If you’ve spent any time in marketing and sales, you’ve probably heard the phrase, “buyers act on emotion and justify with logic.” This transition from emotion to logic happens so quickly that we don’t even realize it. Think of the last time you walked into your local electronics store on the hunt for a new TV. You (clearly with the permission of your spouse) had every intention of making a rational purchase. A simple TV to replace the one you were moving to the spare bedroom. Something with positive ratings that would fit into your budget. Now fast-forward an hour and your next stop is not actually your home but rather Home Depot to rent a cargo van because your new 85” flat screen doesn’t fit into the back seat of your Honda Accord (p.s. this behavior happens with cars just as much as it does with TVs).
This simple example demonstrates a scenario we’re all too familiar with. We go into the store with all the logic in the world but our emotions and desires kick in quickly and we begin making irrational decisions. Now have you considered the same patterns hold true but in reverse? When we reverse the process we’re not justifying a new purchase but rather rationalizing an old one. This is known as the sunk cost fallacy. With sunk costs I’m rationalizing the money I’ve already invested into my previous purchase and allowing that investment (money or emotion) to taint my future decision making; regardless of the benefits that would arise from making a smarter, forward thinking decision.
Between swiping your card at Best Buy and getting to Home Depot you begin experiencing a little buyer’s remorse. How did things turn out so differently than you had planned? And more importantly, how are you going to justify the additional money that wasn’t in your budget. Reenter the rational brain. This is when our logic processing centers go back online and begin rationalizing all the reasons this new 5k TV was truly worth the money (and scorn from your spouse). Coincidentally, it also helps explain why businesses charge a “restocking fee” when we all know that restocking is just a credit card refund and moving an unopened box back to the shelf from which it came.
What Are Sunk Costs?
Investopedia defines a sunk cost as “a cost that has already been incurred and cannot be recovered.” It then goes on to very casually state, “Sunk costs (past costs) are excluded from future business decisions because the cost will be the same regardless of the outcome of the decision.” In Investopedia’s eyes it’s a foregone conclusion that sunk costs should be ignored…but that’s not at all how our brains operate. This article from You Are Not So Smart explains that in behavioral economist Dan Ariely’s book, Predictably Irrational, he says that when factoring the costs of any exchange, you tend to focus more on what you may lose in the bargain than on what you stand to gain. The “pain of paying,” as he puts it, arises whenever you must give up anything you own. The precise amount doesn’t matter at first. You’ll feel the pain no matter what price you must pay, and it will influence your decisions and behaviors.
It’s a huge misconception that we make rational decisions based on the future value of our experiences. In reality, many of the decisions we make are colored by the emotional investments we’ve accumulated over the course of time. And the more we emotionally invest the more difficult it is to separate fact from fiction…or reality from the stories we tell ourselves. Going even deeper, this behavior runs hand in hand with the scarcity mentality many of us were raised with. Thinking, “there isn’t going to be enough for me” (emotionally, physically, mentally or spiritually) triggers fear when I sense I’m not going to get something I want or I’ll lose something I’ve already got.
So how does this relate to buying software? Having spent the past twenty years building better mousetraps I can’t count the number of times I’ve tried selling to companies who desperately need the product I’m offering but are too afraid to make the jump because of sunk costs and/or the fear of change. They won’t make a change even when the amount of money they’re wasting is off the charts. Sometimes this happens because they just don’t know a better solution exists. Frankly, that’s why someone else decided to build a new piece of software to begin with. They also got frustrated because they were trying to solve a problem with duct tape and bailing wire and finally got fed up. Necessity is the mother of invention and they built a new solution to solve their problem. Now they’re just trying to convince everyone else that their solution is actually better than the previously mentioned duct tape model.
But more often than not, even when the new solution is measurably more efficient, more effective and costs less the possibility of replacing all their hard work is just too painful to consider. I often hear things like, “I know it doesn’t work very well but we’ve invested so much in our current system that it would be too difficult to change,” or “I made the buying decision for our current system and don’t want egg on my face for making a bad decision.” Both of these responses are the sunk cost fallacy in disguise and are often a CYA response. With the speed at which people change positions in this day and age it’s easier to own my poor decision for a year or two then move on to another opportunity than it is to own my decision now and take the appropriate steps to fix it.
Eliminate the Fallacy
So how do you know if sunk costs, scarcity and fear are a part of your current decision-making process? Ask yourself these questions:
- Has the phrase, “but we’ve already spent so much on…” come to mind?
- If we make a change will it cause me to admit I’ve made a poor decision?
- Is the fear of change encouraging me to play it safe?
- Am I willing to let go of a long-standing relationship to improve the health of my company?
- Am I making this decision based on facts or is there an emotional story I’m telling myself?
- Does my current solution help to achieve my long-term goals better than the new solution?
- Is part of my reluctance based on unmet promises of my current solution provider?
If some of those questions make you feel a little icky try focusing more on facts and less on emotion. Some good questions to help you get back on track are:
- How much are you continuing to pay for the current service?
- How much time are you using to support the current system and what is that true value of that time?
- How much time are you using on duplicated efforts and inefficiencies and what is its true value in dollars?
- If I want my business to grow, how do the costs in the previous two questions scale with my growth?
Going against years of well-developed neural pathways is not easy. Doing it alone is even more challenging. One of my favorite quotes from Albert Einstein is, “We cannot solve our problems with the same level of thinking that created them.” One great way to make your decision-making process a little easier is to find a peer or mentor outside your company that can sufficiently understand the problem and the potential risks and rewards — but from an outsider’s perspective without any storytelling or baggage. Another suggestion would be to write it down. Mental pinball is exhausting and hard to win. Try using a decision matrix to transform the subjective into the objective.
And when all else fails listen to your gut. I’ve found it to be right 8 out of 10 times.