Epi #4: THE SUNK COST FALLACY - Don't Get Trapped in the Quagmire
G'day!
Today, we're diving into a common cognitive bias that can wreak havoc on all our marketing strategies: the sunk cost fallacy.
Whether you're new to the concept or have fallen victim to it before, we'll help you understand the pitfalls and learn how to avoid them.
As always, I'll aim to focus on a brief description, some real-world examples & actionable methods to overcome this emotional & cognitive bias.
What is it??
The Sunk Cost Fallacy describes the tendency for consumers continuing to invest time, money, and/or resources into something simply because they have already invested in the past; regardless of whether the investment is rational or not.
This applies to practically everything; relationships, businesses, subscriptions or memberships that are no longer used. Etc.
The term "sunk cost" refers to any cost that has already been incurred and cannot be recovered, regardless of the outcome.
For example, we always buy the same brand of toothpaste. We don't know if it's the best quality, price, or value.. But it works & its mentally available. But you may be the CMO at a cutting-edge new toothpaste brand that offers a superior clean, better taste & is more economical. You can push your features & benefits all you want, but until you recognise that many Australians carry an ‘if its not broke, don’t fix it’ mentality, it'll fall on deaf ears. The job of your advertising is to first, take a step back & show why they need to stop investing in something that's not adding as much value as your product or service.
Further, if you have already 'won' your customer, you can leverage sunk cost to your benefit by encouraging new purchases based on previous spending. For this reason, it's a hugely powerful principle for activating & maximising retention & customer value optimisation.
We'll unpack several examples of both:
How to Apply it: When your prospect carries a sunk cost with Competitors
2. Offer a Trial or Demo: Allow potential customers to experience the superior value of the new product or service firsthand. Offering a free trial, demo, or limited-time access can help users realise the improved functionality & benefits without feeling pressured to make an immediate decision.
3. Testimonials & Case Studies: Share stories from satisfied customers who have made the switch from the suboptimal product or service to the superior one. These real-life examples can help address concerns and demonstrate the tangible benefits of making a change
4. Calculate the Opportunity Cost: Help potential customers understand the potential long-term costs of sticking with the suboptimal product or service. This may include lower productivity, higher maintenance costs, or missed opportunities for growth. Quantifying these costs can help users see the value of switching to the superior alternative.
5. Address Switching Costs: Make the transition as seamless & hassle-free as possible. Offer support & assistance during the switch & provide resources like guides, tutorials, or customer service to help users adapt to the new product or service. The perception around making changes is often bigger than reality. Especially in industries such as utilities.
领英推荐
6. Reframe the Decision: Encourage users to view the decision as an opportunity to invest in the future rather than fixating on past investments. Emphasise the long-term benefits & value the new product or service will bring, helping users see the bigger picture.
How to Apply it: With Your EXISTING Customer
2. Offering Discounts or Promotions: Your valued customers have already made a purchase(s). As explained in the intro, as we've already invested money in your brand, there's a strong degree of mental availability. If they continue to do so, they'll get the most out of it.
3. Subscriptions & Small Wins: Perhaps you have customers on a Freemium model, or a basic plan. Encouraging customers to sign up for a subscription or membership program by focussing on the benefits (read: not features). Through speaking to short, mid & long-term benefits of your top-tier packages deal directly with the sunk cost fallacy by making clear what they get.
4. Regular Soundbytes: Continually remind customers of their ongoing relationship with your brand. This works particularly well with frequent flyer programs and other loyalty offerings. For example, pointing out the advantages members are receiving activates our innate herd mentality, a highly effective method for dealing with the sunk cost fallacy.
5. Initial Investment: Remind customers of their initial investment and provide a prompt for ancillary purchases. As we're on our way to spending some money with the brand, it's so much easier to rationalise spending a little bit extra. Contextually, it's an upgrade. Fast food companies & eCommerce are experts at this.
6. “Just Two More Steps”: Show customers they've done the hard work, they're almost there! There is only minimal effort required to complete a purchase! E.g. on accommodation booking websites, phrases such as “finalise your booking with just two more clicks” are frequently utilised. Especially on booking.com. As we can see below, Airbnb cleverly summarises the entire thing, showing you just how close you are. This activates sunk cost by summarising the work you've done to get here
Conclusion
In conclusion, understanding & directly dealing with the sunk cost fallacy is critical for both new & existing customers.
From a competitive perspective, it's a fallacy & bias that needs to be met.
For your existing customers - provided you're adding supreme value - you can leverage this principle for a hefty increase in CLV.
While many of the advertising examples will be both obvious & familiar, understanding 'the why' underpinning these, hopefully, provides you with an actionable framework to create excellent advertising.