Users are reluctant to pull out of something they're invested in.
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ℹ️ The Sunk Cost Fallacy describes our tendency to follow through on an endeavor if we have already invested time, effort, or money into it, whether or not the current costs outweigh the benefits.
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Imagine that you bought a concert ticket a few weeks ago for $50. On the day of the concert, you feel sick, and it’s raining outside. You know that traffic will be worse because of the rain and that you risk getting sicker by going to the concert. Although it seems that the current drawbacks outweigh the benefits, why are you still likely to choose to go to the concert?
This is known as the sunk cost fallacy. We are likely to continue an endeavor if we have already invested in it, whether it be a monetary investment or the effort we put into the decision. That often means we go against evidence that shows it is no longer the best decision, such as sickness or weather affecting the event.
The sunk cost fallacy means that we are making irrational decisions because we are factoring in influences other than the current alternatives. The fallacy affects many different areas of our lives, leading to suboptimal outcomes.
Takeaways for Decision-Makers
- Powerful Up-selling Informing customers of a cost that’s already been incurred can help increase sales. For example, when customers put through an order for some trousers in an m-commerce app, along with the price, seeing a message that reads “complete the look with this black shirt for only $20” can dramatically increase average basket value. It does this by reminding customers how much they’ve already invested towards their overall clothing purchase, and highlighting how small the extra sum required would be to ‘complete the set’ - which itself plays on our natural desire to complete collections.
- Value highlighting to smooth out kinks If, however, you’re struggling with capacity under utilization because of booking cancellations at the last minute, notify consumers in the run-up to the event of what they’d booked, and its value. This will help to increase the sunk-cost effect, and therefore their desire to attend, or perhaps to gift the tickets to allow a friend to attend on their behalf.
- Increasing post-sale purchases While traditional consumer theory suggests that pricing goods such as cars at a low selling price to entice consumers is a solid strategy, the recent research coming out of Singapore suggests that increasing sunk costs by pricing such goods higher can result in more use and therefore wear & tear, which will therefore lead to a higher rate of purchase on post-sale services and products. This could return more over the long run, and help develop a long-term brand commitment.
- Reminding as a means of post-selling As an aside, offering complimentary check-up services on durable goods may remind consumers of the cost they’ve already incurred. This has the strong potential to increase purchase of post sale consumables (such as antivirus software for a laptop).
Resources
Sunk cost, Wikipedia
Why are we likely to continue with an investment even if it would be rational to give it up?
The psychology of sunk cost
Sunk Cost Effect, UI Patterns
Sunk Cost Effect, Coglode Research
