11.18.07

Economics and Branding: The Sunk Cost Fallacy

In economics and in business decision-making, sunk costs are costs that have already been incurred and which cannot be recovered to any significant degree. These can be costs of time, money or opportunity.
The idea of sunk costs is often employed when analyzing business decisions. A common example of a sunk cost for a business is the promotion of a brand name. This type of marketing incurs costs that cannot normally be recovered. It is not typically possible to later "demote" one's brand names in exchange for cash (except perhaps as an exit strategy from a market). Decisions about future investments, sales or more advertising should be made based on future possibilities, not biased by the recent large investment in the advertising that the company made last year (or even last week).
So, the idea is that the fact that you invested $20,000 in advertising last year with your bad product name shouldn't be considered when you're thinking about changing the product's name. The idea is that only prospects matter -- the future. The amount of time and money you spent in the past shouldn't be considered.
In microeconomic theory, only variable costs are relevant to a decision. Economics proposes that one should not let sunk costs influence one's decisions, because doing so would not be assessing a decision exclusively on its own.
Now, what the elementary economists don't discuss is what brand awareness that $20,000 bought you - which is part of the current state of the brand and absolutely *should* be considered when deciding to rebrand / rename or reinvent your identity.

Even though it's hard to think about your brand this way, it's a fun exercise to really test whether you're resisting the future out of loyalty to the past.
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