What is the principle of sunk cost, and how can it be practically applied to sales? For it certainly can.
Sunk cost is a principle of economics. Sunk costs are costs that a company has already invested in products or services that must now be profitably recovered. These are costs that your company has already “sunk” into raw materials, development or production and, where applicable, storage. They are fixed costs because the money has already been spent; they will not fluctuate.
In terms of sales, sunk costs would be the time and effort invested in an opportunity by a salesperson or a sales team.
The Free Lunch
According to renowned economist Milton Friedman, “There’s no such thing as a free lunch.” This is certainly true for a salesperson or a sales manager; there is always effort of some kind to be invested for a deal to be made. There comes a point in the life of an opportunity, however, when a line must be drawn–will it pay off for sales to invest further time, effort or perhaps even money into it, or should we pull the plug?
Alice and the Giant Opportunity
There was once a salesperson called Alice, who sold services for a web development company. One day Alice brought in a potentially huge deal for her company–a website for an enormous non-profit corporation. In order try and land the deal, the company had to make a considerable investment: a prototype site had to be designed and built so that the company’s capabilities could be demonstrated to the prospective customer. There was a serious risk involved: what if the company didn’t win the deal after making this substantial investment?
Once the demonstration had been made to the prospect, Alice and her company waited for word back. This was, in reality, the dividing line: the investment made in the prototype was the sunk cost, the money already invested. If the potential customer didn’t get back to them, it was probably time to withdraw from the project, as considerable expenditure had already been made with no return.
As it happened, though, the prospect did get back to Alice, indicating they truly liked the concept. That gave Alice’s company the confidence to make yet more investment, and in the end the opportunity was won.
As happened there with Alice’s company, the judgement factor enters for every company at some point in the life of an opportunity: should we continue investing, or should we withdraw?
In watching the stock market recently, you can see that we’re in a boom cycle. It’s a bull market–investors are buying up endless market share in companies in the hope that it brings them enormous profit.
A salesperson or sales team cannot afford to endlessly invest, though, because they must deliver a result at the end of the month or quarter. Chasing an opportunity ceaselessly in hopes of a big win puts the company in serious risk. The salesperson betrays themselves, the team and the company.
Of course this judgment must be made depending on the market, type of product, and length of sales cycle. In high-ticket complex sales, there are technical teams and others involved. There might be travel to customer locations. Such sales cycles can take a year or more. Judgment as to when to draw that line must be made with extreme care in such situations.
Sales Process and Buyer Signals
There is a principle which is utilized to reduce the risk when it comes to sunk cost: watch the buyer signals. In the case of Alice above, her company, once they had delivered the prototype to the prospect company, waited to hear back before laying out further expense. They then got a positive signal back–the prospect was happy with the direction–and so they could continue.
A tried-and-true sales process in place reduces risk, simply because best sales practices are being utilized as the opportunity progresses. You then know what signals to watch for that indicate you should progress with the deal.
Pipeliner CRM has as part of its functionality buyer’s action–seller’s activities. This is part of Pipeliner’s sales activities–the seller waits for a particular signal from the buyer before engaging in the next activity. Of course these signals and activities are completely unique to any company, and for that reason Pipeliner is totally tailored to a company’s sales processes and sales activities.
Having such a system in place–watching for buyer signals–you know when to move and when not to. If your prospect isn’t giving you any kind of indication that they’re moving toward a purchase, you cease spending time, energy and money. You can continue to do things which don’t cost you, such as emails or calls.
Sales Team Priorities
On a sales management level, having a firm eye on sunk cost is vital. To do so, the sales manager prioritizes opportunities for the sales team, indicating which of these–or which type–should be pursued.
A Pipeliner CRM feature that makes such prioritization easy is its opportunity labeling feature. There are three different labels which can be applied to deals all throughout the system: focus, hot and stalled.
A stalled opportunity isn’t necessarily dead, it’s just stalled. It might stay in that one place for a year. It can still be lost, but it isn’t yet. At some point that prospect might give you the signal that the deal is hot–and additional sunk cost is then worthwhile.
Sales is never a risk-free proposition–there is always risk involved with engaging in an opportunity. But with a good sales process, and by utilizing buyer’s actions as signals for sales activities, you can greatly minimize the risk and the sunk cost.
Pipeliner CRM empowers salespeople to precisely react to buyer signals. Download a free trial now.