WHAT IS THE SUNK COST EFFECT?
The Sunk Cost Effect is an influence-based principle that supports the notion that people can sometimes be influenced into making irrational decisions based on a perceived loss of time, money or effort that they have already invested into a product or service and it’s development.
Once we have invested our time or resources in something, we try our best to ensure the investment of time or money is not wasted often by continuing to invest in the decision even if we know it is incorrect.
In marketing we find a high level of sunk costs. Since most businesses market their products and services, a marketing expense is a great example of sunk cost. Any level of investment you spend on marketing or advertising is money you’re unlikely to get back or recover.
Let’s say you created a new product or service and spent $10,000 on marketing and advertising to help spread the word about it to potential customers. As a result, the investment into the said marketing and advertising campaigns proved to be ineffective. Due to the fact that you’ve already spent $10,000 and won’t reap a return on investment, this amount is there, defined as the sunk cost.
We also find a high level of sunk costs in research and development. As a business owner or leader of your organization, you’ll likely spend money on the research and development of your upcoming or current products or new service offering.
Let’s say you spend $15,000 on the development of a new tech device. Once the product is released, however, no consumers display an interest in purchasing your company’s new device. The $15,000 you originally invested on the device’s development is considered a sunk cost since it was a failed investment, you again, you are unlikley to recover it and, therefore, shouldn’t be considered in your decisions on the fate of the tech device.
Equally in training. Here there is a high sunk cost too. Let’s say you own a clothes shop and you spend $25,000 training your staff on all of your products and how to use the tills you’ve installed. After a while, the tills are no longer up to par and you discern that need to use a different till. Equally, your range of clothes may change too or a new approach to selling changes. This would require you to re-train your employees yet again. The $25,000 you initally invested in training your new employees for when they first joined the company or ongoing training is considered a sunk cost because this inital investment will never be recovered.
Finally, the sunk cost effect can also be felt in the recruitment industry as it also has a high level of sunk costs attached to it as well. Let’s say you own a company and you’re looking to hire a new employee. Once you find a potential candidate, you offer them a $6,000 hiring bonus. If this potential candidate is then hired but doesn’t end up fulfilling their contract, the $6,000 hiring bonus you gave to the recruitment company can again be considered as a sunk cost – you won’t be recouping that $6,000 hiring bonus or investment again just because they left your company or you terminated their employment.
You can learn more about sunk costs here: https://en.wikipedia.org/wiki/Sunk_cost
Learning how not to be drawn into chasing your investment of time, money or effort and drawing a line underneath your investment and moving on when you know or can see it not working is a strong mindset to have. It is almost the same as chasing your debt. Keeping ploughing in money and time is beneficial in some occasions but often these become sunk costs that can end up spiraling out of control as our ego takes over and we believe so much in our product, service or idea.
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You can head over to Duncan’s Youtube Channel on Youtube.com/duncanstevens to learn more about the sunk cost effect or even hire him to speak at your event by following the link below. Duncan is a professional keynote speaker and global authority on influence and persuasion.