down or drop prices and try to scrape by attracting lower-paying guests.

This is how we operated when we ran our hotel. We were very strategic with our opening dates and only worked during the peak season. During the slow times, we shut down the hotel, went into maintenance mode, and did upgrades.

This worked well when there were lots of guests, but if you have a terrible snow season or a global pandemic, for that matter, you can run through your reserves quite quickly.

Catering to Local Customers

Your goal here is consistent revenue throughout the year. You have to choose your prices to match the local market. Your customer base is smaller during the low season, but during the high season, your revenue jumps drastically.

This is the model we use to run our restaurant. We live and work in the community year-round and provide good food options at reasonable prices regardless of the season.

By establishing relationships with residents and business owners within the community, you can develop a strong clientele that will sustain you throughout the year. Those relationships help you to flourish during the high season when residents recommend your services to travelers in town.

Catering to Locals and Tourists

Matching both markets is a tricky needle to thread, and I haven’t seen many businesses do this successfully. Essentially, you must provide a service that can increase prices during peak times without alienating local customers. The closest we came to this was with the hotel, which had peak and low-time pricing. But this isn’t catering to local businesses; it’s just modifying your pricing to match traveler demand.

Photo provided by Mike Humphrey

2 – Staffing

Ski towns have some unique staffing issues that can be challenging for small businesses to overcome. The small local population combined with the boom and bust market makes staffing one of the most difficult things to deal with.

Staff Training

In a ski town, the money-making window is short, and staff is transitory. We hired 5 – 7 staff during peak season to help run the hotel. They would arrive early to mid-December, 1 – 2 weeks ahead of our first guests.

We rarely had repeat staff, and they had to be fully trained before the Christmas rush. It was trial by fire. You have to get them up to speed in 2 weeks so they can provide the best customer service possible. When the guests do start to arrive, it’s crunch time. You are running at full capacity almost immediately.

It’s the perfect storm. You need to hire the right people and have outstanding training programs and processes in place so they can hit the road running as quickly as possible.

Finding Good Staff is a Challenge

While this may be true for any industry, working in a ski town is appealing because you can ski. There is always a balance between finding a good employee and their desire to hit the hill.

As soon as the ski season starts, it’s too late to hire someone new. You better find the right people at the beginning and make sure they are doing a good job. Having to fire underperforming staff mid-season is a considerable risk.

You have to weigh the negative impact of keeping the employee on versus the risk of being short-staffed.

I have been through both experiences, and it was better to let the person go instead of hanging on.

Here are some tips for finding good staff.

Ask For Recommendations

Ask previous and current employees if they know anyone who would be a good fit. Check with friends and family or other business owners in the area.

Watch Out For Red Flags

Trust is critical; skills can be taught, but trust and work ethic can’t. During the interview process, look for signs that there may be issues. Identify them immediately and be upfront. Don’t move on until you feel entirely comfortable.

Check references. Call them and have an honest conversation. Ask what issues they had with the employee.

Use Contracts To Your Benefit

An employee contract goes a long way to establishing a good relationship with an employee. Reviewing and signing a contract makes your relationship official and keeps your employees committed.

Photo CC by lamoix

Retaining Staff

The boom-bust nature of the ski industry means you can’t always keep staff all year long. The business can’t sustain employees during the low season. You always run a skeleton crew during the off-season and go into maintenance mode.

This means retaining good employees is hard. Expecting people to stick around and barely make enough money to live is unreasonable. Here are some ways to keep staff all year round.

Provide Extended Vacations

Give staff the chance to take time off during the shoulder seasons. They can take the opportunity to travel or go home to see family.

Reduce Staff Living Expenses

Consider alternative living arrangements or provide food through your business.

Collaborate with another business and offer a trade. Provide your services in exchange for cheaper accommodation for your staff.

It’s Hard Work

You have to make hay while the sun shines. For 4 – 5 months, you run flat out. Not only that, it’s playtime as well. You want to be out on the hill as much as you want to run your business. It’s easy to be understaffed and run your employees ragged. It’s a 4-month whirlwind of activity that can be hard to handle.

