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Marketing 360® Blog

Sunk Costs and the Power of Quitting

A Chef With a Sinking Feeling

I have a friend who loves to cook, so she decided to become a chef.  She attended culinary school for two years and did well.  She’s worked as a professional chef for the last 2 years.

And she hates it.

She’s learned that while she loves to cook, she can’t stand the restaurant industry.  She doesn’t like the hours, the finicky customers, or the pace of the work.  To her dismay, she’s realized that loving cooking and working in a commercial kitchen are not the same thing.  Also, she’s making less money than she thought she would.

But she’s still working as a chef.  I asked her why.

She explains that after the expense of going to culinary school – which her parents covered – she feels like she has to carry on.  It seems like such a waste to have put in all that effort only to start over.  She doesn’t want be a quitter.

She’s suffering from the sunk cost fallacy.

A sunk cost is one that has been incurred and cannot be recovered.  She attended culinary school and spent that money on tuition.  There’s no “I decided not to be chef” refund policy.

A sunk cost is said and done.  It’s independent of any event that will happen in the future.

The fallacy, in her case, is that the decision to go to culinary school must influence decisions about her future.  She could quit as a chef today, or she could continue with this path for years to come.  In reality, that decision is independent of what she did in the past.


Sunk Costs Are in the Past

It’s vital to realize that sunk costs are independent of future events.

The fallacy of the sunk cost is that you have to stick with it because of the original investment you made.  It’s the idea that somehow, because you already spent the time and money, you have to continue even when it’s obsolete or dragging you down.

It becomes an emotional decision.  As I spoke more with my friend, it became apparent that one of the main reasons she’s still working as a chef is because her parents paid for culinary school.  She doesn’t want to have tell them that their investment isn’t working out.

However, that ship has sailed.  Today, the reality is the investment isn’t paying off.  If she could get a different job tomorrow that’s a better fit, the sunk cost of culinary school would be there, just the same as if she continued as a chef.

She’s set a trap that’s causing her past to get in the way of her future.


Sunken Website

We recently consulted with a prospective marketing client who came to us because his website wasn’t performing.

We audited his site, and realized that the design and eCommerce functionality were simply not a fit for what he was trying to do.  We advised him that he’d probably need to look into a redesign on a different platform.

He got upset.  Redo the website design?  He’d already spent a large hunk of his marketing budget on that design.  He hadn’t even gotten any kind of return on that investment.  No way I’m spending more on another website design!

The sunk cost fallacy at work.  Consider that he’s had enough time and gathered enough data to know that his current website isn’t working.  Today, it’s losing money.

But he’s trapped himself.  He’s being held back by a past decision that cannot be reversed.  What he spent on the design that he now knows doesn’t work is irrelevant.  That money is gone.  The only question now is how is he going to improve things moving forward.


What Doesn’t Work

A Marketing 360® marketing executive ran a paid search advertising campaign based on an offer he thought would drive huge sales.

He was wrong.

The campaign did poorly, with conversion rates under 1%.  He tested ad and landing page variations, but to everyone’s surprise, it all flopped.  There was only one ad with a slightly different word choice that showed any promise at all.

The client wasn’t exactly beaming about these results.  He started talking about getting his money back, but it was spent.  Sunk cost.

But the story doesn’t end there.  The marketing executive looked at the ad that did get a trickle of response, and then did further analysis on the needs that really seemed to be important to the target audience.  Based on this, they devised a new campaign.  It was a bold approach and there was a lot of uncertainty about how it would work.

This campaign took off.  Super conversion rates and high ROI in just a couple of months.  Now the business owner was happily bemused.  I never would have thought this could have worked so well.

The first campaign incurred a sunk cost and its direct results failed.  But we also learned what wasn’t working while gaining a nugget that let us create a much more effective campaign.


The Power of Quitting

There are a lot famous quotes and words of advice that suggest that quitting is for losers.  Vince Lombardi famously said:

Winners never quit and quitters never win. 

But did you know he also said:

The greatest accomplishment is not in never failing, but in rising again after you fall.

The sunk cost trap makes people think they can’t quit, even when what they’re doing isn’t working.  They think because they already committed and invested, they must carry on and try to gain from that investment.

Winners never quit…in business nothing could be further from the truth.  People who are successful in business and marketing quit all the time because they ignore sunk costs.  They don’t dwell on a past decisions and they’re decisive when they realize it’s time to cut their losses.

The rise from their mistakes.  They learn from past failures and make allowances not to repeat them.  Most of all, they don’t get caught in emotional entanglements that make it impossible to admit they were wrong.  Instead they learn from their errors and come out stronger as a result of them.

You can’t get everything right.  Circumstance change suddenly.  You wrote the check, but now you realize it’s going for a loss.  Accept it – then forget it – and move forward.

My friend told her parents when she graduated from culinary school that she wanted to open her own restaurant.  I asked her if she still had those aspirations.

She look at me like I was nuts.

“I’m not the smartest person on the planet,” she said with a grin, “but even I know better than to make the same mistake twice.”

Sometimes the winning strategy is knowing when to quit.