If you’ve ever ordered food from a restaurant which is below par and continued to eat it, you’re engaging in what’s known as ‘sunk cost fallacy.’
Most people would simply refuse to eat something they didn’t enjoy – so why do some people continue and finish the food anyway?
In its simplest terms, the ‘sunk cost effect’ refers to anything we’ve invested in which we can’t get back – be it financial, emotional or time-related.
‘Sunk cost fallacy’ refers to how people factor in a sunk cost (which has already happened) into their decision-making process either now or in the future.
From a psychological perspective, we’ve already committed money, time or feelings into a decision, hence the need to see it through to its completion – regardless of whether it’s worth it or not.
If you’ve ever committed to a bad relationship for longer than you should have, this is sunk cost fallacy in action. The reason why we do this is because loss is considered to be painful – no one wants to feel they somehow lost out on something, even though a rational mind might say otherwise.
It’s one of the reasons why people continue on a course of action which others might see as being detrimental. From a marketing perspective, the sunk cost effect has a huge impact on the decisions our customers make.
Even though sunk cost fallacy seems negative, it can actually work to your advantage when marketing and selling.
- The Power Of Upsells – Customers are more likely to purchase upsells, downsells and other products and services in alignment with what you’ve already sold them. They’ve made the initial investment and many will want to see this through to the end – so take advantage of it
- Set Expectations Clearly – Capitalise on the time already invested in doing a particular action by setting expectations clearly. For example, if you’re sending customers a survey which is pretty long, you could use a progress bar to show how much progress has been made in completing it. This encourages customers to see it through to completion, rather than abandon the process part-way.
- Engineer Brand Loyalty – Once someone buys with you, they’re more likely to repeat buy. Deliberately engineer loyalty by creating reward schemes, discounts for additional purchases or sending customers loyalty based promotions is a great way to keep them coming back for more.
- Membership Programs – Membership programs are a great example of sunk cost fallacy in action. For example, I personally have a membership with a particular brand that offers training for digital marketers for the last 7 years – even though I only use the training maybe once or twice a year. This is because I don’t want to lose out on the special deal I locked in when I started and it would be too expensive to purchase the training one by one.
In short, your customers don’t like to feel as if they’re missing out on anything and want to take advantage of special offers if you let them!