The critical takeaway is good hiring, training, and processes/systems. Watch for red flags when hiring staff; do not ignore your feelings about people. Don’t get me wrong, I have had some exceptional employees, but I’ve also had some horrible ones. Getting staffing right is crucial to making your small business work in a ski town.

One-on-one Training

When you’re in the thick of things, spending an hour or two with your employees teaching them may feel like a waste of time. But this is time well spent. An hour now could save you 10 – 20 times that time later in the season.

Learn From Other Businesses

We have friends who manage a hostel. They offered to take us through the building to show us how they managed their property. Here are some of the changes we made:

1. We added a self-check-in process for late arrivals
2. Better Signage
3. Better local information Kiosk

Hire an Expert

If you’re unsure how to get better, find someone who has done it before and offer to pay them for their time. Have them watch how you run your business. Then, get them to make recommendations on how to improve.

Lessons Learned

After the season, talk with your employees about how things went. What things did you do well, and what could be improved? What pain points did the employees experience? Your perspective and the perspective of your employees will be different, and it’s essential to record what you learned.

Document

Solid documentation can be a great way to leverage your knowledge and compound your efforts. Keep records of everything you do. I like to use a Google Folder to build up a library of procedures. Whenever I need to use it, I review it and try to improve it. Things to document:

1. Role Descriptions
2. Job Postings
3. Marketing Materials
4. Standard Operating Procedures
5. Annual Schedules
6. Maintenance requirements
7. Licensing renewals

This list will depend heavily on the type of business you run.

Implement

Last but not least, implement. If there is no action or change, then nothing will improve. I like to use project management software like Asana or Wrike to break everything down into manageable tasks. It will eventually get done as long as it’s written down and recorded.

3 – Cashflow Management

Cashflow is king, and managing your finances through a ski town’s boom and bust cycles is tough. Your business depends on tourists arriving at the start of the season to keep it running.

Building a reserve that sustains your business throughout the year is essential. But you also need to balance this against re-investing in your business. Cash sitting on the books doesn’t help your business grow and expand.

4 – Work-Life Balance

Running a business in a ski town is not all fun and games. You must be organized, stay on your toes, and manage your time well. It can be easy to get overwhelmed by the pace.

You can use the winter playground if you manage your business well and have the right staff. However, if you don’t, you will run yourself ragged, trying to keep everything afloat.

Final thoughts from a seasonal business

So, if you’re considering launching a business in a ski town, remember these points.

First, be prepared to put in a lot of hard work. It may not seem glamorous, but running a ski town business takes dedication and determination.

Second, be mindful of costs and stay on top of your finances. Knowing what you’re spending and where it’s going can help ensure you stay profitable.

Third, hire and train the right people to help you build a successful business. Finding and building a great team will make your life more enjoyable in the long run.

Finally, take advantage of where you live. Enjoy the mountains, the people, and all a ski town offers. It’s an incredible experience and one you won’t want to miss out on. I have seen too many business owners forget why they started their business and don’t get out and enjoy the lifestyle.

Photo CC by Radek Kucharski

Frequently asked questions: seasonal business

What are the peak seasons for running a business in a ski town?

The peak seasons are typically winter and summer when people come for skiing and summer outdoor activities.

Is it possible to maintain a steady income all year round in a ski town?

This largely depends on your business model. Some businesses are seasonal, while others offer services that are in demand year-round.

How do I attract local customers in addition to tourists?

Offering locals-specific discounts, involving your business in community events, and building a solid local reputation can all help attract local customers.

What challenges should I expect when running a business in a ski town?

Challenges may include:

• Dealing with the seasonal nature of business.
• Maintaining a steady workforce.
• Managing cash flow

How important is fostering relationships with other local businesses in a ski town?

Very important. Strong relationships with other businesses can help you stay informed about local trends, collaborate on joint initiatives, and create a support network.

Any advice on maintaining work-life balance while running a ski town business?

Schedule regular breaks, get involved in local activities, and ensure you take time for yourself and your family. Remember, enjoying your surroundings is part of the ski town experience!

About the author Mike Humphrey

Mike Humphrey is a writer and entrepreneur. He has operated several hotels and restaurants and founded mykhumphrey.com, where he writes articles about business, freelancing, remote work, and living abroad.

