Latest / Marketing Psychology with Fexingo: Behavioral Triggers, Persuasion, and Consumer Behavior / How the Sunk Cost Fallacy Keeps You Subscribed
Transcript
- Lucas: So Luna, quick question. How many streaming services are you paying for right now that you actually watched something on in the last month? Luna: Oh, that's a painful question. I think I have four, maybe five, and honestly, I've only opened two of them recently. Lucas: Right. And you're not canceling them. Why do you think that is? Luna: I guess I keep telling myself I'll get my money's worth eventually. I've already paid for so many months, it feels wasteful to just cut it off. Lucas: That, right there, is the sunk cost fallacy. The money you've already spent is gone — it's sunk. But your brain keeps treating it as an investment that needs to pay off. And marketers know this better than almost anyone. Luna: So this is Episode 168, and we're finally talking about the sunk cost fallacy. It feels like it's been lurking in the background of so many of our past episodes. Lucas: Absolutely. And today I want to zoom in on a specific place where this bias is doing heavy lifting: subscription businesses. Because they've basically built their entire retention model around the fact that you won't cancel once you've paid, even if you never use the thing. Luna: And there's a great example from the gym industry. I read that gyms make most of their money from people who never actually show up. Lucas: That's the classic case. A 2019 study from the University of Chicago found that people who join a gym with a monthly contract end up paying about 70 percent more over the long run than people who pay per visit — even though they'd save money with a per-visit plan. But the monthly contract feels like a commitment, so people stick with it. Luna: So the gym is essentially betting on the sunk cost. They know you'll keep paying because canceling feels like admitting you wasted all those previous months. Lucas: Exactly. And they reinforce it with things like annual contracts and cancellation fees — which are basically a financial penalty on your sunk cost. The longer you stay, the harder it is to leave, because you don't want to lose the 'investment' you've already made. Luna: But it's not just gyms. Streaming services do the same thing. They lock you into monthly plans, and every month you don't cancel, it feels like you're building up a history of 'use it eventually.' Lucas: Right. And there's a really interesting variation of this with annual plans. If you pay for a year upfront, you've made a big sunk cost. So even if you stop watching after month two, you're not going to cancel — the money's already gone. And when the renewal date comes around, you've been paying for ten months already, so you just renew. The bias compounds. Luna: And I've definitely done that with a certain productivity app. I paid for a year, used it for two weeks, and then kept it for the remaining eleven months just because I'd paid for it. Lucas: Oh, I think everyone has that app. And companies are very aware of this. Some of them even design onboarding flows to make you feel like you're building something — like a profile, a playlist, or a project — so that the emotional investment grows alongside the financial one. Luna: So it's not just about the money you've spent. It's about the identity you've built around the product. You've told yourself 'I'm a person who uses this app,' so canceling feels like losing part of that self-image. Lucas: That's a really good point. And that's where the sunk cost fallacy gets intertwined with something like the IKEA effect, which we covered in Episode 154. The more effort you've put into something — whether it's building a coffee machine or curating a playlist — the more valuable it feels. The sunk cost isn't just money; it's time, effort, and emotional energy. Luna: But there's a dark side to all this, right? I mean, is it ethical for companies to bank on this bias? You mentioned gyms making money from people who don't show up. That almost feels predatory. Lucas: It's a thin line, and I think it comes down to transparency. The gym example is arguably borderline because they're profiting from people's self-deception. But there are companies that use the sunk cost fallacy in a more constructive way — like prepaying for a course or a coaching program. The sunk cost motivates you to actually follow through and put in the work. That's using the bias to help the customer, not just to extract money. Luna: So the intent matters. Is it about helping you get value from something you've already committed to, or is it just about keeping you on the hook? Lucas: Exactly. And that's the ethical question. I think we should actually talk about a specific company that tried to design against the sunk cost fallacy. IKEA, for example, has this thing where they offer a 365-day return policy. That's a deliberate move to remove the sense of 'I've bought it, so I have to keep it.' They