1 Upselling and Cross-selling: Benefits, Strategies, Industrial Applications and Models

1.1WHAT IS CROSS-SELLING AND UPSELLING?

Cross-selling and upselling are strategies of firms to increase profit by selling additional, complementary or upgraded products or services to the customer who intends to make a purchase. Cross-selling is the marketing of additional or complementary products of a different kind in addition to what the customer is already purchasing. The additional product is generally related (or sometimes unrelated) to the product already purchased – for example, buying a mouse with a laptop. Upselling is the strategy where customers are encouraged to purchase more units of the same purchased item or to upgrade to a more expensive, higher-end version of it. Upselling provides firms higher revenue while the customer gets a better product.

Difference between Cross-selling and Upselling

Both upselling and cross-selling are brilliant strategies of increasing revenue by increasing customer engagement. Considering the execution and results, both are very similar but their fundamentals are very different. 

Cross-selling strategies are associated with giving add-ons and additional products while upselling provides a better, higher version of the same product.

The customers who are cross-sold, often don’t really intend to buy the product they are sold from the start. While upselling, the customers always intend to buy the product beforehand.

Firms while upselling, sell an upgraded and costlier version of the same product. But the products sold while cross-selling are entirely different from the originally purchased product. They may be related but are not of the same type.

While upselling, the actual margin rate is increased. The firm earns more revenue per product as it sells costlier products. While cross-selling, the firm provides offers to attract customers towards special bundles and this marginally decreases the earned revenue per product sold.

Cross-selling is generally preferred when the acquisition cost with shipping and maintenance costs are comparable to the profit obtained by sales. Upselling is preferred when all other costs are negligible compared to the selling price and gross margin.

Upselling is generally easier than cross-selling because in cross-selling, the customer might not really want the product.

Percentage of Upselling and Cross-selling Suggestions Clicked and Bought

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BENEFITS

Cross-selling and Upselling Increase Revenue Faster

For any firm, the value of a customer does not end with the purchase or transaction. There is a larger value that includes additional potential revenue. Cross-selling and upselling are the ways by which firms tap this additional revenue potential of customers. During upselling and cross-selling, customers are influenced by several means to reconsider other available products for purchase. Personalised ads and customised offerings have made influencing customers an easy task and this has increased the revenue share of cross and upsold products. Research shows that the response rates from cross-selling efforts are 2 to 5 times better than those of cold sales. Around 30%-35% of total revenue in e-commerce is the contribution of cross-sell and upsell strategies.

Suppose a firm sells a product at $100 after spending $30 on shipping and $10 on acquisition at a 50% gross margin, it will earn a profit of $10. By cross-selling a related product at $20 with negligible additional shipping and acquisition costs, the firm gains an additional $10 profit. This doubles the profit with relative ease.

Cross-selling and Upselling Show Higher Customer Engagement, Retain More Customers

The probability of selling to an existing customer is more than 60% while the probability of selling to a new prospect lies below 15%. It is found that it costs 5 times less to serve an existing customer than to acquire a new one (Rotherfeder 2003). So, at times, spending more to please new customers may not be smart. Increasing retention rates by ensuring customer engagement plays a vital role in this case. This decreases the Customer Acquisition Cost for the company which is a very important business metric in itself. 

CAC for New Customers vs Upsell vs. Renewal

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Increases Knowledge of Customer Behaviour for Better Decision Making

Cross-selling (and upselling) ensures that customers buy more products and services from the firm and it broadens the scope of relationship and trust among customers in parallel. This increases the actual and psychological cost of switching from one firm to another. The firm gets to know more about the customer’s needs and preferences. This improves its target marketing and cross-selling or upselling capabilities. This information about consumer behaviour creates a local monopoly for the firm. This established relationship gives the firm an upper hand in the competitive market.

Products Get Advertised and Find a Market

In today’s vast market, many products do not get customers’ attention and remain unsold. Cross-selling and upselling offers are a great way to put those products in front and make people aware of them, providing more options and variety to customers. 

