What is the Sunk Cost Fallacy?
If you've never heard of the Sunk Cost Fallacy, you've surely lived it. Here's how behavioraleconomics.com talks about it, “Individuals commit the sunk cost fallacy when they continue a behavior or endeavor as a result of previously invested resources (time, money or effort) (Arkes & Blumer, 1985).”
One way I think about it (and talk about it) is to think about it as momentum. Once you get someone doing something, especially if they see it as an investment, the momentum keeps them moving in that direction.
What does it have to do with selling a product?
There are at least four ways that folks selling products (especially software products) can leverage the sunk cost fallacy. Each one works the same way, but in different contexts. You may already be using one of them, but I challenge you to consider all four.
The Power of Free Trials
The first way to leverage the sunk cost fallacy comes as you think about getting people to try your product. If you get them to try it, as in a free trial, you get them investing in the setup and configuration – which is an investment. Once they put some energy into setting things up, it's hard to pull everything back and quit the trial.
But to make it work, you have to help them see the benefit. Not just a tour.
Think about it this (crazy) way. Let's say you want to sell me your house. So you invite me over and give me the tour. I get to see all the inside – each room. Then you escort me out. Maybe I buy. Maybe I don't.
On the other hand, if you invite me to stay there for a few weeks, and I bring my clothes and furniture over…. you know I'm going to sell myself on the house. And that's the point, right?
Free trials that simply give me a chance to look inside won't feel like an investment. You won't benefit from the sunk cost fallacy. But if I can get it configured and put it to use, and see it's benefit, it's an investment I won't want to waste. And that's when you have me.
The Power of Testimonials
One of the consequences of writing every day, especially over a period of years, was that I ended up writing about a lot of products in the WordPress ecosystem. As a result, there are a lot of quotes from me all over their product pages. That's not the only way they get there, but honestly, some people thought all I ever did was write testimonials.
That's not what I'm talking about here. Instead, I want to tell you the story of a product that I tried out for a couple weeks. At the end of the time that I was checking it out, the founder reached out and asked for a call.
We talked for an hour or two and at the end, he asked if I would be willing to give them a testimonial about their product – what it did well and who would really love it. I said sure.
Do you know what happened next?
I started using the product. A lot.
Why? Because the testimonial I gave was an endorsement. And an investment (of my name). So I was pulled into putting my money where my mouth was. I started using the product because I had already given the quote and I value my integrity.
How often do you ask for a testimonial from someone? It might be an interesting and powerful way to leverage the sunk cost fallacy. And if you do, please check out my favorite testimonial solution – testimonial.to. Need help asking for testimonials? I showed you how to do that already.
The Power of Coupons
One of the things we do in the Product team I lead at Nexcess is create coupons that discount the product for months at a time. Not one or two. Sometimes 3, 4, or 6. Crazy, right?
Not if you believe in the power that momentum and want to leverage the sunk cost fallacy.
What I'm counting on is that people will make an investment in building their online store or site, and then after x months, when the price goes back to normal, they won't stress about it.
It's not a new strategy.
When I first started at Liquid Web, we built a solution that was differentiated. I reached out to some folks that were hosting their sites elsewhere. I invited them to move over to my new platform.
Know what they said?
“But I paid for 3 years up front and still have a year left. Let's talk in a year.”
Sunk. Cost. Fallacy.
It's powerful. It's Newton's First Law – objects in motion tend to stay in motion.
The Power of Onboarding
There's a great no-code product out there called bubble.io. What I love most about their product is their onboarding. They are offering a product that lets you build your own software application, without writing any code. No way, right?!?
But to convince you, they walk you thru the steps to actually building something. In other words, they're not willing to simply get you started with a free trial and let you figure it out on their own.
Instead, they create a free trial that drives you to activity – specific onboarding steps that help you learn how to do things. But you're investing. In yourself. In your ability to use their platform. And in your thinking about what's possible.
It's a fantastic model. Go check it out.
Leverage The Sunk Cost Fallacy
What I'm telling you is that even though it's a fallacy, it's a common dynamic that we all face and live with. We're wired to want to finish what we start. And it's something you can leverage as you sell products.
That said, I'm not suggesting you trick anyone. You'll notice that all four of these situations actually benefit both the buyer and seller. When you dig into cognitive biases and logical fallacies, the trick is still to act with positive intent.