The sunk cost fallacy and software

Person in front of laptop

The sunk cost fallacy. The burdensome tendency to stick with something because you’ve invested too much not to.

Sound familiar? You’ve probably stomached an unsavoury meal just because you’ve paid £10 – or maybe you’ve even finished studying a course you no longer want to pursue as you’ve already invested blood, sweat and tears.

In hindsight, focusing on unrecoverable costs rather than the better decision seems irrational. However, that’s exactly how many businesses look at their expenditure; passing up the opportunity to do things better – and likely saving money as a result – because they’ve put so much into it already.

As a software provider, we see this time and time again. When the cracks start to show, many businesses will throw even more money at their software with custom updates and workarounds, rather than acknowledging it’s simply unfit for purpose.

Let’s dive into this and consider the alternative.

 

Sunk cost in software

In economics, a sunk cost is money that has already been spent and cannot be recovered in future. The sunk cost fallacy is when we make an investment and follow it through even if doing so doesn’t bring the best gain. In other words, it’s “throwing good money after bad”.

So, in terms of software, the sunk cost fallacy is at play when a business acknowledges a solution isn’t ideal, but sticks with it because they’ve already spent time and resources on implementing it. In reality, continuing to plug money into an underperforming solution continues the cycle of discontent and delays growth.

Sunk costs include all unrecoverable investments made, including:

  • The software
  • Onboarding and ongoing support
  • Custom updates
  • Add-ons / workarounds

The longer you stick with a solution, the more money is thrown at it – all of which is unrecoverable. This is why we often see businesses reluctant to move on and invest in implementing new software.

However, switching to an optimised solution can increase your business’s efficiency and save money in the long term. This is especially true if your current solution is on-premise, as this requires ongoing maintenance (i.e. sunk costs) compared to cloud software that has flexible contracts and fewer associated fees.

It’s essential to consider your opportunity cost – the potential gain of moving to a new optimised solution – and factor it into your decision making, which could make those sunk costs appear insignificant.

 

Prospective costs

On the flip side, we have prospective costs – the opposite of sunk costs. These are future costs that can be controlled, unlike ones that have already been incurred.

The economic theory posits that considering this is the only way to make a rational decision. Taking this approach means you can think logically in terms of what can be gained moving forwards. Regardless of which route you take, any unrecoverable money will still have been spent, so there comes a point where you’ll need to cut your losses.

If a new software product will help lower your monthly bills and increase productivity, therefore saving billable time, your prospective costs will be lower.

 

Biting the bullet

Acknowledging that you’ve invested a fair whack in a software product is one thing, but sticking with it to justify that is another. The sooner you switch solutions, the sooner you can start streamlining the way you work.

Several other factors can deter businesses from switching, including onboarding commitments and fear of making the wrong choice. However, with careful consideration and preparation, you’ll be able to find a software partner that takes the weight off your shoulders.

 

Further reading

We’re passionate about encouraging businesses to revolutionise the way they work with great software. Our handy articles will help you along your journey of transformation. Continue reading the series here:

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