Nobody likes to admit they failed. It sucks to realize your plan isn’t working out.
So we resist making these admissions. Maybe, we think, there is still hope. Maybe I haven’t wasted my time and money.
That resistance, particularly in business, creates the sunk cost trap.
A sunk cost is an incurred cost that cannot be recovered. If you’ve spent on an advertising campaign, that money is gone irregardless of the return you’re getting.
The sunk cost trap is feeling we all know. It’s the tendency to irrationally continue with an effort even after it’s become clear the effort is failing, because we don’t want to face the reality that what we’ve already invested is lost. It’s the reason you finish a meal that’s disappointing. Or wear clothes you realize don’t really fit or look as good as they did when you bought them. It’s why you sit in the stands at a football game when it was over by halftime. These tickets were expensive, we’re going to stay till the end!
For entrepreneurs, the sunk cost dilemma can become a serious problem. Even when their business idea is rapidly going South, they don’t want to admit that all the time and money they’ve put in was a waste. So instead of cutting their losses and moving in a new direction, they keep investing in a failing effort, hoping to make the initial investment seem worthwhile, even where there is no evidence things can be salvaged.
Sunk Costs in PPC Marketing
One area where you are likely to experience sunk costs is pay per click advertising (PPC). In fact, this is one marketing endeavor where sunk costs can be a good thing – if you respond to them correctly.
The best way to arrive at a top-performing PPC campaign is to test content in a process called A/B split testing. Here, you run campaigns with the same goals but different content simultaneously over a fixed time period. You measure results, and then move forward with content that performs better.
The failed campaign is a sunk cost. You spent, it didn’t perform to expectations, and you ditch it. You can’t get the money back, but it does have a payoff because of the data it provided.
You may run other campaigns that don’t deliver and start to look like a sunk cost. Here’s what you should do:
- Make sure you plan and run the campaign for fixed period of time. You don’t want to work the opposite of the sunk cost trap, which is pulling out in a panic before you have enough data to understand what’s happening.
- Plan and execute modifications during the campaign run, including the A/B split test. By tweaking content, you come across the combination of things that performs.
- If you do each of the first two steps and the campaign is not getting a return, cut you losses and try something new. Avoid the sunk cost trap.
In business, you often face a point where you must evaluate if an investment is worth continuing when results aren’t meeting expectations. Can you save it, or is it just throwing good money after bad?
Remember that the sunk cost trap is driven by emotion, by your desire to avoid the truth that your energy was wasted. With PPC advertising, you need to respond logically to the data. When it says your campaign is going nowhere, cut and run. Getting caught in a sunk cost trap at that point is the kind of mistake that puts people out of business.