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.

Customer Qualification

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?

Wrong.

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.

Clearing Hurdles

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.

Relevance

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.

Foundation Series: Substitutes and Complements

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.

Conclusion

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.

Do you know about substitute goods and complementary goods?  If you’re doing any eCommerce, and are thinking about cross-sell and upsell, you should understand the basics about substitutes and complements.

Substitutes

You’re considering purchasing a specific product (e.g. a blank compact disc from Memorex).  You could consider purchasing an alternate product (e.g. a blank compact disc from TDK), substituting the alternative for the original.  At a high level, that’s the definition of a substitute good.  Any product that could be substituted for another product, and still satisfy the needs that the original product was intended to address.

Complements

You’re purchasing one product (e.g. a slice of bread with peanut butter).  The value you get from the original product would be increased by the purchase of a complementary product (e.g. a slice of bread spread with jelly).  The basic definition of complementary goods is “products that are purchased together.”

Economic Models: Substitutes and Complements

The definitions for substitute products and complementary products come from the world of micro-economics.  Substitutes and complements are used to model the interdependent nature of the changes of prices on the supply and demand of “related” products.

You can imagine a junior economist who tried a pricing experiment to determine the price elasticity of demand of Jif brand peanut butter.  He predicted that by raising prices on the peanut butter, that the store would sell less peanut butter.  Sure enough, demand (at the higher price) was lower, and sales dropped.

However, he also discovered that sales of Skippy brand peanut butter went up, almost by exactly the amount that Jif sales dropped.  This is because Jif and Skippy peanut butter are substitute products (economists call them “goods”).

Later on, this economist tried another experiment.  He raised the prices on both Jif and Skippy at the same time.  This time, the store sold less peanut butter in total (there were no other brands), and the economist thought his experiment was concluded.

Another surprise for the economist – sales of jelly dropped too.  Sales of peanut butter and of jelly are tied together – when you sell more of one, you sell more of the other.  Economists, trying to be difficult, would say that when you raise the price of one, the demand for the other falls.  Technically true, but a little confusing.

Thus entered substitute and complementary products into the world of economics and pricing.

Substitutes and Upselling

You know that you’re upselling – trying to replace one product that is about to be selected with an alternative product – when your customer is considering substitute products.  Notice in the screenshot from amazon.com (above) that ~9% of the people who were otherwise going to buy the original product instead were convinced to buy a more expensive substitute product.

The goal in upselling is to create a win-win situation.  Your customer gets more value from the substitute product, and you get more profit from the sale of the substitute than you would have received from the original.  Everyone wins.

Complements and Cross-selling

The number one mistake I see when people talk about cross-selling is they call it “upselling [sic].”  Its enough to make me Cranky. The example above, also from amazon.com, shows an encouragement, when purchasing the first book (in the series), to also purchase the second and third books. What’s especially clever is that there is no discount – the total price is the same as the sum of the prices if purchased individually.

You can take advantage of the complementary product model to create product bundles, identifying products that should be sold together.

Although that may not be the best idea.

Often, you will see bundles created by combining products that do not go well together – products that are not complements.  This is a sneaky way for companies to sell products that otherwise would not sell as well.

The recording industry made money in the 1950s and 1960s selling singles.  The recording industry then made a lot more money selling albums that “bundled” 8 or 9 mediocre songs with one or two hits when compact discs hit the market.  Digital downloads have re-introduced the popular purchasing of singles, and revenues are declining – not because of piracy, but because a “take advantage of our customers” bundling practice is now broken.

Complementary goods should be used to create bundles that increase value for your customers.

A baking cookbook is a good complementary product for a customer purchasing a stand-mixer (a key appliance for baking).

Symmetric Substitutes and Asymmetric Complements in Context

Substitute products are symmetric – either product works effectively as a substitute for the other – in a specific context.

If you need a new computer to use at your desk, then a desktop computer and a laptop are symmetric substitutes.  Regardless of which one is your originally selected product, the other is a valid alternative.  If however, you are looking for a computer that you can use while travelling, the desktop is not a valid alternative for the laptop (nor would it be your first choice).

When you’re considering the travelling scenario, the products are not substitutes.  Economists will say that they are substitutes as long as they share common uses.  But economists are looking at aggregated behavior.  You have to make decisions in context – and when the context implies that products are not substitutes, they are not substitutes.

