Are you caught in the trap of the Sunk Cost Effect?
Here’s a common sales situation. John is working on a big, complex deal. The prospect is well qualified. He’s had to invest substantial sales time to move the deal forward (as well as wrangle countless hours of support from his support and product teams). He think he has a good chance of winning the order. But numerous decision dates have come and gone with no action.
Now, John’s boss, Paula, wants to know why he thinks the company should continue spending time on the prospect. John reassures her that it’s still looking promising. His chief internal advocate at the prospect, Rachel, keeps encouraging him to stay engaged with vague hints of future action. But…
John’s reached a point where common sense would dictate that he should stop investing additional time and resources into the account. But he wants to continue pursuing the deal because he has fallen prey to the classic economic trap called The Sunk Cost Effect.
In our own selling, we often justify sticking with certain sales opportunities longer because we’ve invested so much time, energy and resources in them (which represent our sunk costs). And we think that with just a little more investment we will make the whole thing pay off. Which usually doesn’t happen. And, as a result, we end up throwing good money after bad.
The problem is that we hate having to admit, to ourselves or anybody else, that we’re wasting our investment of time, energy and resources on deals that we were certain were going to reach a decision, but likely won’t.
Avoid the Denial Response
In fact, a common response by sellers to the Sunk Cost Effect, is what I call the Denial Response. Instead of changing their approach to an account, the decision is made to invest even more time, energy and resources in the opportunity. The justification for this incremental investment is usually along the lines of “Well, we’ve already invested so much in this deal. Just a bit more, and I’m confident that we’ll win the order.”
Unfortunately, this escalation of commitment on the part of the seller making the investment rarely yields a positive outcome. In fact, usually just the opposite occurs. And, by making the additional commitment the seller, or sales manager, are putting themselves and their personal reputations on line. They’re taking the long odds on a bet with their managers that the deal will happen and pay off the sunk costs.
You can see the impact of this escalation in sales meetings. Salespeople hate to admit that they were wrong. Especially in front of peers or managers. Unable to defend the logic of their actions, they become more defensive in talking about the Sunk Cost deal(s).
As a rule of thumb, the degree to which a sales rep becomes defensive in discussing the status of an opportunity with a stalled, sunk-cost prospect, is in inverse proportion to the likelihood of the deal ever happening.
How to break free of the sunk-cost trap
What’s the solution? How do you break loose from sunk-cost deals? Someone has to make an objective, unemotional decision about whether to fish or cut bait. Here are a few ideas to make that happen:
1. Take the sales rep or sales manager out of the equation. Let someone who doesn’t have a direct stake in the outcome make the decision.
2. This may be a situation where the CEO needs to step in. Or perhaps a new manager in the company who’s not invested in the outcome could be brought into the decision.
3. Bring in someone from outside your company, such as an executive coach or consultant. Use an experienced third party who can objectively analyze the pros and cons of the situation and help you reach a dispassionate decision about the next steps to take.
Keep in mind that the primary negative impact of the Sunk Cost Effect is lost sales time. Any additional time that you spend hoping that you’ll be able to turn around a lost cause just compounds the problem. This is sales time that, once it is spent, can never be recovered and used to sell to other qualified prospects that actually will make a decision. In short, it reduces your potential sales productivity.
Avoid the sunk-cost trap of believing that you can win an order with a prospect just because you’ve invested a lot of time, energy and resources in the deal. If you feel stuck in a deal, then ask for help in making the decision about what to do next.