Increases Order Value

The improved customer relation and the availability of a wide variety of relevant products induces in customers a willingness to spend more. This increases the average order value (AOV). Upselling and cross-selling provides more value to customers and makes shopping very interesting. The suggestions and pop-ups show customers what they are looking for in less time. Psychologically, scoring a good deal brings a sense of reward and customers feel that they have saved money on an item they needed. People find relevant recommendations when they already are in a psychological state of buying. This prevents the effort to bring a customer in a mood to spend. Also these techniques create in customers a psychological fear of missing out. Many strategies like bundling, tiering and sequential cross-selling motivate customers to increase the value of their purchase. In many sectors, expenses like customer acquisition or shipping add a high fixed cost to orders and increasing the order value becomes a necessity.

Increases Customer Satisfaction

The ability to tailor upsells and cross-sells based on what the firm knows its customers already enjoy, helps increase customer engagement and increase their satisfaction. For instance, e-commerce sites start suggesting similar products after we make a purchase. The firm should keep track of its customers’ purchases so it may direct them toward like products in the future. Alternately, inform them if a fresh, relevant item is released. Both the firm’s revenue and their satisfaction may rise as a result.

UPSELLING AND CROSS-SELLING STRATEGIES

All outstanding cross-selling and upselling strategies have a solid foundation based on data. Blind product pushes as suggestions to cross-sell and upsell no longer work in today’s competitive market. Firms must have a data fuelled idea of the following to successfully implement the strategies:

• The products customers want as add-ons
• The spending limit they are open to
• The products that work best with the firm’s brand positioning
• The extent of benefits offered to customers
• The relatability between the offered add-on and purchased product

Increasing benefits is one of  the best strategies that we come across. Discounts increase the perceived value of the offer on expense of the revenue. This attracts customers and increases the overall value of the firm.

Discount Benefits

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Here are some strategies that firms generally implement in order to increase the chances to upsell and cross-sell.

Acquisition Pattern Analysis and Collaborative Filtering

There are two upselling and cross-selling strategies in the context of Customer Relationship Management (CRM) – acquisition pattern analysis and collaborative learning.

Acquisition pattern analysis identifies the sequential, logical steps of customers in terms of product or service acquisition. This is a long term study of the needs of a person over time that depends on his income, social standings and stage of life. This is done based on the acquisition patterns of previous customers. Collaborative filtering is identifying the items that a user might like on the basis of reactions by similar users. In contrast with acquisition pattern analysis, collaborative filtering can predict a new different product that may not be a part of sequential acquisition.

Bundling

Bundling is the strategy of selling several products and services combined as a unit. The combined products may be related or dissimilar depending on the previous purchase patterns. Bundling is often accompanied with a discount which increases the perceived value of the offer to stimulate demand. Bundling provides these discounts at the cost of profit margin

. 

Comparison of Bundle and Unbundle Strategies

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Sequential Cross-selling

People always have a sequence of buying certain products that depends on logical ordering and resource constraints. Sequential cross-selling uses this feature of market behaviour to increase profit. Different products or services are sold at different points of the customer’s tenure with the firm, instead of selling add-on products at the time of purchase. These services are generally associated with servicing or refilling. Industries and firms dealing with life stage marketing often exploit this market potential to maximise their benefits. Suggesting an ink cartridge 6 months after purchasing a printer is an example of sequential cross-selling. One good strategy of sequential cross-selling is to entangle the offers and benefits on products over time. This becomes very handy for firms such as banks which can give very appealing yet profitable offers after a certain period of maturity. These benefits spread over time increase customer engagement and make the firm strong. Many models have been developed that incorporate customers’ purchase decisions about the products and services to understand sequential acquisition patterns.

Tiering

Tiering is the process of categorising the provided products and services into different levels of value. Often, the main goal is to have growth in sales and revenue by grouping the products smartly for different customer demands. Making available different packages and products of varying costs and specifications based on tiers makes the products appropriate for all ranges of demands. This gives the firms knowledge about the volume of investment required for each separate tier. This helps them optimise their investment strategies more efficiently.

Along with this, tiering creates a sense of class in people and motivates them to upgrade. Tiering often forces people to overbuy and spend more money in a desire to have a high-tier product. 