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.  Surprisingly, amazon.com still recommended adding a mixer to my book purchase.  Technically rated a “toss up” by GetElastic in their great cross-selling do’s and don’ts article, but I put it squarely in the don’t bucket (until measured and proven otherwise).

Summary

• Complementary Products – consider cross-selling an additional product.  Complements are usually asymmetrical.
• Substitute Products – an upsell is a suggestion to replace the original product with an alternative product.  Substitutes are symmetrical, but only in a context where both products address the relevant needs of your customer.

A couple weeks ago, our article on writing design-free requirements triggered some great discussion around requirements and design (also known as “reqs and specs”).  What happens when you’re dealing with a website?  There are many stakeholders, who are clear about their own goals.  Who then turns them into requirements?

A Website Requirements Scenario

Consider the following situation.  Your company has a website, and through that website you sell hats- it is an eCommerce haberdashery.  You have at least three stakeholders that are important in this scenario:

• Customers (or prospective customers) who interact with the website and purchase products from your company.
• A Merchandiser who is responsible for the content (images and text) that is presented on your website, designed to sell products to customers.
• A product manager who is responsible for sales of a line of products, including through your website.
• A host of others, including SEO experts (responsible for getting traffic to the website), user experience teams responsible for how customers interact with the site, and implementation teams responsible for building different elements (such as the CMS or the customer-data master or the product catalog).

The Customer

The customer has a straightforward requirement: having a great shopping experience while getting great deals on the perfect products.  This is an infinitely deep area for discussion, but to keep this article short(er), the focus will be on the internal players at your haberdashery.

The Product Manager

The product manager is responsible for his product line.  In this scenario, he makes high-end, retro-styled hats.  The two most important products are the bowler hat and the top hat.  The product manager is responsible for the profitability of this retro-chic hat line.  The bowler hat sells for $175 with a $75 profit margin, and the top hat sells for $250 with a $125 profit margin.  The product manager has a strategic requirement.  We’ll use a user story to describe his requirement.

• As a product manager, I need to increase the profits for my retro-chic hats product line, which already dominates the market, so that our stock price will rise.

This requirement is too ambiguous and abstract to be actionable.  The product manager can’t really give this to anyone else.  What he can do is create an Ishikawa diagram that helps him identify the components of product line profitability, so that he can choose one to focus on.  Our haberdashed product manager decides (for this example) that the strategic lever he wants to pull is to change the product mix.  He feels that growing the total number of hats sold is not a good strategy – his market is saturated.

Instead, his goal is to convince his customers to buy more top hats – at the expense of buying fewer bowler hats.  Each customer who switches from the bowler to the top hat will generate an additional $50 in profit.  He further needs to make sure that he doesn’t lose sales to customers who really wouldn’t be happy with anything but a bowler hat.  Being measurable is also important.  To meet his performance objectives, the product manager realizes he needs to shift the mix from 50/50 to 60/40 (60 of every 100 retro-chic hats sold need to be top hats).  His requirement can be rewritten.

• As the retro-chic hats product manager, I need to increase the percentage of top hats sold to 60%, without reducing the total number of hat sales, so that I can increase the profitability of my product line.

OK, that’s measurable.  Whatever someone does, you’ll know if it succeeded.  But is it actionable?  No – it is still ambiguous.

The Merchandiser

The merchandiser is responsible for finding the best photos, writing the best ad-copy, and determining the marketing messages that are displayed to customers on the website.  The merchandiser is held accountable for conversion – the percentage of visitors who come to the site, view the content, and ultimately decide to purchase.  Since your company is not dis-functional, the merchandiser has aligned her goals with the product manager.

• As the retro-chic hats merchandiser, I need to convince online customers who would have bought the bowler hat to buy the top hat instead, so that the percentage of top-hats sold is at least 60% of all retro-chic hats.

There’s an implicit choice here – a specification.  Here’s another user story that would achieve the same goal.

• As the retro-chic hats merchandiser, I need to increase the conversion rate for customers that view the top hat page from 2% to 3%, so that the percentage of top-hats sold is at least 60% of all retro-chic hats.

Since they are both actionable, but both very different, that works as a good litmus test that the product manager’s requirement, while measurable, was still ambiguous.

