The cost sunk fallacy is a psychological phenomenon where people continue to spend time or money on a negative course of action because they don’t want to waste the original resources invested.
You may have been affected by the cost sunk fallacy before. It’s spending two hours watching a bad movie rather than walking out because you’ve already paid $15 for the ticket. Or worse, stayed in a relationship for months too long, because you’ve already spent years with your partner.
The cost sunk fallacy is a fascinating psychological effect that shows how emotional humans are when it comes to decision making. As a species, many of us would rather double down on a bad decision, than accept a loss. We do this even though continuing our course of action usually makes the loss bigger.
HOW THE COST SUNK FALLACY AFFECTS OUR BUSINESS DECISIONS
Do any of these scenarios sound familiar?
- You invested time and money in a DIY website.The website is not SEO optimised and doesn’t bring in organic traffic. Fixing it would require a whole new build which equals time plus money. Instead, you spend time and money on half-fixes and plugins that don’t solve the problem.
The cost sunk fallacy here is regret avoidance. You regret taking the DIY path so double down on fixing your existing website rather than paying for a new one. While it’s hard to admit that building the first website yourself was a mistake, spending time and money on a new website will take your business further in the long run.
- You’re unhappy with your digital agency but have been with them for years.As a small business you feel ignored by your agency, but switching to someone new means investing time and energy into a new relationship. After all, this agency already knows you.
The cost sunk fallacy here is maintaining the status quo. Finding a new agency will take time, and there will be some onboarding while they get to know your needs. But, the status quo isn’t serving your business. You’re already being ignored. By switching agencies your business will benefit long-term from partnering with someone who cares and prioritises your needs.
- You run an advertising campaign that fails to reach any goals so you increase the budget.You run a marketing campaign that fails to reach any conversion goals. Rather than scrapping the campaign, you increase the budget. After all, it would be a waste of everyone’s work not to.
The cost sunk fallacy here is an ongoing commitment to the work that has already been done. While it sucks to have people’s energy go to waste, spending more money on campaigns that aren’t delivering is now a waste of your team’s budget.
HOW TO AVOID THE COST SUNK FALLACY IN YOUR BUSINESS
To avoid the cost sunk fallacy in business first we need to understand why we are so unwilling to accept a loss to make a gain? The reason is that humans have an aversion to loss, failure and pain. This is called loss aversion.
Instead of admitting we failed, we keep the website that doesn’t work, stay with the agency that doesn’t email us back, and spend more money on campaigns that don’t convert. All to avoid the pain of the original ‘failure.’
The good news is, there are ways we can avoid the sunk fallacy cost in our business.
Create an environment where failure is part of the learning curve
We’ve all heard of businesses where people carry on doing things that don’t work because they’re scared of speaking up. It makes sense. If a team member has brought up a problem before and hasn’t been listened to, or worse, belittled for suggesting a change, it’s unlikely they will speak up again.
Foster an environment where staff members feel heard. Praise your team for catching errors, or suggesting improvements even if said improvements require dismantling what’s already been built. This way it’s more likely your team can pivot away from any failures before they get too costly.
Focus on the opportunity cost
Every decision has an opportunity cost. This is what is gained from making the hard decision. Yes, building a new website will take months, and cost your business money, but it will also boost your organic traffic. More organic traffic could mean warmer leads for your sales team, and an increase in sales.
Stopping a marketing campaign that isn’t converting is disappointing. But rather than funneling more of the budget into a dud campaign, your team now has an opportunity to create a new campaign. They also have the data that campaign A isn’t the right approach for your audience. And what is marketing if not testing the waters?
Let long-term goals guide your marketing efforts
The cost sunk fallacy examples we have mentioned all have one thing in common; they are all short-sighted solutions. By taking a step back and analysing your decision from the perspective of time, many businesses would make a different decision.
In a year’s time, you could have a new website that has brought in 6 months of steadily growing organic traffic. Or your business could be working with an agency that has suggested tons of helpful advice. Thinking long-term will help you to avoid making decisions that seem like a good idea today, but will have harmful consequences a year down the line.
Finally, find a digital agency you can trust
Falling victim to the cost sunk fallacy happens because we aren’t always aware of the consequences of our choices. The best way to become an expert in making digital marketing decisions? Partner with an agency that has got your digital back!
Digital marketing is about future-proofing your business. With the right agency by your side, you’ll be able to avoid the cost sunk fallacy, and instead, put your money and time into digital marketing efforts that make an impact.
At Blitz Digital, we are experts in making our clients’ businesses stronger. We can help you make the tricky decisions today, that will set you up for long-term success.