Red Bull spends $2 million sponsoring a single stunt: a man jumping from the edge of space. The stunt proves nothing about the energy drink's product efficacy. It wastes money by any rational measure. But the waste itself is the signal. Costly signaling is the principle that the more you're willing to waste on something, the more credible your commitment becomes, because waste is costly and therefore trustworthy.
This is counterintuitive. You'd think efficiency would be credible. But authenticity has always been costly. A craftsman takes weeks to hand-finish a product, losing efficiency. A luxury brand charges £1,000 for something worth £200 in materials. The cost itself is proof of authenticity—why would they waste money this way unless they genuinely believed in what they're signaling?
Shotton doesn't explicitly frame it this way, but Red Bull's extreme spending is costly signaling: we spend absurdly on extreme sports because we genuinely believe Red Bull gives you wings (energy, power, capability). The expense is the proof.
Kirmani & Wright (1989) studied costly signaling in advertising spend.1 They presented brands as spending different amounts on advertising for identical products:
Same product, different advertising spend, different quality perception. Why? Because advertising spend is costly, and costly things carry credibility. The brand wouldn't spend £20 million unless they believed the product was good. The willingness to waste money signals authenticity.
But there's a threshold: beyond £20-40 million, the effect flattens. Spending £100 million doesn't increase perception further. At some point, the spend becomes so extreme that it loses credibility (seems wasteful rather than committed).
Costly signaling originates from evolutionary biology: the handicap principle. A peacock with an enormous tail is handicapped—the tail makes it harder to escape predators. But that handicap is the signal. Only a healthy peacock can afford such a handicap and survive. The cost proves fitness.
Human costly signaling works similarly. A luxury brand charging £1,000 for something worth £200 is handicapped—they could sell much more volume at £200. But the high price signals that they're confident in their product's quality. Why else would they handicap themselves?
The key insight: cheap products have to prove quality through other means (warranties, reviews, guarantees). Expensive products prove quality through waste. The expense becomes the proof.
This inverts normal economics. Normally, efficiency increases profit. In costly signaling, waste increases credibility, which increases price, which increases profit despite the waste. The company profits from handicapping itself.
Step 1: Identify what counts as costly in your market For luxury fashion: hand-finishing, heritage storytelling, limited production. For drinks: extreme sports sponsorship. For luxury cars: cutting-edge technology that 99% of drivers never use. What can you waste that signals authenticity in your category?
Step 2: Decide on the spend level The spend needs to be visible and substantial enough to be noticed, but not so extreme that it seems disconnected from the product. Red Bull's space jump is visible ($2M is impressive), and it connects to the energy/capability benefit of the product.
Step 3: Make the waste visible and attributable to the product Kirmani & Wright's effect worked because advertising spend was visible. The more visible the waste, the more credible the signal. If you're spending £20 million on advertising, make sure people know you're spending that much. It's proof of commitment.
Step 4: Connect the waste to product authenticity The waste needs to signal something real about the product. Red Bull's space jump signals that they believe in capability, pushing boundaries, extreme performance. The waste is consistent with the brand promise. If a budget brand wasted £20 million on an extreme sports stunt, it would signal bad business sense, not authenticity.
Step 5: Recognize the threshold Beyond a certain spend level, the effect plateaus. You don't need to spend £100 million. Find the threshold where spend becomes noticeably costly (signals authenticity) but not wastefully extreme (signals poor judgment).
Costly signaling fails when the waste seems disconnected from the product or seems frivolous. A luxury brand spending £1 million on a corporate party to staff isn't costly signaling—it's corporate excess. But a luxury brand spending £1 million on heritage documentation and artisanal workshop space is costly signaling—it's connected to the product.
The waste has to be defensible as commitment to product quality or brand authenticity, not just excess.
There's a point where additional costly signaling doesn't increase credibility. Kirmani & Wright found this: £20M spend rated 6.16/9, and £40M spend also rated 6.16/9. The credibility plateaued. Doubling the spend produced zero additional credibility gain.
This suggests that costly signaling works in a band: there's a minimum (if you spend too little, it doesn't signal), a sweet spot (where spend signals credibility), and a diminishing zone (where additional spend doesn't help). Finding that sweet spot is the implementation challenge.
Behavioral-Mechanics → Price as Quality Badge: Costly signaling explains why higher price creates perception of higher quality. The price itself is waste—the brand could charge less and sell more. The willingness to accept lower volume at higher price signals confidence. Price as Quality Badge is the consumer-side effect; costly signaling is the brand-side mechanism.
Psychology → Loss Aversion: Costly signaling creates loss aversion commitment: if you're visibly spending millions, you've invested heavily in the brand's success. Loss aversion makes you more committed to protecting that investment, which makes the brand more authentic (you're fully committed to quality because you've already invested so much). The visible cost creates a sunken cost that the brand uses to signal commitment.
Behavioral-Mechanics → Behavioral Residue: Costly signaling is visible in advertising, sponsorships, and brand behavior. That visibility becomes behavioral residue—evidence that this brand is committed. Behavioral Residue explains why the visible waste matters: it's proof of identity and commitment that consumers encounter repeatedly.
Sharpest Implication: Authenticity can be purchased through waste. You don't have to be authentic to seem authentic—you just have to be willing to waste money in ways that are consistent with your brand promise. The waste becomes proof of authenticity regardless of whether the authenticity is real. This means brands can compete on credibility by competing on visible spend, not on actual product superiority. The brand that wastes the most convincingly wins.
Generative Questions: