navigating sunk cost effect

The sunk cost effect is a well-known business term which is usually cited while explaining cases of businesses or products that dug their own grave due to their inability to quickly pivot away from a path undertaken due to costs that have already been incurred. Pivoting away shuts the door for good, to realize any business value from the investment that has already been made in that particular direction. Hence, the decision to do so is difficult and a lot of businesses enter into the sunk cost trap.

However, what I found really interesting was the deployment of sunk cost effect by businesses to their advantage. A popular example is the e-commerce behemoth Amazon with their Prime membership. I always wondered the economics behind being able to provide Amazon Prime members with an OTT and music streaming service along with free delivery while shopping, for a relatively meagre annual fee. I came to know later on, that the OTT and music streaming services (most likely cash guzzlers) were basically hooks to reel in consumers into a cleverly designed psychological trap to drive more e-commerce business. Most users may primarily purchase a prime membership for the streaming services, however when there is an online shopping need for the user, Amazon indefinitely becomes the go-to-choice over any other e-commerce alternative, as users want to extract that maximum utility from their investment i.e. subscription fee.

Another interesting variation of the application of sunk cost effect is of Tesla and their free superchargers. Here the superchargers kind of serve as hooks to reel in consumers to buy an expensive Tesla EV over other EVs or even ICE vehicle alternatives. Sacrificing the realization of any direct monetary value from the superchargers is a small price to pay for a bigger picture goal i.e. to drive growth in the more economically viable EV sales which can compensate for the losses incurred by the supercharger network. From a psychological standpoint, consumers who have purchased a Tesla will at times subconsciously try to utilize their vehicle more than they need to, so that they can derive maximum value from the free superchargers. This plays perfectly for Tesla because apart from being an automotive company, it is also a data company. It gets access to more training data that can be utilized for training machine learning models required to improve its autonomous driving technology which is the company's long term goal - driverless cars!