The Sunk Cost Fallacy is one of the most fascinating aspects of marketing. It refers to how people continue to do something based on the emotional and financial investment they have already made.
It’s the justification of an investment based on the sums of the investment, despite new evidence suggesting that the cost of continuing the investment is higher than the expected benefit.
If you’re in B2B SaaS marketing, you’ve probably seen this happen a lot.
Especially when you try to persuade a target account to choose your product or service over a competitor.
Most likely, your prospect has been working with your competitor for an extended period of time, and the thought of making the change creates too much friction in your prospect’s mind.
So why is a prospect not willing to accept a loss to make a gain?
One reason for this behavior identified by psychologists Daniel Kahneman and Amos Tversky is loss aversion.
This means people are generally less willing to accept a loss than make a gainand so have the tendency to avoid losses.
What’s common for high-ticket SaaS products is that there are significant purchases tied to its usage.
This is true not only in terms of money but also in terms of people and processes.
The whole sales cycle for a high-ticket product usually involves people from sales, marketing, finance, C-suite, even IT departments that are involved in the purchase, operation, and integration of new acquisitions.
This means that people who have incurred a sunk cost also tend to overestimate the probability that a project will be successful compared to those who have not been subject to a sunk cost.
The fallacy usually is the result of a combination of factors, including a bias caused by:
All these biases may make prospects less willing to accept failure and halt their decision-making.
Any messaging you’re trying to create to market your product to them will not have much impact.
The sunk cost fallacy is a problem because it puts blinders on people
Obsessed with sunk costs, prospects become unable to make rational calculations about what action will result in the most benefit.
It’s in your hands as the marketer to help alleviate that in your messaging.
Two ways to help alleviate sunk costs in a prospect’s mind.
First: Focus on the opportunity costs
What is your prospect giving up in order to chase those sunk costs?
Picture a company that’s spent a lot of money developing a solution with your competitor.
Let’s say that the early feedback is negative and it looks like a dud. Instead of further investment and continuing to push the solution — what about taking those resources and putting them towards another project that has a higher return?
Opportunity cost is a strong emotion and might be the first step towards getting interested in other alternatives.
Second: Avoid committing to a specific outcome
The insidious thing about the sunk cost fallacy in marketing is that there’s a hidden social aspect to it.
It’s bad enough that a prospect may feel an innate drive to try to recover sunk costs; it’s made worse when they are part of a team and feel that people are watching and judging because they are publicly committed to a specific outcome.
Well, the world is too random for us to be able to declare victory 100% of the time.
So you use that in your messaging.
If you’re going to publicly commit to an outcome — then you better have a mastery over the inputs to that outcome.
The most important thing about measuring all of this
Marketers are prone to the fallacy by monitoring and optimizing campaigns using vanity metrics which show no correlation with the businesses’ bottom line. More often than not, there is no correlation between these metrics and real-world business impact.
Yet many marketers continue to spend time and money reporting on these “shiny” metrics because they have invested so much effort into such reporting.
Don’t get me wrong, this isn’t an easy problem to solve, internally or externally, and with the fact that there is ongoing spending in any company, the problem may persist.
But people get past it all the time.
The point is, if you’re going to flirt with the sunk cost fallacy, do it intentionally. Do it with your eyes open.
Make it a conscious choice, not blindly like everyone else.