Sunk Cost

What is a sunk cost?

A sunk cost refers to resources that have already been spent and cannot be recovered. In Product Management, this could involve time and money allocated to research, development, or any other phase of creating a product or feature.

These costs are “sunk” because, regardless of the outcome, the resources spent cannot be recouped. Understanding sunk costs is crucial as it helps you make decisions based on future potential rather than past expenditures.

Think about the funds and time you’ve already invested in a particular feature or aspect of your product. Whether it’s money spent on developer hours, tools, or testing, these costs are now in the past. They’re the definition of “sunk” – done, finished, and irreversible.

The important thing to remember is that these costs shouldn’t influence your future decisions. Instead, your focus should be on what will bring the best results moving forward.

Why is understanding sunk costs important for Product Managers?

As a Product Manager, your job is to steer your team toward the best outcomes, and that means making tough calls. Understanding sunk costs helps you do just that.

Imagine you’ve spent months developing a feature, but user feedback indicates it’s not working out.

It’s tempting to keep investing more time and money to try and fix it because of what’s already been spent – the sunk cost. Getting your head around sunk costs lets you step back and evaluate whether continuing is truly the best option, or if it’s time to pivot to something with greater potential for success.

It’s easy to fall into the trap of thinking, “We’ve invested so much already, we can’t give up now.” But clinging to this mindset can lead to even more wasted resources.

Instead, by recognizing those costs as sunk, you can focus on what’s truly important: the future potential of your product.

This shift in perspective allows you to ask the critical questions: What will benefit our users the most moving forward? Where should we allocate our resources to achieve the best outcomes? It’s about making decisions that are informed by what’s ahead, not what’s behind.

In practical terms, recognizing sunk costs helps you avoid the trap of continuing down an unproductive path just because you’ve already invested heavily in it – the “sunk cost fallacy”. 

What is the sunk cost fallacy?

Imagine you’re building an amazing new app. You’ve poured weeks (or maybe months!) into a specific feature. But lately, things haven’t been clicking. Users aren’t engaging with it, and your team is hitting roadblocks left and right.

Here’s the trap: because you’ve already invested so much time and effort, you might feel pressured to keep pushing, hoping things will magically improve. This is the sunk cost fallacy in action – where past investment clouds your judgment about the future.

Let’s face it: not every idea pans out. But how do we avoid throwing good money after bad and make smart decisions about when to hold ‘em and when to fold ‘em?

Here’s some easy tips for dealing with the sunk cost fallacy:

1. Focus on what’s next: Don’t dwell on what you’ve already spent. Instead, ask yourself: is this feature actually helping us achieve our goals? If the answer’s no, it’s time to re-evaluate.
2. Set clear checkpoints: Right from the start, establish clear milestones and goals for your project. Think of them as pit stops to check if you’re still on the right track. This way, you can catch problems early and course-correct before you’re in too deep.
3. Data doesn’t lie: Ditch the guesswork and rely on hard facts. Use data and user feedback to measure progress and assess the viability of a feature. This helps you make objective decisions, not ones based on past investment.
4. Communication is key: Keep your team and stakeholders in the loop. Explain the sunk cost fallacy and why focusing on future value is crucial. Open communication builds trust and allows everyone to get behind tough choices.
5. Be flexible: Sometimes, the best decision is to hit the brakes and change course. Don’t view this as a failure, but rather a strategic move to free up resources for more promising opportunities.

By recognizing the sunk cost fallacy, you can make informed, future-oriented decisions. This ensures your team’s efforts are always directed towards the most valuable initiatives, driving your product towards success.

What are common challenges with managing sunk costs and how do you overcome them?

Understanding sunk costs is crucial, but putting that knowledge into action can be tricky. Here’s a breakdown of common challenges and how to tackle them:

Emotional attachment

It’s easy to get invested in features your team has poured effort into. Letting go can be tough. This emotional attachment can cloud judgment and make it harder for you to objectively assess how viable an initiative really is.

Solution: Implement a culture of data-driven decision-making. Regularly revisit goals and key performance indicators (KPIs) to ground your choices in reality. This ensures that everyone’s prioritizing the product’s future success over past investments of time and money.