Do you tend to panic about a lack of business at a certain point during the year?

Do you always feel like you’ll never get enough bookings for the fall?

I know several independent professionals who feel like this:

• a professional photographer who always worries in late summer that there won’t be enough bookings for senior portraits in the fall
• a bed and breakfast owner who gets nervous about seasonal bookings not coming in
• a professional speaker who feels panic when nothing is on the calendar during “dead periods”

You know who deals with this most? Seasonal businesses.

The simple solution: Put a reminder on your calendar for next year.

Around the time when you would normally panic, put a reminder or event on your calendar. Include a measure of where you were at this point during a year when you survived.

Your reminder could include a specific number:
“20 fall sessions booked on August 1 last year.”

Or just give yourself a bit of encouragement:
“Remember that there’s usually nothing booked at this time of year, but you’ll get through this.”

If you have tips for keeping a positive outlook during slack times, add it in the comments.

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Photo credit: josealbafotos on Pixabay

Guest post by Rob Hatch

My dear friend John Grossman and his wife Dawn own the Holyoke Hummus Company in Holyoke, Massachusetts. I’ve marveled at how they grew from setting up a small folding table at a local park selling falafel sandwiches to acquiring a cart. Next, they outgrew the cart and bought a food truck. They eventually opened a restaurant.

I appreciate their growth because John tested each stage and grew based on the results.

Don’t get me wrong, it wasn’t easy, and some steps tripped him up, but each stage built on the success of the previous one.

Pandemic Adjustments

In the early days of the pandemic, restaurants shut down. So, like many others, John made the switch to pick-up or delivery orders. But maintaining a full, sit-down restaurant didn’t make sense financially. [Read our October 2020 story on Holyoke Hummus.]

John adjusted quickly. He moved his food prep operations to a co-kitchen. Then, he partnered with a new cannabis dispensary where he could park his truck and serve. This spot became the new pick-up (and walk-up) location.

It was great. Locals could venture to the truck to grab a bite, and the online delivery orders kept coming.

Of course, that changed when restaurants reopened. Suddenly those pick-up orders slowed down.

So, John adjusted again.

Not going back to a restaurant

He stopped his truck service at that location and shifted his focus to his business’s catering and events side. He continued to use his food truck and food trailer, which are far more profitable than the restaurant.

While this was all happening, John hired a food scientist to replicate his hummus recipe for large-batch preparation and eventual supermarket distribution.

From the outside, owning and operating a restaurant has all the indicators of achieving a certain level of success. But, in reaching that point, it might be tempting to hold on to it too long for fear of having to do what feels like a failure or at least take a step backward.

John’s story is different. First, he did what he could to make adjustments and stay put through the pandemic. But when it became clear that wasn’t going to work, he changed his model.

Shift to What Works

The phrase Fail Forward gets used a lot. And while I get that, it seems like that’s what is happening here. But I’m not sure it is.

At its core, the Holyoke Hummus Company makes and sells delicious food. They have a variety of proven methods for getting that food to their customers. And when one of those methods stopped working, John shifted to something else; something that had worked for him before.

And the shift did work until it didn’t. So John shifted to something else that has worked.

We spend so much time worrying about our failures or attempting to mine them for precious lessons.

Maybe we need to change that approach and shift to what works.

Find out about Rob Hatch’s coaching

One of the Small Town Rules is to spend your brain power before spending dollars. Be creative about how you handle challenges rather than to throw money at the problem.

Venture capital vs. Bootstrapped

We’ve all heard about startups that have been funded by whatever venture capitalist or angel that has just dropped a truck load of money on them, so they’re just throwing money at every single challenge that comes up. They burn through all that money without doing the creative thinking.

The opposite of that is bootstrapping. Startups funded only by their founders are more likely to say, “I’m going to do it on all my own money, and I’ll figure out how to make it work. Because it’s my money, I’ll make it go as far as I can.”

The free solution

The example I like to share is from my liquor store. When my mom took over the store back in the 1990s, she started carrying a lot more wine than the previous owner had. She needed a place to store the extra wine in the backroom on its side to keep the corks moist and preserve the quality of the wines.