want you to feel like you can return it anytime, so the decision to buy isn't weighed down by the fear of being stuck. Luna: But does that actually work? Doesn't it make people more likely to buy in the first place, even if they end up returning stuff? Lucas: That's the genius of it. By removing the sunk cost, they increase the likelihood of an initial purchase. And the return rate is actually low, because once you've got the furniture in your home, you'd rather not deal with the hassle of returning it. So it's a clever way to get past the customer's mental blocker. Luna: So it's a bit of a double-edged sword. On one hand, they're helping you overcome the sunk cost bias. On the other, they're using it to get you in the door. Lucas: Right. And that's the nuance. There's no pure villain or pure hero here. The sunk cost fallacy is a tool, and how it's used depends on the company's intentions. But for us as consumers, the bigger lesson is learning to recognize when we're falling for it ourselves. Luna: And that's actually something I've been thinking about with this podcast. You know, we put out these episodes every day, and people often tell me they've learned something that actually changed how they think about their own spending or their own business decisions. Lucas: Yeah, that's the best feedback we get. And it's a big part of why we keep doing it. There's no big corporate backing or paywall — the show stays free because of a simple thing: listeners who find value in it occasionally chip in a couple of dollars a month. Luna: If these marketing conversations have sparked something you've actually used, you can support the show at buy me a coffee dot com slash fexingo. Even a small amount genuinely helps keep these episodes coming. Lucas: It's a small gesture, but it adds up. And it means we can keep digging into these biases without worrying about sponsorship interference. So, if you've gotten something out of these episodes, that's where you can help. And now, back to the sunk cost. Luna: So we talked about how companies use it. But how do we, as consumers, actually break the pattern? I feel like every time I try to cancel something, I get that twinge of 'but I've paid so much already.' Lucas: The classic advice is to ask yourself: 'If I were starting from zero today, would I pay for this again?' That removes the sunk cost from the equation. Because the money you've spent is gone — it shouldn't influence any future decision. Luna: That's a good mental trick. But I think the hard part is the emotional attachment. Like, I've had this Spotify playlist for years. If I cancel, I lose all those songs I've curated. That's not just money — that's a history. Lucas: And that's where platforms like Spotify are really clever. They know that your playlists are a sunk cost in the form of time and emotional energy. So they make it easy to build them, and they don't let you export them easily. The switching cost becomes a barrier, and the sunk cost keeps you loyal. Luna: So it's not just about the money. It's about the psychological lock-in. Lucas: Exactly. And once you see that, you can start making decisions based on what you'll actually use in the future, not what you've already spent. It's like the old saying: 'Don't throw good money after bad.' But in this case, it's 'Don't throw good months after bad ones.' Luna: I love that. So as a marketer, how would you use this insight ethically? Like, if I'm running a subscription business, how do I make the sunk cost work for my customers, not against them? Lucas: The key is to make the sunk cost a motivator for action, not just a guilt trip. For example, if you sell an online course, you want them to have paid upfront so they're motivated to complete it. That's using the sunk cost to help them achieve a goal. But you shouldn't design features that trap them or make cancellation deliberately difficult. Luna: So transparency and ease of cancellation are the ethical markers. If you make it hard to cancel, you're probably relying on the sunk cost in a harmful way. Lucas: I think that's a fair line. And there's some research that suggests even a simple reminder of the sunk cost can help people follow through. Like, a fitness app that says 'you've worked out twelve days in a row — don't break the streak' is using a sunk cost of past effort to keep you going. That's positive. Luna: So it's all about the direction of the nudge. It can be a force for good or for exploitation. Lucas: And I think that's the takeaway for our listeners, whether they're consumers or marketers. Recognize the sunk cost in your own choices, and if you're building a product, ask yourself: 'Am I helping my customers get value from what they've already invested, or am I just trapping them?' Luna: I'm going to look at my subscription list tonight with fresh eyes. Maybe I can finally cut down from five to two. Lucas: Let us know how it goes. I've got a feeling there's a lot of wasted monthly charges in all of our lives.