Overcoming the Sunk Cost Fallacy When Selling Applications

I’ve been reading Michael Lewis’ great new book, The Undoing Project. Like everything else he has written, it is a joy to read and you get deep insight into the main subjects that he is profiling. But ever since I got exposed to behavioral psychology and economics in graduate school, I’ve really been fascinated by the topic. The Undoing Project profiles the pioneers in this field, the ones who identified the behavior that was exhibited in Moneyball, perhaps Lewis’ most famous book.

I’ve written about the topic in the past, but that post was geared towards helping marketers and salespeople to avoid falling into those traps. But in conversations with clients lately, it’s become apparent that many of them are dealing with one particular issue when it comes to their own prospects, “the sunk cost fallacy.” In a nutshell, it’s the justification of increased investment, based on the cumulative prior investment, despite new evidence suggesting that the cost, beginning immediately, of continuing the decision outweighs the expected benefit.

The sunk cost fallacy comes up most commonly when with respect to large systems of record like SFA, marketing automation or ERP systems. (This isn’t a perfect representation of the sunk cost fallacy since subscription-based pricing means there are future outlays expected, but this in a SaaS world, this is a close variation of it). These are significant purchases, not only in terms of money (both upfront and ongoing), but also in terms of people and process. They are the technology linchpins for many sales, marketing, finance and HR organizations, not to mention the IT organizations that are involved in the purchase, operation and integration of those systems. No one expects the presence of those systems to magically transform an organization, but they are viewed as doing more than storing sales contacts, managing campaigns or handling payables. But there clearly is a mismatch between the breadth of capabilities that buyers believe the systems possess and what the systems can actually deliver.

Let’s use sales as an example because this is where it’s been particularly acute from a client perspective as of late. It’s not uncommon for clients to be paying up to $200/per month/per rep to get the highest-tier of SFA system. And they probably spent a lot of time and money to configure the system, roll it out, train the reps and manage the data and integrations. When the right process is in place, reps use the system and data is kept clean and up-to-date, the ROI is usually very compelling, even at a high price. But to the sales and IT executives that blessed the deal, it still seems like a large amount of money.

So when it becomes obvious to the people responsible for sales ops, sales enablement, demand gen and product marketing that the SFA can’t fully meet their needs in specific areas like forecasting, content management, predictive analytics or ABM, they go looking for best-of-breed solutions to fill that gap. The problem they often encounter, particularly in larger organizations is that sales management or IT says something to the effect of “we’ve spent hundreds of thousands of dollars per year on SFA, go make it work.” This is an example of the sunk-cost fallacy and some it’s related biases. From a purely rational point of view, investments made in the past should have no bearing on investments you make in the future. If the previous investment doesn’t do a particular task (or do it well enough to meet the business need), then you need to evaluate additional solutions and their associated ROI independent of the previous investments you’ve made.

But it often doesn’t work that way, much to the chagrin of the affected individuals and the vendors that are proposing solutions. And simply pointing out that the executive are falling victim to the sunk-cost fallacy isn’t going to help. No one likes to be told that they are essentially acting irrationally, nor do they want to stick their necks out and ask for more money when they may have framed the previous investment as being sufficient to meet the business need.

So what can be done about this? There’s no magic bullet here, but here are some ideas for both the technology providers. These  apply not just to SFA but the other solutions I mentioned above.

• Messaging: Address the concerns head-on rather than running away from it. Expect that issues around previous investments may exist and don’t try to minimize it or view it as irrelevant in their internal discussions. Don’t be overly dismissive of the existing investments (and the lack of capabilities) and talk about how the new investment can help increase the value of the original investments
• Case Studies: Develop and provide case studies that highlight the specific situation the prospect is facing (where they recognized the larger system didn’t meet their needs); Show them examples of where their peers encountered a similar situation, yet still chose to move forward.
• Sales Enablement: More work may need to be done to remind the SDRs and the reps that these objections are likely to be encountered (especially in larger accounts) and ensure they have the right training and content (both internal and external) to help address these objections. A lot of these markets are sexy and fast-growing and so the tendency is to spend more time focusing on the pure-play competition rather than the underlying fears of buyers. This may work out okay when selling to mid-market companies, but it rarely works in the larger enterprises. Being able to help internal stakeholders get past sunk-cost objections may actually provide a more important competitive advantage than any feature or capability.

If you are encountering resistance internally, here are some suggestions:

• Messaging: Similar to the guidance I gave to the providers, you should make sure not to dismiss these concerns. It may make your life difficult from an operational perspective, but you’ll be better off accepting the concerns and bridging to talk about how the new solutions can make your existing investments more valuable.  Try to quantify the benefits whenever possible.
• Peers/References: When you are struggling to make the case on your own, it’s always good to look for examples of where your peers were in a similar spot and how they solved it. This isn’t about simply finding external examples to offer proof points to your management, but also to find out how your peers overcame the internal resistance. You can reach out through your own social or other networks, but lean on the providers to give case studies and references as well.
• Analysts and Consultants: We have dozens of examples of where clients have (in our view) rightly argued for a particular change in approach or investment, but they hit a brick wall with their executive team. We often come in and provide similar advice, but suddenly it’s treated like the “word of God.” So if you find yourself getting repeatedly shot down, reach out to the analysts, consultants and other third-parties and find out if they are on the same page as you. If so, arrange a call where your internal decision-makers are present and let them hear the message from someone else. Hearing that Gartner or some other trusted firm told them to go ahead and make a new investment (despite the existing investment) can help to re-orient them to the future rather than being stuck on the sunk cost, since after all, that is the “rational” move.

Don’t get me wrong, this isn’t an easy problem to solve, internally or externally, much to the chargin of economists. And with the fact there is ongoing spending (and not a purely sunk cost), the problem may persist. But people get past it all the time. It just takes the right approach, both internally and externally, over a sustained period of time.