There could also be an SEO expert, for whom the story would be “…increase traffic to the top-hats page without decreasing conversion…”  A member of the the site design (or user experience) team, could try and improve conversion by creating a more efficient flow (like “one click ordering”) that increases conversion rates – but only enable it for the top hat product.

There are just too many cooks in the kitchen.  Every one wants to feed the hungry people, but each specializes in a different dish.

You have at least four viable ways to approach solving the product manager’s goal.  You need to pick one before you get the development team involved.

A Matter of Perspective

The merchandiser, SEO expert, and site design teams all have the same goal – support the product manager and achieve a 60/40 mix in retro-chic hat sales.  Each of them can develop a reasonable requirement, within their own domain.

To a man with a hammer, every job looks like a nail.  The merchandiser is not going to focus on purchase-path redesigns, nor is the SEO expert going to suggest changing from a boring photo of a manikin to a photo of an attractive man laughing with friends over an expensive meal.

The product manager, however, should not be telling the cooks how to make the stew.  The product manager (of the product being sold) is not responsible for, and should not be driving the decisions about how to achieve his 60/40 mix goal.  The product manager could think of the people in each area as vendors, “selling” alternate solutions to his problem.  Each solution has a cost, so the product manager probably can’t just “do them all.”  Unfortunately, the product manager is not qualified to pick the right vendor – only to evaluate the promised benefits (from each) at the projected costs (from each) and hope he chose wisely.

A Website Product Manager

The critical need to product managing your website is more visible than ever.  Without it, you won’t make good decisions about how to address your real business goals.  You need someone who understands the risks, trade-offs, and possibilities inherent in each of the four solution approaches.  If your website is large, you may have a portfolio manager for your website, with individual product managers owning areas of the site.

Recognize that not only are your (company’s) customers your customers – but so are your other stakeholders.  As a website, you create commerce, you don’t just sell products.  You have to help (external) customers have great shopping experiences, while helping (internal) customers meet their goals.

The website product manager works with the retro-chic product manager to understand his goal of achieving a 60/40 mix in sales.  Taking into account the big picture from a website perspective (who are our customers, who is the competition, what is our vision), the website product manager has to make a “design decision” and choose one of the solution approaches.

The website product manager is constraining the solution space by selecting one of the hammers.  Is this bad?  The retro-chic product manager constrained the solution space too (when deciding that a shift in mix was the “right” answer).

Then the how would we solve it, if constrained to solving it this way, user stories have to be developed and given to the implementation team.

Conclusion

You need to have someone acting as a product manager for your website.  That person is in the ideal position to constrain the solution approaches to addressing any given stakeholder.  Those constraints do limit your options – so you better have a good product manager.  It really is no different, however than saying you better have a good general manager, so that the strategy you are supporting is a good one.

What are your interactions like with the folks that own your website?  Or are you already a website product manager?

SEO, Search Engine Optimization, is an area that every online website needs to think about.  The idea is that the more traffic you can get to your website, the more products you’ll sell.  Just because you can lead a horse to water doesn’t mean you can make him drink.  What a great opportunity to product manage your website and ask why about SEO.

SEO

When you’re building a website, you have four primary channels by which you get traffic (visitors) to your site:

1. Direct Traffic – people who type in the URL (address) of a page on your website directly into their browser.
2. Referral Traffic – people who are sent to a URL on your website from another website (usually by clicking on a link).
3. Paid Search Traffic – people who click on an advertisement that you run (on other websites) to reach a URL on your site.
4. Organic Search Traffic – people who use a search engine (like Bing or Google) to try and find an answer to a question, who then click on a link to a URL on your website within the search engine results.

[Note that the graph above combines #3 and #4 into one channel of traffic, as the source of about 1/3 of the traffic for this website.]

Search Engine Optimization, or SEO, is collectively the set of activities you do to increase (“optimize”) the amount of traffic you get from organic search (#4 above).  SEO has at best a second-order effect on the other three channels from which you may get traffic – they are effectively unaffected by your SEO activities.

There are entire companies, in fact an entire industry, built to help companies increase the traffic they get from “organic” search.  It is called “organic” search based on the premise that search engine algorithms will determine (through their own proprietary algorithms) the “best” results for any given search.  Like nature, this can be influenced by you, but is out of your control – hence “organic.”  This is in contrast to paid search, where you are directly controlling when someone comes to your site (by clicking on an advertisement that you paid for).

