Why does cross-selling, the process of selling something additional to someone who is already making a purchase, work? This article explores some of the theory and rationale behind cross-selling – from qualification to motivation and profitability.
Cross-Selling is Big Business
You have an eCommerce site where people purchase products from you. Adding cross-sale capabilities to your site can have a significant impact on your bottom line.
The e-tailing group’s 2009 report shows (by survey of eCommerce executives) that 55% of online retailers will include cross-sell and upsell capabilities in their sites in 2009 (already there or being added). For retailers that measure the data, cross-sale promotions result in a range of conversions (additional sales) from under 1% to over 10% – with a plurality of responses in the 1% to 4% range. That represents additional revenue the retailers would not get without using cross-selling.
According to the Get Elastic blog, Amazon reported that cross-selling accounted for 35% of their 2006 revenue.
Understanding why cross-selling works requires understanding customer’s purchasing processes work.
Customer Purchase Process
The following is a model for how customers make purchases.
- Customers start by thinking about their problem – what problem are they trying to solve (with a purchase)?
- Some people will try and understand the problem space, while others are happy to jump to solutions.
- Understanding the solution space (what are my options?) is next – and may be a shallow or deep analysis.
- Within the solution space, customers will select a product and decide to buy it (from you) or not.
- Customers who reject their first product choice may select another product or may abandon your store.
You can take a higher-level view of these customer activities and decisions, and categorize them into areas:
- Learning – Your customer is learning about her problem and possible solutions.
- Choosing – Your customer is comparing possible solutions, with the intent to purchase one of them.
- Buying – Your customer has selected a solution, and is trying to buy it.
In direct sales, one of the first steps a sales rep will take is to qualify a prospective customer – how likely is this prospect to make a purchase? A similar model can be applied, when treating your website as a sales rep, to understand how likely it is that a visitor to your website will make a purchase. There is a ton of additional qualification (assessing a prospect’s ability to pay, for example) that we won’t talk about in this article. In this article, we’ll focus just on this simplified purchasing model:
- Customers who are learning are more likely to buy than visitors who are browsing (window shopping).
- Customers who are choosing are more likely to buy than customers who are learning.
- Customers who are buying are more likely to buy than customers who are choosing.
That last bullet seems silly – of course customers who are buying are more likely to buy – like 100% likely, right?
Prospective customers abandon the buying process all of the time. SeeWhy reported ~70% abandonment rates during 2009’s post-Thanksgiving online shopping spree. They also used the phrase “a relatively healthy 63%” to describe abandonment rates in August 2009. SeeWhy is specifically measuring abandonment of the shopping cart (inside the “buying” area), but there is abandonment (often called leakage) throughout the process above.
The further a customer is into the purchase process, the more likely they are to actually make that purchase.
As a customer moves through the purchase process, they are clearing hurdles that would prevent them from making the purchase. Each time they clear a hurdle, the pending “mental cost” of making the purchase gets smaller.
One of the hurdles is making a decision to purchase now, another is making the decision to purchase from you.
Offering cross-sale promotions to customers who have already (probably) decided to purchase from you, now, means that you’re offering the promotions to customers who are qualified.
A defining element of a cross-sale is relevance. You’ve got a customer who is purchasing a product, to solve her problem. You want to increase the value of the transaction – both for your customer and for yourself. To do that, you have to offer a relevant cross-sale item. Selling french fries with a sandwich makes sense. Selling car wax with a new car makes sense.
Selling car wax with a sandwich? You probably won’t have a lot of success with that.
How do you determine relevance? You can start out with an “expert opinion” – car wax is relevant to cars, for example. Or you can do some data mining of past orders – “7% of people who bought cars also bought car wax.” That lets you start out with a hypothesis (that car wax is a relevant cross-sell item for purchasers of cars). If you’re data mining past orders, however, you may not know the direction of the cross-sell. Cross-selling works because the two products are complementary goods – usually asymmetric complements.
Complementary goods are rarely symmetrical. Peanut butter and jelly is a good example of symmetric complements – they have comparable price points, and both generally can be improved by purchase of the other. In the mixer-cookbook example above, the cookbook is a great complement product for the mixer.
However, if your customer had selected the book initially, the encouragement to “add a stand mixer” would fall on deaf ears.
You can measure behavior on your site to determine the nature of the complementary goods relationship. For the orders that include two particular products (that are offered as cross-sale promotions for each other), in what percentage of orders with both products was each product selected first? Alternately, what is the conversion % of product A when added to a transaction for product B, versus the conversion % for product B when added to a transaction for product A.
Measurement of Cross Selling
The obvious metric that most people think of when evaluating cross-sale promotion effectiveness is conversion rate. Conversion rate identifies the percentage of people who, when buying the “original” product, choose to also buy the “promoted” product. Making changes that raise your conversion rate increase your sales of the promoted product. However, this conversion ratio is more a reflection of the relevance of the promoted product to the original product than it is a measure of profitability.
Your goal is to maximize profitability, while providing additional value to customers (who are better off or more satisfied with the original purchase when they also purchase the promoted item).
Introducing a cross-sale promotion can increase, decrease, or have no effect on the rate of purchase (conversion percentage) of the original product. You need to measure the original-product conversion rate for customers who were shown the cross-selling promotion versus those that were not.
Second, you’ll want to know what the ideal products to promote are. Typically, more than one cross-sale promotion is presented to a customer at a time. For this example, assume 3 promotions are displayed. Also assume that your data-mining exercise has identified 5 products that could be promoted as cross-selling items for this “original” product. Which three of the five do you select?
You should select the three that you expect to be the most profitable.
“Most profitable” can be calculated as (profit per promoted item) x (conversion % – of the promoted item in the context of the original item). When you don’t have conversion percentage data, you can either gather it (through testing) or predict it (through modeling). There are many aproaches for predicting the degree of affinity, or implied relevance, of one product to another – but all of them are too detailed to cover in a blog article. When you don’t have a model, you can test the possibilities to see which ones perform the best.
Some companies also report average order value (AOV), but that’s not necessarily an indicator of profitability. It may be a component of profitability, but not necessarily.
Product Managing Cross-Selling
If you’re product managing your website, and exploring adding cross-selling capabilities, or enhancing current capabilities, here are some things to keep in mind:
- Your customers are in the middle of a buying process, and will be interested only in complementary products that would give them a better purchase – more value, even if it means more money. This drives both the importance of relevance and value as criteria for selection of products to promote.
- There may not be any one person who is responsible for (rewarded for) the profitability of your cross-selling capabilities, as the complementary products being promoted may be “owned” by different parts of your organization.
- You will want to test the effectiveness of the approach you use for promoting particular products – which original products, promoted products, and unique combinations of the two are the most profitable?
- You will want to be able to test the effectiveness of changes in the presentation of promotions (images, page location, text, etc) on profitability (or on conversion percentage as an isolated variable.
- You may want to offer discounts that apply only in the context of the cross-sale promotion (e.g. “Buy these together and save!”) and measure the impact on profitability – do the added sales offset the reduced profit per sale?
- You may find that a given complementary product has a different degree of relevance (and therefore effectiveness) depending on the market segment to which you are promoting it. As an example, a game controller may be more relevant to consumers buying a large computer monitor than small business owners buying the same monitor.
Cross-selling works when you promote a relevant product that is complementary to the original product. It works because the prospective customer is already in the process of purchasing the original product, and is therefore already qualified. You should only promote products where the additional sale increases value to your customer and increases value to you.
Ultimately, cross-sale is about profitability.