You sign an annual contract for a gym membership, locking you in at a great “introductory rate” for the whole year. You’re ecstatic to finally hit the ground running on your new year’s resolution to get in better shape! Throw in a shopping spree to get some trendy new workout clothes, and a rough outline of a workout plan and you’re ready to become a bonafide gym rat and workout fiend!
Fast forward three months later….and you’ve been to the gym a grand total of two times. Maybe you’ve been busy at work. Maybe the gym is too far out of the way of your daily commute. Maybe you just don’t like picking heavy things up and putting them back down.
But now your friends are signing up for spin class! “It’s so fun, so full of energy with such great pump up music,” they all tell you. “It’s made working out SO MUCH MORE FUN!” They want you to sign up too, but you’re loathe to budget more money for physical activity. After all, you’re still on the hook for that annual gym membership you signed up for and already paid for. As much as you want to join your friends in spin class - and you know, with that type of support group, you’ll actually go to class regularly - you can’t justify further outlays from your budget to physical activity.
Does that sound familiar? It should; all humans are susceptible to the sunk cost bias, and it can negatively affect our decision-making going forward.
How Companies are Affected by Sunk Cost Bias
Companies are not immune from letting sunk cost bias creep into their decision making processes. Nowhere is this most commonly seen than with IT systems or critical business software.
Let’s face it: there are so many systems and so much software available for companies to run their businesses with. These systems are becoming more niche than ever, with each piece doing one specific thing very well. Unfortunately, this means you need many pieces in order to do all the individual things you need to run your business. Take a look at the Marketing Technology space to get a sense of just how prevalent business systems are at all companies these days.
The prevalence of these systems and software becomes a sunk cost bias when they hamstring companies from buying other software that they need because they feel they’ve already invested too much. According to TechTarget’s recent Cloud Pulse survey, many small- and medium-sized businesses (SMBs) say that they delay public cloud adoption because they’ve sunk too much money into legacy IT. Translation: “I can’t justify spending more money to buy more software that I actually need and will actually use because we’re already paying for this other old software that we don’t use properly.”
Here’s the thing about sunk costs: they’re not going to change, no matter what you do. You’ve already paid for this gym membership and that legacy IT system and that won’t change, regardless of how much or how little you use them. You’re not getting any money back, so you’re basically left with two options:
- Spend as if you never bought that legacy system or gym membership - Want to buy an expensive new system or sign up for an annual spin class membership? Go right ahead! Don’t let your old purchases stop you; after all, you’ve already paid for them, and using them more isn’t going to get your money back or anything like that. Of course, your personal budget or your company’s CFO might not be so happy with this decision. There’s only so much budget to spend on software and business systems; the pragmatic realities of business suggest that there if you run out of budget, you’re stuck with what you have. Most companies can’t just snap their fingers and magically create bigger budgets, regardless of how much software they want. So, while cognitive researchers suggest that this is the best way to overcome sunk cost bias that might be holding you back - proceeding head-on with a devil-may-care attitude - the fact of the matter is sometimes, that just isn’t possible.
- Maximize your existing systems - If you can’t just buy the new software you want, it’s time to roll up your sleeves, buckle down and make your existing systems work for you, so that you get more value out of your prior investments. And, in most such situations, this is all about finding the niche use case that suddenly unlocks all the potential you never knew you had before.
One of our favorite examples is with marketing automation and CRM systems. Oftentimes, most businesses use one and use the other….but not in concert. Being able to sync them up will unlock unbelievable value from these systems that you were using, but never to their full potential. Imagine having leads generated through your marketing automation system automatically synced with accurate and up-to-date data in your CRM immediately; that creates amazing response times with much more accurate information that will enable your sales reps to sell more powerfully. Suddenly, both your marketing automation and CRM systems that you were using before have suddenly become much more valuable to you, allowing you to truly justify the hefty investments you made.
And that’s often the key to maximizing the value of existing systems - finding their niche use cases (be it as an event management system, an email system, a support system, a finance system etc.) and then seeing how that can be synced with the rest of your systems. Systems that talk to each other and work together help each other be more robust and useful to you. It’s a simple case of 1+1=3.
Don’t let your business systems become sunk costs and allow that bias to prevent you from making the right decisions for your company going forward. Learn how integrating your systems can truly unlock their powerful potential, and make you feel much better about your heavy investments.