Since SEO is such a large topic, even though this is a longer article, it only scratches the surface.  This article focuses on the decision making you would do (and the measurements needed to support those decisions).  It does not attempt to be a one-stop-shop for all of your SEO needs.

SEO Has ROI (or Does It?)

People who promote their SEO services will tell you – build it, and they will come.  What you do with the traffic once it arrives is up to you – SEO just gets people to show up.  Makes for a good movie, but it doesn’t always work that way.  This is where product management can help.

You want the right people to show up, not just anyone.  In keeping with the baseball analogy, applied to the web: your website is the stadium.  The games are free.  Your SEO efforts get people to show up at the stadium.  But you’re not selling tickets.  The only way you make money is if people buy hot dogs or pennants or peanuts.  You have products for sale at the stadium and you want people who will buy them to show up.  You don’t get any value from just filling the seats.

If the people who show up don’t buy anything, it’s as worthless as if no one ever came in the first place.

I’ve worked with a client in the past who had a project that successfully increased the number of visitors to one of their websites by over 30% for several months, resulting in almost no change in the amount of products they sold during that period.  An SEO-only person would say “hey, the people showed up, I did my job,” but a product manager is acutely aware that this was an exercise in futility.

Perhaps the people who showed up had no intention of buying anything.  That would be consistent with the data my client collected.  Perhaps something intrinsic to the website prevented the new visitors from purchasing (while allowing a consistent percentage of the previous visitors to continue making purchases).  To the best of my knowledge, the data needed to perform that root cause analysis was not available.

When you’re product managing your website, you are responsible not only for getting people to your website, but also for getting them to convert their presence into purchases.

Measuring SEO – Easy Versus Important

The challenge in any measurement activity is determining what to measure.  There always seem to be a bunch of things that are easy to measure, and a handful of things that are important to measure.  When you’re lucky, there’s some overlap.  The challenge is to resist the urge to measure stuff just because it is easy – you’re making work for yourself – both in taking the measurements and in reviewing the measurements.

To select the right measurements for your website, you first have to understand your goals.  Assume that your goal is to sell products, profitably.  This is the driver for your “bottom line measurements” – at the end of the day, how is your product (website) performing?  If you aren’t measuring revenue and profits, you won’t know if you’ve filled your stadium with “empty chairs” who don’t buy any peanuts.

You also have to understand the buying processes that users (website visitors) use to make purchases from you.  One way to characterize the buying process is to look at the process from the perspective of the user, who goes through the following stages of activity:

1. Identify a need to solve a problem (possibly by purchasing a product).
2. Discover possible solutions to the identified problem (possibly products that solve the problem).
3. Compare solutions (products) and decide which to implement (purchase).
4. Solve the problem (purchase and use the product).
5. Re-evaluate the solution (product).

Step 2, discover possible solutions, is where SEO can help.  One way people can discover solutions (and there are many others) is by using a search engine to discover solutions.  Those people may search for phrases that describe their problem (“webcam not working with Skype”) or ask questions as if the search engine could solve their problem directly (“how do I make my webcam work with Skype?”).  Some people will determine (or assume) that the problem is with their webcam, and that they need a new one.  Those people will search for the solution they’ve already envisioned (“best webcam”), or combine steps 2 and 3, and search for comparison data (“webcam reviews”) or pricing data (“webcam deals”).

In addition to the goal-measurements (step 4), you’ll also want to include search-effectiveness measurements (step 2).  Keep in mind that there are other factors at play in your website – not every visitor who searches has a propensity to buy, visitors who arrive may abandon your site because they don’t like your pricing, etc.

Measuring SEO Effectiveness

Keep in mind that you’re trying to sell products (profitably), and this particular effort is focused on improving organic search as a mechanism by which you attract customers to which to sell products (profitably).  Your measurements should focus on these two aspects.  Here are some things that are interesting to measure [note: the screenshots below are of Tyner Blain traffic - I won't share any client data - so these values are low compared to a successful eCommerce site - but they are illustrative.]:

Organic Search Engine Traffic

• How many visitors come to your site from search engines (and from which search engines?)?
• 
• What are the keywords / phrases that visitors used to find your website?
• 
• To which pages did the search engines direct the most traffic?
• 
• What search terms sent traffic to which pages?
• 
• SERP Ranking (Search Engine Results Page Ranking) – How high up is your result for one of your targeted keywords?  Is it on the front page?
• 

All of those measures, while easy to do (the screenshots above are from the free Google Analytics program), only tell you about how many people came to your stadium, they don’t give you any insight into peanut sales.  You can use these measurements to provide feedback as you make changes in your SEO implementation – to determine if each change increases or reduces traffic (or fills seats).

