Your business may be succumbing to sunk-cost fallacy culture—and you may not know it.
What’s worse is it may be costing your business thousands (if not more) every single day. The cost isn’t just money you’re wasting; there’s also a very real cost to your missed opportunities.
What Is Sunk Cost?
A sunk cost is a cost that you’ve already incurred and that you can’t get back.
This cost can be literal money—you spent $1,000 on branding photos that you don’t completely love. You can’t get your money back. It’s been spent.
They may also be costs of time, energy, and other resources (for example, last week’s payroll is a sunk cost).
Consider them “past” costs. They’re going to stay the same—they’re not going to change—regardless of the outcome. Compare this to relevant costs, which are future costs. These are costs you can weigh to make future decisions.
What Is the Sunk-Cost Fallacy?
As humans, we have a a tendency to keep doing something because we’ve invested time, money, and/or energy into it. Even when it’s not working, we lean into the plan and justify it with the idea that “we’ve already committed to it” or “we’ve already come this far.”
There are several psychological factors at play here, including commitment bias. You made a plan and you want to stick to it, if for no other reason than “it was the plan.”
Another big factor is loss aversion. Our human brains love to minimize loss even when there’s a potential for a much, much bigger gain. We do everything in our power to avoid loss—even when doing so means we’re giving up our chances to win.
For example, you may need to fire an employee who isn’t performing. The cost you’ve already invested in the employee is time and money you can’t get back. But you may think “well, if I just train them in this area,” or “it’s easier to keep them then start the hiring process from scratch.” But what opportunities are you missing out on by having the wrong person in the role? What gains could you see if you hired the right person?
Irrational Human Mindset vs. Entrepreneurial Mindset
If you’re the CEO of your business, you own it to your business—and your employees—to forget about sunk costs when making your future decisions.
“Yeah but I’ve already done so much work—I don’t want to change it.”
It’s understandable. When you’ve already put so much work on your challenges or your SLO (self liquidating offer) or your funnels—any of it—it’s hard to let them go.
You’re already so invested in what you’re doing … even if it’s not working. You’ve put time, energy, and resources into making it work and you feel like if you just keep pushing it may work.
But it’s short-term thinking versus long-term, strategic planning.
Instead, think of it as, “I have an opportunity.” First, because you do. Second, because that’s what the CEO version of you needs to do. Making the right decision for your business matters more than anything else.
Switching to an entrepreneurial mindset is a must. To do that, start by following the following three steps.
3 Steps to Break Free of the Sunk-Cost Fallacy
1. Strip the Emotion
First, being aware of the sunk-cost fallacy and knowing that no human is immune to it can help you start to recognize when it may be at play in your own decision making.
It’s hard to not feel emotionally tied to your plan. There’s no doubt it’s hard to recognize a sunk cost for what it is without blaming ourselves for incurring it in the first place. We don’t want to feel bad that we “lost.” We feel personally responsible for making sure our idea succeeds.
But the entrepreneur isn’t thinking about what’s lost or “failure.” They’re thinking about what they’ve learned and how they can move forward with this new set of information.
Just because one tactic or path wasn’t a success doesn’t mean you aren’t a success. Separate yourself from the decision and view it as just that: a decision. It’s not your identity. It doesn’t sum up you as an entrepreneur. It is just one more lesson learned in your entrepreneurial toolkit.
2. Trust Your Numbers
One way to remain impartial is to look at your data. If you’re not seeing the numbers you want, chance are it’s not because they’re not possible. It’s most likely because you’re pursuing tactics that simply don’t work for your business.
The “everyone-is-doing-it” tactics don’t mean these tactics are working for everyone.
One way to set yourself up for success is setting your goals ahead of time—to include when you’re going to reevaluate and change course. For example, “if I am not hitting my revenue goal within six months of pursuing this option, I am going to sit down and reevaluate.”
That doesn’t mean you’re going to completely change course, but it does mean you need to take an unemotional look at what’s going on. Are you making progress, just not as much as you’d hoped? Has your company regressed? Are you flat lining? Do you need to adjust your goals based on other external factors that may be impacting business (e.g., a pandemic)?
Track your numbers week to week and month to month.
3. Focus on the Problem—and Potential Solutions
Armed with data and as much emotional independence as possible, look at the problem. What, specifically, is the problem?
The problem is not that you invested in something and it’s not delivering the returns you wanted. The problem is you’re not getting people to opt in to your offer. Or you’re not converting people once they have opted-in to your offer. Or it’s…name your problem.
By focusing on the specific problem, and blocking out the distractions (yes, that includes the sunk-cost fallacy), you can start to brainstorm solutions.
Look at every stage of the buyer’s journey. Pinpoint where things are breaking down. If you’ve tried one tactic—really given it a fair shot and have statistically significant data (e.g., five conversions isn’t statistically significant)—then it’s time to explore the possibilities.
Where do you go from here?
Spending more time doing something that isn’t working doesn’t mean it’s going to start working, it just means that you’ll have wasted more time before finding what does.
If you were in the desert, digging a well for water and there’s just no water down there, would you keep digging because you’ve already dug so far? Of course not—you need water to survive! You’d find a new spot to dig or, in this case, come over to where I’m standing with my overflowing well and telling you, “Hey! Dig here for water! It’s right down there.”
Have you bought into the sunk-cost fallacy—and how much did it cost your business? If you’re up for it, share in the comments below!