Mom didn’t have any of the specialized wine racking that was available for sale. That costs money. This was for the backroom, so appearances weren’t important. It just had to work. My mom was not about to spend money she didn’t have to.

She dug around and found old bookshelves she already had. Then she took the divided cardboard boxes wine was shipped in, put them on their sides on the bookshelves, and made wine shelves for the back room. It cost her nothing to do that. We were still using those cardboard boxes on shelves 20 years later. We hadn’t spent money on commercial shelving, and it worked just fine.

Why buy expensive commercial wine racking for the back room when you can make your own for free? That’s spending your brainpower before your dollars. Photo by Becky McCray

Have you filled out the Survey of Rural Challenges? Find it here. 

How Holyoke Hummus stays Idea Friendly through a crisis

One of the first small steps: a used minivan and a tiny food cart. Photo courtesy of Holyoke Hummus Company.

John is the owner of Holyoke Hummus in Massachusetts, along with Dawn and their family. Like a lot of food entrepreneurs, John started by cooking for friends and family. He grew through a series of small steps and experiments, from selling at a folding table at a event, through a tiny food cart, a mobile truck, and pop-ups at more events. Eventually, he opened a cafe in downtown Holyoke across from city hall.

Holyoke isn’t a small town, but you have seen this same type of experimentation by entrepreneurs in small towns that you know.

This was a perfect example of the Idea Friendly Method in business. You start with your big goal. You use that goal to Gather Your Crowd. You turn your crowd into a powerful network by Building Connections. And you and your newly-powerful network accomplish that goal by Taking Small Steps.

Through each step, John was Gathering His Crowd as he built a following. He was Building Connections networking to find resources and answers before taking each step. And of course he was Taking Small Steps.

Business was up and down, mostly good, until COVID hit and closed down the downtown around him.

John didn’t stop. He closed his dining room, of course, but he kept experimenting. As soon as mobile dining was allowed, he converted his cafe to a production base for his food truck. He is also exploring opening it as a shared kitchen for other food businesses needing a base for their mobile operations.

Another small step, the food truck. Before investing in a custom paint job, a small banner held on with bungee straps was good enough to test the market. Photo courtesy of the Holyoke Hummus Company.

Since the downtown location wasn’t working anymore, he wanted to test a new location for his food truck in a nearby community, but there’s a local regulation that doesn’t allow selling from food trucks on the streets. John found the owner of an empty muffler shop building. He asked him for permission to park on his parking lot, and the owner said yes. So he’s setting up shop on the empty parking lot and building a new customer base. Another Small Step.

It’s not easy to keep a business going when a crisis hits, but the Idea Friendly Method makes it possible to move forward without knowing all the answers.

Thanks to our friend Rob Hatch for sharing updates on his friend John and the Holyoke Hummus Company.

Update: 2022 Growing again

Holyoke Hummus is still adapting to changing times. Read how they’re growing without going back to a restaurant.

Idea Friendly means you don’t have to know it all

You don’t have to know all the answers. You just have to be open to new ideas.  

Being open to new ideas requires us to let go of worrying about whether the idea will work. Lots of those ideas will fail. In fact, most ideas will fail. By keeping the tests and trials very small and immediate, we can reduce the cost of failure to almost nothing.

Author Clay Shirky says “Failure is free, high-quality research, offering direct evidence of what works and what doesn’t.”

It will never go back to the way it used to be. You have to start from here and go forward, one small step at a time.

Get the Idea Friendly Method Video

At SaveYour.Town, we’re offering a special video on using the Idea Friendly Method to make your community a better place. Learn more about the Idea Friendly Method video at SaveYour.Town.

When businesses reopen for customers after lockdown, it’s not going back to the way business used to be. Chris has 5 shifts for you to consider.

As different places begin to allow local businesses to open up, you’re not alone if you’re breathing a sigh of relief mixed with a gasp of worry. We all need the money. We all want to get back to being useful for the people we serve. And some or most of us are worried about what happens next. Let’s talk about some of it.

OPEN UP! It’s the Customers!

Remember this above all else: everyone is tense. No one will likely be their most courteous and their best behaved. No matter how grown up and strong we all our, this really counts as actual real mental trauma. It’s going to take a bit to get over it, and that means you as the business owner will have to smother their customers and prospects with kindness, but there’s a lot more.

