Foundation Series: Cross-Selling and Upselling

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.