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Opportunity Costs, Sunk Costs, and the Emotions Driving CRM Failure

By Christopher J. Bucholtz CRM Buyer ECT News Network
Jun 28, 2012 5:00 AM PT

About a year ago, I heard a great story on National Public Radio's "Marketplace" that illustrated the concepts of sunk costs and opportunity costs using baseball players as a sample group.

Opportunity Costs, Sunk Costs, and the Emotions Driving CRM Failure

While fans marvel at the enormous contracts paid to star players, there are thousands of younger players who toil away in the minor leagues for very low salaries; if you add the numbers up, it is clear that for the average player, quitting is more lucrative than chasing a dream.

That's because playing minor league ball imposes an opportunity cost on young athletes -- the time they'd otherwise spend gaining an education or building the foundation for a career is pushed into the future, placing the non-stars at a disadvantage when compared to their non-athletic peers.

In fact, "if you take two people who grew up in the same circumstances -- let's say one played baseball and one didn't -- the person who plays baseball is making about 40 percent less on average 10 years after they enter the game than the person who decides not to play baseball and who just wanted a regular career," noted Columbia University's Sudhir Venkatesh.

The sunk cost is the effort put into becoming a good baseball player -- the effort and expense involved in playing the game. The opportunity cost represents the loss of time that could have been spent doing something different -- like establishing a career or finishing a college degree program.

Baseball and CRM

So why am I talking about these ideas in relation to CRM? Well, the emotional mechanics that drive ballplayers to stick to a losing career path are the same ones that help businesses both miss the opportunities in CRM and perpetuate losing CRM strategies.

Missed opportunities are easy to spot. The one that seems most obvious is that of the sales-focused organization that never completes the circle and fails to tie customer support into the CRM process.

This type of company keeps its eyes on one aspect of the prize -- customer acquisition -- and it sees that aspect in isolation from the rest of the potential that a complete customer view can offer. This myopia ends up derailing it later on, as customer retention becomes a problem.

By that point, straightening things out has become harder as processes are in place and roles within the company must be redefined. The opportunity cost: lost customers, but also lost time as customer support is retrofitted to the CRM strategy.

Other opportunity costs are incurred as businesses blindly proceed without fully understanding what information they should be collecting and considering about their customers. Capitalizing on a newly discovered and formerly overlooked nugget of customer information can be lucrative, but it would have been more lucrative had it been discovered earlier.

Similarly, if the business has been collecting data it now realizes is useless, this represents wasted extra work and a missed chance to collect data that is truly important and useful.

As galling as opportunity costs are, though, sunk costs and their effects on behavior are far more damaging. In the case of baseball players, their years of devotion to the game keep them from being able to quit when it becomes clear that they're not going to the Major Leagues. After all, who would want to admit that they'd devoted their entire young adulthood to a failed dream?

With that in mind, it's easy to see why someone would stick with the game rather than make the wrenching decision to go in another direction.

Kill Your Darlings

This same emotional phenomenon keeps businesses from making similar honest decisions. Early in the CRM selection process, it's critical for businesses to gain a brutally honest and thoroughly candid understanding of which processes work and which do not.

However, if your part of the business and the processes you've developed are suddenly revealed to be the weak spots in the organization, the natural tendency is to become defensive. After all, admitting failure's not good for your career. However, failing for a longer period of time is a lot worse for your career -- so suck it up, Sparky.

Even after CRM's in place, you can spot this sunk-cost thinking. How many organizations are running a CRM application that's two or three generations behind the times, patching and plugging shortcomings with jury-rigged customizations, because the decision makers who could put the old system out to pasture are fixated on the original expenses of acquiring and deploying the system, rather than the daily punishment the failing system is inflicting on the bottom line and on the people who are forced to use it?

While gut reactions have their place, they're not always the best factors in making decisions of process, deployment and replacement when it comes to CRM. If you can remain conscious of the emotional reactions that aspects of CRM planning and deployment cause, it's much more likely that you can make choices based on what's really best for your customers and your company.

CRM Buyer columnist Chris Bucholtz blogs about CRM at the CRM Outsiders. He has been a technology journalist for 17 years and has immersed himself in the world of CRM since 2006. When he's not wearing his business and technology geek hat, he's wearing his airplane geek hat; he's written three books on World War II aviation.

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