1. Clean Up

Customers are going to want to understand how you’re handing a clean work environment after this pandemic. Even if you personally think it’s silly in some cases, don’t discount your customer’s vote on this one. Make it clear and obvious and explain how you are handling everything, even things you can’t imagine someone wondering about like whether you disinfect your cardboard before boxing up their product. (Turns out this is a big and common question now when people consider purchasing something online.)

2. Sell Online

Even after the big bad bug is finally vanquished enough for us not to care about it, people are used to ordering and buying online for many products and services you can’t even imagine people getting remotely. I have a friend who sells hay and the moment he got the web store live on his website, he had orders.

3. Communicate More

Partly because of online sales and definitely because of this “If I can’t see it, how do I know what’s going on?” mindset, people are looking for more “touches” between themselves and companies, even in B2B situations. If the order typically takes a week to build and ship, then give people updates every day or two. When I ordered DoorDash to get a burger sent to me during lockdown, I received five or six texts from the app, telling me the food was being made, the food was ready for pickup, the driver picked up the food, the driver is two minutes away, and the driver is here. Do something like that.

4. Consider New Payment Options in Two Ways

On the one hand, if you’re not using things like PayPal, Stripe, Venmo, and Cashapp, you might want to get some accounts setup. People are sending money through multiple channels. Second, you might realize that with nearly 30 million people unemployed in the US on the day I wrote this to you, cash is tight. You might have to sell “smaller bites” versions of what you offer, so that people can afford you. There are many creative ways to work on this.

5. Reach Out

It’s no surprise that this is my advice. I’ve spent twenty years begging companies to use tools like video and audio and good email marketing to reach potential customers. There’s a lot to this, it seems, but at the root of it all is the same goal: communicate and connect with the people you hope to help and earn the right to sell and serve.

Here’s help

To that end, Becky and Deb have a whole new program about learning to restart your local shopping. If that’s your kind of small town business, then it’s pretty important you check that out.

If not, realize that all businesses are going through some form of what you’re experiencing and that it’s important to accept that it won’t be perfect. But know this, also: people are really getting behind “shop local” in a way they’ve never expressed it before. This might be an ideal time to change up some of your work and really earn their money and customer longevity.

You ready?

By Chris Brogan

As the world starts to ask what’s going to happen when this pandemic is finally over and we can look at what it will take to jumpstart the economy again, one venture capitalist says we have to save Main Street and not bail out banks and hedge funds. Chamath Palihapitiya said in a CNBC interview that the way back requires a different perspective.

“On Main Street today, people are getting wiped out. And right now, rich CEOs are not, boards that had horrible governance are not, hedge funds are not. People are.”

You know that we spend no time here at Small Biz Survival pointing fingers or laying blame, and we’ve been here with you for years helping rural and small town businesses navigate the world, and that’s why this interview might prove interesting to you. It’s an important voice telling the nation that your business is who needs the help.

Don’t Wait for Handouts

As with all things, anything the government intends to do to help your business won’t come quickly enough for most people. It’s your job to rebuild and get your business back to thriving. Don’t wait for the handouts at all, but when they come available, don’t let your pride get in the way of filling out a few forms to get some “wiggle room” on the way to your recovery. You’ve worked hard and deserve that money more than the usual people who get bailed out.

Get to the Core Business

Over the years, maybe you’ve added and added and added to your business. Coming out of this pandemic might be a time where people will want the core of what you do more than anything else. Everyone is dealing with information overload, choice fatigue, and overall world-weary feelings. Make everything easier by offering your core service. If you do people’s taxes, offer your tax time services and monthly/quarterly bookkeeping. That’s it. Don’t get all that heavy into the other offers. Look at what makes your business important and strengthen that, keep the the “extras” and choices to a minimum.

Upgrade Your Payment Methods Now

Make it easier to accept payment from different sources, such as PayPal, Venmo, CashApp. As people struggle to make ends meet, smaller and faster money transfer technologies are used more. It’s worth your time to get your ability to be paid in multiple ways up and running faster than not. Never forget that YouTube has plenty of free videos to walk you through the setup and use of any new app you don’t yet understand. It’s a lot easier than you think (with a little guidance).