Generating Affinity

Generating affinity in customers for a brand, product or mode of purchase is a very common strategy for most of the firms. It aims to increase brand loyalty and market awareness to have the best customer relations possible. Strong affinity to products psychologically forces customers to purchase them and often leads to cross-selling and upselling. Firms follow many strategies to generate and maintain their affinity among customers. It is always wise to keep customers in contact with the appealing offers and beneficial motives of the firm. Multilayer advertising is the most efficient way of generating affinity. Advertising at different levels allows firms to remind current customers about more products and potential launches, while gaining new customers at the same time. As customers see a great product being advertised again and again, they gain affinity for the product. This largely increases chances of upselling and cross-selling.

Affinity marketing also plays a significant role in boosting cross-selling and upselling. Here, competitive businesses come together under one institution and co-operate with each other instead of competing, selling similar products to target a large band of customers. This allows them to share their parts of markets, reduces overall risk and makes the whole system stable for the firms. This gives the customers access to a very large range and variety of products, increasing the firms’ chances of cross-selling and upselling.

ANALYTICAL TOOLS AND MACHINE LEARNING APPLICATIONS WHILE CROSS-SELLING AND UPSELLING

There have been many attempts to recognise the most efficient cross-selling and upselling strategies. All of those studies have been predictive and mostly data driven. The ability to identify target customers also becomes a major part of the problem. With all that, the right timing of making a cross-selling or upselling attempt plays a vital role in determining its success. Making different offers at random and unplanned instances train the customers to ignore those attempts. The most important problem with these strategies still is the choice of products offered while upselling and cross-selling. This aspect needs detailed information about the average customer statistics, their preferences and tendencies. This also needs a very specialised history of each customer as every customer has different priorities and likings. Firms must consider changing trends, fashion and preferences. Something that is in trend today, may not be relevant tomorrow. This results in many situations where data science and machine learning can be applied.

While cross-selling and upselling, customer relationship management frameworks largely determine the extent of success. This largely includes optimising service offerings on the basis of pre-transactional, transactional and post-transactional behaviour of customers. Most of these highly efficient CRM Models often divide the entire process into three stages: market basket analysis, client interaction and transaction. Separate analysis for each stage is necessary for efficiency.

Most of the predictive work done in cross-selling and upselling use concepts of feature engineering and price discrimination. The main aim for most of the models is to generate higher profit with better utilisation of logistics related costs and resources. There are many models built for problems like choosing the right bundle price for a distinct customer and predicting cross-selling revenue in an artificial environment. Also, entire market simulations can be done, where users can try out all imaginable strategies without facing the risk of actual loss.

Distinguishing between Upselling and Upsetting by Cross-selling and Upselling incentives

The model works on the weights of external and internal incentives in driving employee efforts as well as the cost of effort. The parameters including the effort choices of the sales representative, customer satisfaction and utility of the add-on products are simultaneously estimated using the Generalised Method of Moments (GMM). The model quantitatively frames customer satisfaction and predicts it on the basis of the suggested customer satisfaction equation.

UPSELLING AND CROSS-SELLING IN DIFFERENT INDUSTRIES 

E-commerce

E-commerce industries have higher acquisition costs and a great scope of upselling and cross-selling with the large range of available products. In India, the average CAC for e-commerce companies is estimated to lie somewhere between INR 300 and 5000. Also, there is a lot of global competition among e-commerce firms because of easy comparability between competitors and transparency in processes. Ensuring cross-selling and upselling advantages becomes necessary for the firms to recover from the high acquisition costs and minimise competitive risks.

Upselling and Cross-selling Strategies in E-Commerce:

Prioritising customer experience: This is very necessary as it is the key to retaining customers. It is very important that the firm’s cross-selling and upselling attempts enhance customers’ experience instead of annoying or frustrating them. While upselling, suggestions should be offered only when there is certainty about the product and purchase. Offers must be more customised and uniquely aligned for the customers. The customers must find the suggestions and upselling options very relatable and convincing. Thus, having a detailed idea of customer behaviour is very important. All these factors add to the reliability and value of the entire firm and improve customer engagement, increasing cross-selling and upselling chances. 

Upselling and Cross-selling in CRM

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Start with the best selling product: The best selling product develops in customers’ an affinity towards itself. This also sets a higher reputation for the e-commerce firm.