You also need to know about the peanuts.

The specific financial measurements you make will depend on your strategy for how you engage your market.  Are you a discounter, trying to maximize sales in the short term, with a transactional focus?  Are you focused on the long term, building relationships, and maximizing the lifetime value of customers (better to sell more, later, than less, now)?  Are you trying to gain market share, or maximize profits in a mature market?  The specific ways you measure will vary, but some common measurements are:

• Conversion Percentage – how many of the people who come to your site end up purchasing (during that visit)?
• Number of Purchases – how many orders were placed?
• Average Order Value (AOV) – how much is each order “worth” in both revenue and profit?
• Lifetime Customer Value - how much is each customer “worth” in both revenue and profit?

The way you get real insights from these measurements is by combining them.  Utilize the “SEO mechanics” measurements (above the peanuts) to slice or segment the financial measurements.  Ask questions like “How many orders were placed by people who came to the site and landed on the webcam page?” or “What is the conversion percentage for people who came to the site by searching for best webcam?” or “How much revenue do we get from each keyword that sends organic traffic to our site?”

SEO Goals – Getting Actionable

Combining the results of the two forms of measurement (mechanics vs. revenue) will identify for you where you are getting the most value, and where you have the most opportunity to increase value.  You’ll have to do analyses of “do I make one thing (page, keyword, etc) better, or do I try and make all things better?”

One technique that can help you reach those decisions is by noticing that most of the metrics you see follow power law (long tail) curves.  Roughly speaking, 80% of your traffic will come from 20% of your keywords.  80% of your sales may be to 20% of your customers.  20% of your pages may generate 80% of your visits (or 80% of your revenue).  You’ll have to “do the math” for each project to estimate the impact of those projects – and determine if your best bet is to improve a single page (a lot), or make a change to your site that improves all of the pages (a little).

You may find that your website is not sufficiently instrumented to make the measurements you need.  My suggestion is to instrument your website first, and then try and improve it second.  If you can’t measure it, it didn’t happen.

The current “state of the industry” for SEO has a hint of product management influence in it already – there’s some awareness that these sorts of aggregate statistics are limited in their ability to give you insight about your customers.  Where SEO seems to be pushing today is in being able to segment the above data views against personas or market segments.  This looks to me like an industry that is maturing beyond the elastic user problem that software development and user experience teams have been addressing for years.  This approach will allow you to target your website development initiatives with an eye on the uniqueness of customers in different market segments.

SEO Product Management Conclusion

Search engine optimization is important.  Focusing your efforts to improve your business, as it relates to search engines, is what is really important – and search engine optimization is how you get there.  Discover the factors that have a bottom line impact, and then execute to address them.  Don’t just assume that more traffic is better traffic.

You have an eCommerce site.  You sell products online.  Do you cross-sell additional products?  Do you upsell to better products?  This article explains the difference between cross-sell and upsell, and looks at some real-world data about the effectiveness of both.

Cross-Sell and Upsell – What Are They?

Cross-selling and upselling are marketing techniques that are applied during the sales process to increase the value of the transaction to both the buyer and the seller.  Technically, they only increase the value to the seller – but they should also be increasing the value to the buyer.

The key idea behind both cross-selling and upselling is that you are changing a transaction that is already in process.  You might think that marketing ends once buying begins.  Not so.  Marketing is about getting the right message (buy something from us) to the right person (someone who needs our products) at the right time (when they are ready to buy).

• What better time to market than when someone is in the process of buying already?
• Who better to market to than someone who is in the process of buying from us?

The trick then, is in sending the right marketing message.

Cross-selling and upselling only make sense in the context of an ongoing sales process.  For an eCommerce retailer (a company that sells a product online), that means that the customer (technically, the prospective customer, also known as a prospect) is in the process of making a purchase – either looking for the right product, evaluating a specific product, or having selected (but not yet purchased) a product.

• Cross-selling is defined as selling an additional product when the customer is purchasing the original product.
• Upselling is defined as selling a more expensive product instead of the product that the customer was originally purchasing.