Reach Out

When times are tough, we tend to clam up and go inside. We don’t want other people to know we’re going through a bad spot. And it’s fine not to highlight that too loudly, but rest assured. The entire world is in this with you this time. Everyone out there is missing a payment here and there. People are digging into their life savings more often than they want. You’re not alone.

Reach out to your buyers. If someone hasn’t been in lately and you know how to reach them, do it. Ask if you can help. Offer different arrangements, if possible and if that helps. Don’t cut your prices. Everyone has to eat. You’re not a charity (unless you are). But connect with people and make sure they know you’re here to help. Send mail if you have their email address. Call if you’ve got a number. Keep your customer base warm.

You’re Valuable

We’ve said it all along. Small town businesses and rural companies are the backbone of what makes this nation run. Don’t wait for the cavalry. You’re the one who will save your business and you’re the one who will put this country back on its feet. Go get it.

Rather than seek outside funding to get started, Shawn Anderson grew his kettle corn business from his yard and on the road before buying an existing business in Webster City, Iowa. Photos via Deb Brown.

If you need outside funding to get to the next step in your rural small business, your next step is too big.

Before you bet big on your business idea, test it with small steps. Make some sales from your front yard, then try a booth, then a trailer, then think about moving up to a small building.

Before you borrow money to buy a new piece of equipment, find a smaller step you can take. Borrow or rent equipment temporarily. Share equipment with another business, splitting the cost. Subcontract out that part of production to another business. Redesign your product or process so you don’t need that equipment after all.

Before you go into debt to fix up an older building, think smaller. Find a tiny space to occupy first. Share space with an existing business. Go mobile. Open smaller in a few towns rather than bet everything on a single location.

Go Small or Go Home

This is some hard-won rural wisdom. Better to stay small than go into big debt. Expect that you’ll face some zero income times. Don’t take on more responsibilities than you can cover. Be ready for banks to be bought out, loan portfolios to be sold and resold to unsympathetic lenders. These are part of the Small Town Rules: Be Small to Grow Big, and Plan for Zero.

Have you taken small steps?

If you have a story about taking small steps to stay independent, I’d love to hear about it.

New to SmallBizSurvival.com? Take the Guided Tour. Like what you see? Get our updates.

This future gym almost didn’t happen because of sunk costs, and the business owner almost didn’t realize it. Photo via Micah Lorenc

Guest post by Micah Lorenc

Let’s talk about a topic that’s commonplace in business schools, but not as familiar to rural small businesses. I’m talking about Sunk Costs.

I recently had a conversation with a close friend who is pursuing a new business opportunity, building a gym in a small, rural town in Southern Utah. His new business is closely related to an existing fitness business he started over a year ago. The challenge he is facing is that starting a new gym would mean going in a very different direction than his current business. As we talked, he was struggling to determine how to transform, or even merge, his previous business into the new gym without losing the investment of time and money that he put into the former.

After we had a brief discussion about the concept of sunk costs, he realized that his aversion to losing what he had invested in his old business was inhibiting him from moving forward and committing to his new venture. Being able to ignore the sunk cost associated with his first business liberated him, and he started coming up with exciting, fresh ideas about how to build his new business in a better way.

For those who need a refresher on sunk costs, let’s start with the basics. By definition, a sunk cost is a cost that has already been incurred and cannot be recovered. Now, on the surface this sounds really straightforward; if I spent money on something, and there’s no way to recover any of the money I spent, then it’s a sunk cost. However, when considering sunk costs in business decision-making, it’s not always black and white.

Sunk costs become applicable in business decisions when you understand the sunk cost fallacy, which is this: when we justify further investing in something because the resources we’ve already invested would be lost otherwise. You’re probably thinking, “Well, obviously I’m not going to allow sunk costs to affect my ability to make good decisions.” But this might be harder than you think.