Demonstrating value: Optimal advertising and emphasis on the product demand generate a value for the product among the target customers. Creating time limitations and showing the number of left products are very common yet brilliant strategies to push the sales and chances of cross-selling and upselling.

Bundling: The main objective of this technique is to create a set of products that provide more value together than apart. Customers must feel they are saving money and this makes them loyal to the firm. Cross-selling becomes very easy and large stock rotation is observed.

Categorising into tiers: Ratings and tiering create in customers a tendency to buy the product. Upselling fundamentally means to encourage customers to upgrade to a higher tier. Hence, the entire catalogue of products must be divided into different tiers on the basis of price ranges, capacity or any other factor.

Placing the upsell offers at the right place: Offering cross-selling in different layers smartly creates more chances of success. Also, suggesting upselling offers to people at random instances casts a very poor impression on the customer and he/she very easily loses interest in the purchase. There must be a check on the number of times and the right instances a suggestion is made. This makes the suggestions interesting and less repetitive, keeping customer relations intact. The best places to add upselling offers are: 

• on the cart page when the customer is about to make a purchase
• on the product page where the customer is looking for the deal
• in adequately timed email sequences offering deals about the products in cart or product often viewed
• on out of stock pages, where suggestions can be made to buy a superior product instead of disappointing the customer

Analytical Tools and Machine Learning Models for Cross-selling and Upselling in E-commerce Industry

Predicting Cross-selling and Upselling Revenue Using Price Product Hierarchy(PPH) Model 

This model works to optimise the Dynamic Discount Assignment and pricing for efficient cross-selling and upselling strategies. This provides relevant details of the discount allocation process. This method deals with a completely artificial and simulative environment still having all the intricacies of the actual market behaviour. 

Marketing Model Used for Cross-selling and Upselling

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The Matrix Factorisation Method is used to make correlations between the customers and products. The first K market simulations are considered as history and the data is used to evaluate the (K+1)th period transaction record set. The latent features make the predictions regarding the choices. The latent learning process utilises the collaborative information from transactional history. The model works on the customer loyalty measures and RFM (recency, frequency and monetary) acts as the baseline method for valuation of the proposed model comparing results on customer worth and forms the base of decisions.

Identifying Cross-selling Opportunities Using Database Marketing and Factor Analysers

This model works with a mixed data factor analyser for identifying cross-selling prospects. Database Marketing (DBM) works with very large databases of customer transaction details. The factor analysers work on binary indicators based on different data distributions to reduce the data to fewer and more helpful factors. This model works on identifying a low dimensional map of the observed variables and observes the most salient features.

The estimation method for the factor analyser uses the SML simulated likelihood estimations. The model tries to predict the weights using simulated likelihood which is used to quickly identify the cross-selling or upselling opportunities.

Financial Services, Insurance 

In insurance companies, cross-selling is selling additional insurance to an active customer. For example, selling discounted car insurance with the car loan. Insurance agents often try to sell a higher premium plan to customers showing the associated large coverage. Cross-selling insurance allows additional profit without searching for new clients. 

Upselling and Cross-selling Strategies in Insurance Companies

Customer information is very critical for insurance companies in order to discover any gaps in their coverage and any potential to sell new/additional products. The key to identifying gaps is smart communication and questionnaires. The following is the basic strategic framework for cross-selling and upselling in insurance firms:

• Collecting key data points about the client through CRM helps find coverage gaps
• Discussing potential financial opportunities
• Discussing existing offers and discounts and how they benefit the client
• Suggesting the most acceptable bundle with the most convincing coverage

Random suggestions without prior research negatively affects the relationship with the customer. Having acquired an insurance product already, here are examples of some common gaps in insurance policies acquired that can be used as cross-selling opportunities:

• Having a homeowner’s policy with no flood insurance
• Having health insurance but no vision coverage
• Having Medicare Advantage with no hospital indemnity
• An existing customer with a policy that does not cover all family members

Analytical Tools and Machine Learning Models for Cross-selling and Upselling in the Financial Industry

Sequential Cross-selling in Finance Industries Using Probabilistic Approach in the Ideal Point Model

This research models the development of customer demand for different financial products over time and derives a product purchase sequence considering all the major aspects of the Economic Theory. This model has an ideal point model built in which the predicted choice probability is inversely related to the distance of the object (financial products in this case) from the ideal point and incorporates the results of the firm’s customer satisfaction survey. The model uses a hierarchical Bayesian approach for estimation. The data taken for the model includes the monthly observation of products and accounts users had purchased or used as investments.