As a retailer, you have to know when to attempt to cross-sell, and when to propose an upsell – and when to do both.  To decide when to try and modify (and risk losing) a sale, you have to look at the economic impact on your business of trying to change an ongoing sale.  Cross-selling does not help you make a sale that you wouldn’t already have made – although an upsell suggestion may help a customer discover a “better” product for their needs, and close a sale that would have been abandoned otherwise.

Note – to keep the language of this article easier to read, the word “product” is being used to represent (traditional) products and services – anything a business would sell.

Economics of Selling

To evaluate the economics of cross-selling, you have to first establish the economic measures of selling.  When you sell something you have the following:

• Price - the price the customer pays for the product being purchased.  This is also known as revenue.
• Cost - the cost to the merchant to acquire or create the product being purchased.  Also known as “COGS” – an acronym for cost of goods sold.
• Gross Profit – the price paid by the customer minus the cost of the product.
• Cost of Sale – the cost the merchant incurs to make the sale.  For an individual transaction, this is called “cost per quote” or “cost per order” or “cost per sale.”
• Net Profit – the gross profit minus the cost per sale.  This is also known as operating income.

As an online retailer, you will likely track all of the above.  Your Cost of Sale is potentially difficult to measure – you will probably have a mixture of variable costs and fixed costs that can be allocated to the cost of sales.

• If you pay $1,000 per month to host your eCommerce website (making sales possible) and you make 1,000 sales per month, you could allocate $1 per sale as a cost per sale.
• If you pay 2.5% of the price collected to a credit card processing service, and you sold a product for $100, you would incur a $2.50 cost per sale for that transaction.

A financial analysis of your business will involve aggregating all of the revenue and costs, and calculating the total operating income (all revenue minus all costs) for a period of time.  Since you sell different products (with different costs) at different prices, any given transaction will have a different net profit.  As part of managing your sales and pricing, you may also measure

• Average Revenue per Order - 100 orders for a total $1,500 in revenue would yield and average revenue per order of $15.  Calculated as Revenue / Number of Orders – in this example $1,500/100 = $15.
• Average Gross Profit per Order – 100 orders at $1,500 in revenue with $1,100 in COGS would yield an average gross profit of $4 per order.  Calculated as (Total Revenue – Total COGS)/Number of Orders – in this example ($1,500 – $1,100)/100 = $4.
• Gross Profit Margin (Percentage)- a product purchased for $100 for which the retailer paid $60 to acquire the product has a gross profit margin of 40%.  Calculated as (Revenue – COGS)/Revenue – in this example ($100 – $60)/$100 = 40%.

Economics of Cross-Selling

Cross-selling is when you convince a customer (who is in the process of buying something) to buy an additional product.  When you successfully cross-sell a product, you are increasing the revenue for the order.  This results in an increase in average revenue per order.  The sale of the additional product will also increase the average gross profit per order.  The cross-sell may increase the gross profit margin of the order, or it may not.  When the product originally being purchased is less profitable than the additional product being cross-sold, the margin is increased.  When the original product is more profitable than the additional product, the margin is decreased.

If your current operations strategy involves increasing your profit margins, you need to make sure your cross-sell activities only recommend additional products with higher margins than the products against which they are being cross-sold.  When your strategy is prioritizing growth over profitability, your cross-sell activities should focus on conversion – increasing the percentage of the time are you successfully cross-selling additional products.

Economics of UpSelling

Upselling is when you convince a customer (who is in the process of buying something) to buy something else – specifically, something more expensive.  This replacement of the original item with a new item is known in economics as product substitution.  Since the products are not identical (one is more expensive and presumably “better” than the other), the products are by definition imperfect substitutes.  A perfect substitute is one that would be identical to the product it replaced.

[Update: Check out Complementary and Substitute Products for more on product substitution.]

Successfully upselling a product results in an increase in revenue, and ideally an increase in profits.  It may also result in an increase in profit margin (but may not).  Consider a customer who intends to purchase a 200GB hard drive for $100 (at a cost of $45).  This purchase would yield $100 is revenue, and $55 dollars in profit at a 55% profit margin.  If you successfully upsold the customer to purchase a 500GB hard drive for $200 (at a cost of $100), the purchase would yield $200 in revenue, and $100 in profit at a 50% profit margin.