Stakeholder pressure

Stakeholders who have invested resources may fear admitting defeat by abandoning an initiative. This pressure can lead to them wanting to keep investing in failing initiatives, hindering progress and innovation.

Solution: Transparency and clear communication are key. Present them with data-driven insights to show how reallocating resources to promising areas with higher potential return on investment can lead to better overall outcomes.

Explain the concept of sunk costs and how it impacts your decision-making. By helping them to understand, you can make the bigger picture clearer to your stakeholders, and everyone can make better-informed choices that benefit your product in the long run.

Bias in decision-making

Personal biases can favor continuing a failing initiative, even when all signs point toward it going the way of Old Yeller. Recognizing and countering these biases is important if you’re going to be able to make sound choices.

Solution: Use structured decision-making frameworks to remove personal bias from the equation. Formats like the Product Tree Game can provide everyone with a more objective view of the situation.

Involving a diverse team in your discussions brings different perspectives to the table. This can help you identify and mitigate any individual biases, leading to more well-rounded decisions.

Lack of clear metrics

Without measurable performance metrics, assessing if an initiative should continue is difficult. Flying blind can lead to wasted resources and missed opportunities.

Solution: Establish and consistently monitor KPIs that are tied to your product’s goals. These metrics should provide a clear indication of success or failure. Having concrete data to refer to makes it easier to make informed decisions about whether to continue investing in an initiative or cut losses and reallocate resources to more promising endeavors.

Fear of failure

The fear of failure can drive teams to keep investing in a failing initiative or product, hoping for a turnaround. This fear can be paralyzing and counterproductive, hindering progress and innovation.

Solution: Encourage a culture that views failure as a learning opportunity. An open and honest environment where mistakes are seen as stepping stones to improvement, will help your team feel more free to experiment and innovate.

Analyze past investments to gain valuable insights that can guide future decisions. Emphasize the importance of adaptability and continuous improvement over simply avoiding failure. Celebrate small wins and milestones along the way to keep morale high.

Communication barriers

Sometimes, the concept of sunk costs isn’t well understood across all levels of the organization. This can lead to misalignment and resistance when you’re trying to pivot away from failing sunk investments.

Solution: As mentioned above, education is key. Take the time to explain the concept of sunk costs and how it impacts your decision-making. Use real-world examples and case studies to illustrate the point and ensure everyone is on the same page.

By tackling these challenges head-on, you won’t just be a Product Manager who understands sunk costs, you’ll be one who can navigate their complexities, make informed decisions that benefit your product and team, and foster a culture of innovation that drives your product forward.

Who is responsible for managing sunk costs?

In any organization, particularly within product management, the responsibility for managing sunk costs is distributed across various roles. Understanding who is responsible and how they can effectively manage these costs is crucial for minimizing their negative impact on decision-making.

• Product Managers: You’re the guardian of the roadmap, constantly checking in on features to see if they’re still moving you in the right direction. Don’t be afraid to ask the tough questions: is this feature aligned with your goals? Are you getting the results you expected? Is it worth carrying on?
• Senior Management: They need to create an environment where data and logic rule, not emotions or biases. This means providing the tools and training we all need to avoid the sunk cost trap.
• Finance teams: They oversee budgets, forecast finances, and audit project expenses. Their insights can help you identify potential sunk costs and understand the financial impact of your decisions.
• Developers and Designers: They’re often the first to notice when things aren’t working. An open communication culture is key here – you need everyone to feel comfortable raising their concerns early on.

By working together and holding each other accountable, you’ll be able to make smarter decisions and optimize your resources. Remember, sunk costs are a fact of life, but they don’t have to control your future.

Real-world examples of overcoming the sunk cost fallacy

Even large, successful companies face challenges with sunk costs. By recognizing when an investment is not yielding the desired results and making the tough decision to pivot or discontinue a project, these companies were able to reallocate resources to more promising areas. 

Here are some examples of how some of the biggest product companies overcame the sunk cost fallacy:

Windows Mobile

Microsoft invested heavily in its Windows Mobile operating system in an attempt to compete with iOS and Android. Despite committing significant financial and developmental resources, the platform struggled to gain market share.

In 2017, Microsoft recognized that continuing to invest in Windows Mobile was not yielding the desired results. They decided to discontinue the platform and shift focus to developing apps and services for iOS and Android.