Evaluation of Investors by Latent Trait Analysis to Understand the Market

The paper explains the market as the probability that an investment is owned by an investor. It mathematically explains the investor’s investment objectives, resources and expertise as financial maturity. The model quantitatively estimates the acquisition difficulty and financial maturity using Maximum Likelihood Estimation (MLE) procedures available. The Latent Trait Theory (LTT) is used to determine personalised acquisition orders of 18 different financial products which are used in cross-selling.

Predicted Likelihood of Buying an Insurance

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SaaS Industry

Customers who subscribe to cloud-based software services and solutions make up the majority of the Software as a Service (SaaS) market. Upselling SaaS entails generating additional income and boosting the lifetime value of each customer through subscription extensions and upgrades. Upgrading free users or free trial users to paid accounts is also seen as an upsell when your product offers a free trial at an earlier stage. It generates additional income and boosts the lifetime value of each customer through subscription extensions and upgrades. Firms must ensure that new customers find no barriers to entry and that the application is simple to use yet efficient. This increases engagement rates and ultimately more customers upgrade to paid, premium versions  The primary key performance indicator to monitor revenue growth from current customers that you acquire through upsells and cross-sells is expansion MRR rate (monthly recurring revenue). 

Upselling and cross-selling account for more than 10% of revenue, according to 44% of SaaS organisations. Due to this, upselling and cross-selling are prioritised as a business strategy by half of SaaS organisations. This is a powerful upselling strategy to persuade consumers to buy the more expensive  plan because around 10% of customers convert and are retained after a free trial. High-growth SaaS companies have a conversion rate of between 3 percent and 10 percent when attempting to convert new users to free trial accounts. However, the conversion rate increases to between 8 and 20 percent when free customers are turned into premium ones.

Upselling and Cross-selling Strategies in SaaS Companies

User segmentation: Maintaining a deep knowledge of consumer behaviour is very necessary for maintaining a profitable subscription business. Forging customers who are most likely to buy an upgrade in a different segment requires insights into how your current customers are using your product.

Paywall only after showcasing the value: The free version of the software must be very appealing and valuable for the new users in the trial period. They must experience the product solving their problems easily before being restricted from free access. The free version is the first impression for them, so its quality must be maintained for optimum value delivery.

Application discovery: Subscription businesses need to develop adaptive software that grow with time and users’ needs. It is important to understand the software environment and framework of the customer company before making upselling offers. This helps in assessing the company’s needs and determining the version of software to be offered.

Constant offering of upgrades: Users should be restricted at critical points of need after a glance at the software potential and after witnessing the amount of ease they bring. The firm must not act desperately to sell the premium version. It is optimal if the users make the first move to upgrade.

Customer feedback – It is very critical for SaaS to minimise churn rate and identify critical upselling and cross-selling opportunities. Suggestions and complaints are often the best ways to identify potential improvement areas and understand market behaviour. Customers will feel that the firm takes care of their experience and this increases their trust in the company.

WHAT TO KEEP IN MIND WHILE CROSS- SELLING OR UPSELLING – THREATS, RISKS AND SOLUTIONS

With all these benefits, there is always a chance that the firm gets very loud on upselling and cross-selling products, alienating its customers. Wrong strategies for wrong customers and forcing customers to buy cross-sold and upsold products ruins profit, customer relationship and trust. Also, harsh attempts at upselling and cross-selling is a big reason for churn in most industries. Research also suggests that in a market, upselling rate is negatively correlated with the satisfaction of customers after the purchase or transaction. It is often considered to be a tradeoff between upselling and customer satisfaction. In a study, it was found that on doubling the commission rates of sales agents, the average rates of upselling more than doubled, but the chances of the upsold customers to be retained fell by more than 5%. This shows that cross selling and upselling rates do not guarantee more revenue in the long run.

