Sunk Cost Fallacy

The basic idea behind  sunk cost fallacy , is that once a person has “sunk” time or money into a method, they tend to stick with it.

For example, a person who buys a new phone will stick with it even if a better phone is released later. You can also imagine the person who continues to make costly repairs to their car instead of purchasing a new one. Once time or money is put into something, even an idea, people tend to stick with it.

Sunk Cost Fallacy in Retail

In retail, you might believe that the sunk cost effect only applies to your customers. If you can get them to spend time at your store, then they’ll be more likely to purchase something. While this effect can happen, the sunk cost fallacy equally affects retailers. Consider this: When was the last time that you updated your profit growth approaches? Have you been sticking to your usual methods just because you’ve spent time with them? You may be have read plenty of tips for online retailers about new ways to increase profits, but have you put these tips into action?

For many retailers, it’s high time to let go of outdated approaches to increasing profits—ones that aren’t as effective as new approaches, but are being held onto for no reason other than that they’re already being used.

Let’s say a brick-and-mortar retailer has a weekly ad in the paper that costs $100 a week. The ad generates steady business, but not new customers. Then, the retailer chooses to put another ad online, one that pops up in their target audience’s social media feeds. This ad costs significantly less and drives more business. Should the retailer continue to run the newspaper ad?

Consider how you’ve been advertising your products. Methods of advertising change almost constantly in a shifting digital world. Many e-commerce stores rely on banner ads and email advertising to reach customers, as this has been an effective method in the past. However, today’s internet users tend to use ad blocking software and automatic email filters, guaranteeing that these sorts of advertisements never truly reach them in the first place.

Even well-known advertising outlets like Google Adwords are starting to lose their effectiveness, as users learn more about how to avoid seeing these ads, or just outright ignore them. When was the last time you looked at how effective your ads are, compared to how effective they were a year ago? Can you really increase profits by sticking to the same old methods?

The Sunk Cost Fallacy is Hurting Retailers

The sunk cost effect is hurting you as an online retailer. You may try to update advertising and profit increasing methods, but the result is not as good as it could be. The problem is sticking to old, outdated methods. It’s human nature to stick by what you’re used to, but it’s time to take a step back and reevaluate.

Like the example of the brick-and-mortar retailer, your current ads may be like the newspaper ad. It’s time to shake up your methods of profit increasing and try something new. So, what’s next?

An intelligent incentive platform like Personali can help you gain deep insights about your customers and what drives them, and design incentives that will grow your profits quickly. This platform uses intelligent algorithms to find out exactly when your customers are ready to purchase from you, and how to give them that push from the shopping cart to checkout. Personali’s intelligent platform designs incentives that seem to customers like they were designed just for them—thereby enhancing customer satisfaction levels and profits.

Don’t let yourself get stuck in your old methods simply because you’re used to them. Now that you understand the sunk cost fallacy, you can use it to your advantage. Take a fresh, unbiased look at your profit increasing methods every so often, and you’ll find the methods that work best for you.

Discover how our artificial intelligence platform for retailers helped a big American retailer to dramatically increase their Black Friday revenues. Download case study now!

To read more about the relation between behavioral economics and marketing,
and demonstrate how creative marketing organizations can leverage the fundamentals of behavioral economics
download our eBook: Behavioral Economics as a Key Marketing Driver. Contact us, today.

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