This decision allowed Microsoft to reallocate resources to more promising areas, such as cloud computing and their versatile Surface line.

Google Glass

Google Glass was an ambitious project that aimed to bring augmented reality to consumers through a wearable device. Despite significant investment in research, development, and marketing, Google Glass faced numerous challenges, including privacy concerns and a lack of clear use cases for consumers.

In 2015, Google decided to halt the consumer version of Google Glass. Instead of continuing to pour resources into a product that wasn’t meeting expectations, they pivoted by targeting enterprise markets with a refined version of Glass.

This move allowed Google to try to find a niche where the technology could be more effective and valuable. However, they again recognized the importance of cutting their losses when in 2023 they ended sales of the Enterprise version too.

Amazon Fire Phone

Amazon entered the smartphone market with the Fire Phone in 2014, investing substantial resources into its development and marketing. However, the phone failed to attract consumers, resulting in poor sales.

Despite the sunk costs, Amazon decided to discontinue the Fire Phone in 2015. This decision enabled them to focus on more successful ventures like the Kindle e-readers, Echo smart speakers, and their AWS cloud services.

Watson for Oncology

IBM’s Watson for Oncology was developed to assist doctors in diagnosing and treating cancer using AI. Despite significant investments and high expectations, the project faced numerous challenges, including data integration issues and questions about the accuracy of its recommendations.

In 2021, IBM decided to scale back its efforts in this area, recognizing that continuing to invest in Watson for Oncology was not yielding the expected results. Instead, IBM redirected its focus to other areas of AI and cloud computing, where they have seen more substantial growth and success.

Yahoo’s various acquisitions

Over the years, Yahoo made several high-profile acquisitions, including GeoCities, Tumblr, and the blogging platform, Polyvore. Despite substantial investments, many of these acquisitions failed to deliver the anticipated returns.

Yahoo eventually decided to divest or shut down these assets. For instance, Tumblr was sold at a significant loss. By accepting the sunk costs and moving on, Yahoo was able to refocus its efforts on core areas and ultimately merge with Verizon, which aimed to leverage Yahoo’s existing user base and technology.

How can ProdPad help you manage sunk costs and avoid the sunk cost fallacy?

The sunk cost fallacy can be a major roadblock in product development. ProdPad offers a powerful set of tools that can help you effectively manage sunk costs and make data-driven decisions:

• Centralized roadmap & planning: ProdPad keeps your product strategy and roadmap in one place, fostering transparency and alignment across all stakeholders. This ensures everyone is aware of past investments and their purpose within the overall product vision.
• Outcome-focus: We invented the Now-Next-Later roadmap format here at ProdPad – a format intrinsically linked to outcomes and firmly connected to goals and objectives. This way of roadmapping helps shift the focus of the team from delivering outputs only – working to ship feature after feature – to being outcome-focused, measuring success by the result you were hoping to drive. The Roadmap Initiatives in ProdPad are structured in such a way that the problem to solve and target outcome are what define the item, not the exact feature. This helps you measure more often and make decisions based on what outcomes you are achieving. 
• Idea prioritization: ProdPad’s Idea and backlog management features help you gather and evaluate ideas from your team and customers, and comes complete with prioritization tools to help you easily visualize your entire backlog by your chosen prioritization scale. This makes it super easy to spot the ideas most likely to bring the best return, avoid sunk costs, and have the highest potential for success.
• Customer feedback management: ProdPad’s numerous ways of capturing customer feedback (from feedback portals to email drop boxes) allow you to gather real-time customer feedback and route that straight to the Product team. By incorporating user insights into your decision-making process, you can avoid pouring resources into features that don’t resonate with your target audience.
• Collaborative communication: ProdPad integrates with the communication tools you use across your organization, allowing you to easily capture and encourage open discussion around all your product Ideas and Initiatives.   This allows team members and stakeholders to raise concerns about potential sunk costs early on, preventing further investment in initiatives that may not be viable.

By making the most of what ProdPad offers, you’ll be able to build up a comprehensive view of your product strategy, prioritize effectively, and make data-driven decisions that avoid the sunk cost fallacy. This will help you ensure that your resources are always directed toward the initiatives with the greatest potential for success, rather than throwing good money after bad.