Common Risks in Cross-selling and Upselling

Cross-selling and upselling products that customers don’t have means or requirements to purchase can lead to frustration

1. Upselling and cross-selling strategies incur more expenses. It increases firms’ expenses for maintaining an entirely different segment for cross-selling and upselling. This may be risky for firms doing well with orthodox infrastructure without cross-selling and upselling.
2. Bombardment with offers often desensitise the customers to all possible marketing efforts in future and train the customers to overlook and ignore all these efforts.
3. In the worst case, the firm may end up frustrating a customer to a point that it leads to customer attrition and finally customer loss.

Unprofitable Customers 

Studies have suggested that one out of every five cross-sold customers are unprofitable and this constitutes a big part of loss that the companies face at times. This group of unprofitable customers account for 70% of firms’ total ‘customer loss’ (the loss caused due to higher cost of marketing and goods with lower realised revenue). The more cross-selling or upselling done to an unprofitable customer, the greater the loss. Studies suggest that these customers belong to four distinct profiles.

1. Customers demanding increasing levels of service: They overuse customer service and interactive services and mostly occur in financial industries. Cross-selling and upselling has almost doubled the service demands, raising the cost rapidly.
2. Customers reversing the revenue: These are people who cancel the previous transaction or purchase and wasting all the efforts made. For example, people returning the goods after purchase from an e-commerce site. Such services free delivery and no-cost returns which comes as a direct loss for the firms when purchase is cancelled.
3. Customers who only arrive for discount: Often termed as promotion maximisers, these go only for highly discounted items and don’t buy normally priced items.
4. Customers with limited spending power: These are the customers that are very rigid with their product choices.  They only buy certain fixed products that are necessary.  These customers wait to buy cross-sold bundle items that they would have bought separately also. This in no way improves the revenue. It instead wastes the extra cross-selling efforts and bundling expenses.

Cross-selling or upselling to these customers triggers a downward trend of accumulating losses and increasing profits. 

Solutions to these Problems

All these risks clearly indicate that it is crucial to offer the right product to the right customer at the right time only. It is also necessary that cross-selling and upselling are done through very specified customer contacts and only after enough research.

• Problematic customers always stay but having a substantially large segment of them is a clear sign of error in the incentives. For example, in some financial firms, it was noticed that increasing the earned revenue was more celebrated than increasing the number of sales and this resulted in aggressive cross-selling. Determining the practices to minimise these customers must be the priority.

• When problem customers start causing more loss than a threshold, it is wise for companies to constrain or terminate the relationship with them after considering their future revenue potential. This idea has been implemented by almost 85% of executives in a group of surveyed industries. Also, there are instances where customers were completely banned by a firm. However, ending relationships with customers is always tricky.

• The parameter under which upselling and cross-selling is defined is very crucial. It must be right, profitable and serving. It is often suggested to consider ‘the number of products the customers own’ as the principal metric over ‘the number of products sold to customers’.

Conclusion

Clients are the firm’s most valuable assets. The firm will benefit if it puts in the right efforts to learn about its clients and their needs. Providing personalised services and offering incentives will help the firm retain consumers. It bears repeating: refrain from annoying customers with obnoxious sales talk. Firms must exercise caution while selling and offer the appropriate products at the appropriate time. In essence, if you keep your consumers satisfied, they will stay with you forever.

References

1. A framework for personalised dynamic cross- selling in e-commerce retailing; 

R Chinnam, Arun Timalsina (2012)

1. Cross selling through database marketing; Wagner A.Kakamura, Michel Wedel, Fernando de Rosa, Jose Afonso Mazzon (2003)
2. Cross-Selling Sequentially Ordered Products: An Application to Consumer Banking Services; Shibo Li, Baohong Sun (2005)
3. Applying latent trait analysis in the evaluation of prospects for cross-selling of financial services; Wagner A.Kamakura, Sridhar N.Ramaswami, Rajendra K.Srivastava (1991)

Upselling versus Upsetting Customers? A Model of Intrinsic and Extrinsic Incentives; Jian Ni, Qiaowei Shen, Ting Zhu (2015)