In 1985, a couple of researchers created an experiment to better understand the sunk cost fallacy. The subjects of the experiment were asked to assume they had spent $100 on a ticket for a ski trip in Michigan. But soon after, they found an even better ski trip in Wisconsin for $50, and they bought a ticket for this trip, too. Then the subjects were asked to imagine that they learned the two trips overlapped, and the tickets couldn’t be refunded or resold, and they had to choose one or the other of the two trips. Which trip do you think they chose? The $100 good ski trip, or the $50 better ski trip? Well, it turns out that over half of the people in the study chose the more expensive, $100 ski trip.

This study exposes a human behavior that is a huge liability when it comes to Good decision-making. It exposes the fact that we place a higher priority on loss aversion than on value creation. The subjects in the study were all but guaranteed that the $50 trip would be an even better experience than the $100 trip, and yet over half of them still chose the $100 trip. Why? Because the loss was greater. If they choose the $50 trip, then they’d be out $100, whereas if they went with the $100 trip, then they would only lose $50. That is the sunk cost fallacy at work, because the money is gone no matter what. In this scenario, you have spent $150, period. You can’t get it back, and yet most of the people tested only factored potential loss into the equation, and they didn’t even factor in the value they would get out of each option.

The sunk cost fallacy brings an emotional component related to loss aversion that prevents you from realizing that the best choice is the option that promises more value, not the one that minimizes loss. This is the same reason some people can’t walk away from the blackjack table after losing money. They’re taking into consideration what they lost when deciding whether to keep gambling.

If you ever find yourself in a situation like my friend, struggling with a tough decision, and there are various alternatives that seem to have an emotional component to them, ask yourself this question:

Am I considering certain options that I might not otherwise because I’m trying to minimize my losses?

Then follow that up with this question:

Which alternative would provide the greatest value in the future?

Learning to let go and move on just might reveal some of the greatest opportunities for your business.

About Micah

Micah Lorenc has family ties and attended middle school and high school in a small town in southern Utah. He has spent the last six years doing strategic planning and business architecture at a Fortune 100 company, and he is dedicated to sharing big business strategy lessons with small businesses. His specialty is teaching small businesses and entrepreneurs how to set effective long-term goals for their business and helping them break their strategy down into actionable steps.

Photo (CC) by USFWS Midwest Region, on Flickr

One of the challenges of a business is developing your team of employees.

Previous posts have discussed how to find and hire new employees (Hiring New Employees, Time to Hire, and Employees are Your Foundation are three examples).  The difficult part though is getting everyone to work together and focused on the end goal.

Business literature is full of thoughts, ideas and strategies on how you can achieve a solid team. And it has been that way for lots of years. Herzberg examined it at Lincoln Electric and other places. Thoughts on what motivates an employee and what might be considered hygiene factors or those that items that need to be there but they don’t make an employee motivated or happy were aspects he studied. Maslow, another management guru, suggested employees had a hierarchy of needs and that the lower needs have to be filled first before higher needs would be sought after. This thought fits well with Herzberg’s idea.

Since that time, there has been a continual stream of new ideas and theories in terms of effective personnel management. As the years have went by, getting the most out of your team has went through the idea of “directed and controlled” to today’s focus on “participatory management.” When I hear directed and controlled, I see a sheep dog working the sheep. Everyone is herded up and kept in a tight bunch and then put into the corral. We have largely left this idea behind and we should be glad.

Yet even the term management also seems out of place. You can manage your money but can you, or should you, manage your staff? You can also manage your store but deciding what to display and where to place a display is far different than not fully utilizing a resource with huge potential.

Recently I have read some articles that suggest building a team means to lead. That seems to be on the right track but, again, you may be out in front with no one behind you. In order to be an effective leader, you must have built trust and respect and have a shared vision and goal. 

To achieve this, the words guided and participatory come to mind. Those two terms suggest your input but encourages group participation in the steps to take and even the goal. This doesn’t mean giving up control; it is your business. However, the  harder and more often you push, the lower your team strength becomes. Participation not only means, however, employees involved in the discussion but you involved in the grunt work as well as the long-term planning.

We hear a lot how the millennial employee requires a different leadership style. I would argue that the style suggested today would have been welcomed for many years.

Your employees form a foundation for the business. Make that foundation solid through your effective guidance and daily interaction. And remember, your employees are learning not only by what you say but by what you do.