Skin-in-the-game … that’s usually a good thing. It helps you to stay focused and committed. But there are times when having skin-in-the-game can lead to irrational decision-making.
Tom Wanek, here, and you’re watching Wizard Marketing TV, where business owners learn persuasive tools and techniques to spark miraculous growth.
Keep watching and I’ll show you how skin-in-the-game can drive you to make a decision that may sink your business.
I’ll see YOU on the other side.
The sunk cost trap in psychology describes an irrational commitment to a chosen course of action, especially once you’ve invested any significant amount of time or money.
Driven by a desire to not waste money already thrown into the pot, it’s common to see a poker player fall victim to the sunk cost trap. The player becomes “pot committed” and continues to play a losing hand—throwing good money after bad.
But whatever money you’ve thrown into the pot during previous rounds is “sunk.” This is money you’ve already spent, and can never be recovered. Oftentimes, cutting your losses—and making a different decision … a better decision—is the best thing you can do.
As you may have guessed, the sunk cost trap is a common blind spot among marketers.
Hey, don’t feel bad. As my partner, Roy says, “They wouldn’t call it a blind spot if you could see it.”
I once knew a shoe retailer who dedicated a “special” area of her showroom to display discounted inventory. These were the fugly styles—the mistakes—that no sane person with a smidgen of style wanted to wear.
Some of the product—and there was a lot of it—had been sitting on display for more than eight years. Yes, eight … long … years. And although these shoes were discounted, the savings just weren’t enough to move the needle.
This business owner fell victim to the sunk cost trap.
Recognizing what was going on, I urged the owner to sell the stale inventory for whatever money she could. This was money she could use to pay bills or buy more inventory of the styles of shoes that were selling. But she refused. She demanded to sell for no less than cost. So, the shoes sat on the shelves … literally collecting dust, growing more stale as time passed. And her business continued to decline.
Such is the power of the sunk cost trap.
Inventory is only one area where the sunk cost trap can hurt your business. Staffing is yet another.
Another business owner I know becomes rattled at just the thought of cutting ties with toxic employees—even though his irrational commitment costs him time, customers and money. Clouded by a big heart, he goes on and on about all the time and training he’s invested in his employees.
Once again, we see the sunk trap rearing its ugly head.
See, your brain is programmed to avoid wasting your valuable resources. And this aversion to loss is why the sunk cost trap is such an insidious blind spot for any Marketing Wizard.
So what’s the best way to prevent falling into the sunk cost trap?
Well, for one thing, awareness. Take it from me, just knowing that the sunk cost trap exists will help you recognize it the next time you’re wrestling with a decision.
Another idea is to make others around you aware of the dangers of sunk cost in decision making. Give others permission to throw up a red flag the moment they recognize you’re about to fall into its trap.
This may save you from sinking more time and money into stale inventory or the rehabilitation of toxic employees, or making some other equally irrational decision.
But believe me, it’s still gonna be hard work. Hey, they call it “skin-in-the-game” for a reason.
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