You have to understand if your strategy is prioritizing an increase in revenue, profits, or profit margins.  This will determine which upselling recommendations you want to make to customers.

Measuring Cross-Selling and Upselling

In addition to measuring your sales you want to specifically measure the impact that cross-selling and upselling has on your measurements.  Those measurements are described above.  You may be breaking those measurements down by product category, product price levels, market segments, or any other decomposition that helps guide future decisions.  You also want to measure the effectiveness of your cross-selling and upselling solutions.  You do that by measuring conversion – the percentage of customers that change their purchases in response to your cross-sell and upsell marketing.

Get Elastic, the eCommerce blog, shares some 2009 survey data provided by the e-tailing group on cross-sell and upsell conversion statistics.  Two-thirds of retailers that measure cross-sell and upsell conversion rates reported less than 5% conversion rates.  At the same time, Get Elastic reports that Amazon reported 35% of their 2006 revenue came from cross-sells.

If you’re adding cross-selling and upselling capabilities to your eCommerce website, you should set your initial expectations of effectiveness low, and your aspirations high.  You won’t start out with results like Amazon’s – no more than 98% of retailers that measure conversion see results far lower than Amazon’s.  In fact, most of them see results an order of magnitude smaller.

• You website is not just a tool, it is a service, and therefore a product.
• Your prospects make buying decisions based on your website.
• Your customers make repeat-buying decisions based on your website.
• You risk losing future customers because of your website.

You Already Have Product Managers

You focus on a market, and based on the buyer personas and user personas in that market, you decide what products to create and what they will do.  If your product doesn’t match your buyer’s perceptions, you won’t sell it.  If your product doesn’t match your user’s expectations, you won’t sell them anything else, or sell anything to their friends.  As product managers, we do innumerable tasks to assure that we have the right products for our prospects and customers.  Why don’t our companies put the same effort into our websites?

Retailers Get it

Retailers get it.  They know that their website is the product that allows them to sell other products.  Amazon has product managers for its website, as well as other products (like Kindle and Video on Demand).  Newegg has product managers too, and their only product is the service of selling other products.  Why do many companies not get it?

I’ve worked with several larger clients in the past who viewed their website as a tool, as overhead.  A critical tool, yes, but a tool.  A mechanism for sales, just like a CRM system or an inventory management tool – it has to work, period.  It is all of those things, but it is a lot more.  When you sell products online, your website is how your customers see you, and how they see your products.  Your website shouldn’t just be a collection of technologies that grew out of engineering, supporting processes that have been “engineered for efficiency.”  Your website, assuming online presence is strategic for you (and if you’re reading this, and online isn’t strategic for you, please let me know, I’ll be shocked), should be developed with a strategy in mind.

Even Large Companies Can Change

I was recently working with a larger company who was changing their approach to their website (also known as their “online presence” and “online solutions”), re-aligning parts of their organization to allow them to product-manage their website.  There is a ton of work involved in changing how a large organization approaches this.  Changing how development of the website is prioritized, funded, managed, and executed.  Creating an explicit focus on markets and customers and partners, where before the focus was on features or capabilities.  Gaining insights into how competitors are serving those markets, and how the company needs to change – instead of telling the “other” product teams what choices they have for leveraging the tool.  Understanding the goals of your users – buyers, customers, prospects, and partners.  Incorporating the strategies of your business – the same strategies that drive your other products – into how you approach developing your website.

Here’s a litmus test.  When your company introduces a new product, or launches a new campaign, or enters a new market, does the team managing your website ask “what can we do?”  Or does that team say “here’s where you put the whitepapers; here’s what we need for product data; put your sku list and pricing rules in that system; your images must be this size.”

This isn’t directed at companies who’s product is their website like software-as-a-service companies.  This is focused on the companies who have other products, and treat their website like a tool or an asset.

By treating your website as an asset instead of a product, you create a liability instead of an opportunity.

I’ll be writing more in future articles about elements of product managing your website.  Some topics I may address:

• Understand your markets.
• Understand your buyers, customers, and prospects (and partners and internal users).
• Understand your competitors.
• Manage your internal stakeholders and their expectations.
• Understand your distinctive competencies – what makes you better?
• Understand your positioning – are there opportunities for thought leadership?
• Understand technology – are there opportunities for technological advantage?
• Assess your website as an element of a distribution strategy.