What is Cross-Selling?
Cross-Selling is a strategy wherein a business strives to encourage existing customers to purchase adjacent products complementary to an item that the customer has already bought in a prior transaction, or is currently on the verge of purchasing.
What is the Definition of Cross-Selling?
Cross-selling techniques are frequently utilized by businesses to generate more sales and increase the ticket size of a customer per transaction.
The formula to determine a company’s revenue, at its core, comes down to the pricing of the product multiplied by the total volume of purchases by customers.
- Price → The price tag attached to the products offered by the company to customers.
- Volume → The total number of transactions where a customer completes a purchase.
With that said, cross-selling is an effective sales strategy to achieve the objective of increasing the “volume” component of the revenue formula.
The incremental rise in revenue from cross-selling pertains to increasing the total spending of customers on average by increasing the volume of items purchased per transaction.
Therefore, cross-selling is intended to increase the total spend per sale, thereby enhancing the company’s revenue by extracting more revenue from each customer.
In fact, cross selling is perceived as the easier method to improve sales performance since the target customer is either an existing customer that completed a past purchase or is currently in the process of completing a transaction, i.e. the customer already has their “foot in the door”.
The cross-sold products are typically distinct, yet complementary items that deliver more value to the end customer to increase engagement and derive more benefits from the purchase.
For example, a coffee store could sell its beverages along with add-ons such as an extra espresso shot or whipped cream.
For cross selling tactics to be effective, a company must truly understand their customer base and identify potential items that could be complementary to their core products.
- B2B Business Model → For B2B companies, the sales and marketing (S&M) team will likely need to actively determine a plan to facilitate a potential transaction with cross selling.
- B2C Business Model → A more passive approach can usually be sufficient for B2C companies, such as our coffee shop example where simple product placement and listing the add-ons on the menu could be enough.
What are Common Cross-Selling Methods?
The most common methods of cross-selling are as follows.
- Product Bundling → The product bundling tactic involves grouping together similar products or services to encourage the customer to spend more money per transaction. To further incentivize the customer to purchase the bundle, a discount is usually offered versus buying each item individually.
- Customer Loyalty Programs → A customer loyalty program rewards customers for a past purchase and is meant to improve their repeat purchase rate. The customers in this case are offered discounts (or points) for being an existing customer.
- Point of Sale (POS) Add-On → The point of sale cross selling strategy entails offering additional products amid the customer checkout process. In a physical store, a sales associate could directly offer the add-on at the cash register, while a pop-up ad or side-by-side product placement can be integrated online (e.g. “Customers who bought this also bought…”)
- After-Sale Follow Up Campaign → Once a customer has completed a purchase, a company can collect their information – such as their physical mailing address or email – to follow up with a personalized email offering adjacent products. For the strategy to work, the company must collect data on a customer’s prior purchases to grasp their preferences and subsequently recommend the appropriate products with the most favorable odds of cross-converting.
What is the Difference Between Cross-Selling and Upselling?
Cross-selling and upselling are sales strategies oriented around increasing the total value per customer purchase. For either technique to be effective, the company must understand the needs of their customers to provide relevant suggestions that will add value to their overall purchases.
However, the distinction between cross selling and upselling is that the former is more about encouraging the customer to purchase more items, while upselling is about buying a higher-value product (or service).
- Cross-Selling – Cross-selling refers to a business encouraging its existing customer base to buy complementary products in addition to items already purchased (or near the checkout stage).
- Upselling – Upselling, on the other hand, is the practice of encouraging customers to purchase a more expensive version of the item, or to add on special features or services that increase the value of the purchase. Therefore upselling is a method to raise the “price” component of the revenue formula, whereas cross selling focuses more on increasing the “volume” component.
Why is Cross-Selling Important in Business?
Cross-selling is critical for the long-term generation of revenue (or increasing profits) for a multitude of reasons.
- Increase Total Revenue → By selling more products to existing customers – i.e. the number of items in a customer’s bag – a company can increase their revenue without the need for acquiring new customers, which can often be more costly.
- Improve Customer Retention → If implemented properly, cross selling can not only increase total revenue (and growth) but improve their customer base’s satisfaction by offering value-added products or services. In effect, ownership of more complementary items can enhance customer loyalty and improve customer retention over the long term, i.e. reduce customer churn and the number of one-time purchases.
- Build Customer Profiles (End Market) → The act of cross-selling strategies requires understanding customer needs and behaviors that pertain to spending patterns, which can often provide informative insights that “flows down” to improving future product development and sales & marketing strategies.
- Benefit from Economies of Scale (EOS) → By selling a higher volume of products via cross selling, a company can better utilize its existing resources to achieve economies of scale, where the per unit cost declines as more products are sold. If obtained, a company benefiting from economies of scale will see improvements in its profit margins, which directly increases the probability of establishing a sustainable, long-term “moat”.
- Establish Customer Relationships → Because cross-selling and more engagement with the company’s employees go hand-in-hand, the increased interaction with customers can lead to stronger relationships with a more personal touch, resulting in the potential for greater customer loyalty and satisfaction.
What is an Example of Cross-Selling?
In recent times, cross-selling has become an integral part of business models across practically all sectors.
A classic, illustrative example of cross-selling is the eCommerce retail business division of Amazon (AMZN).
Suppose a customer has decided to purchase an iPad from Amazon. On the right side of the online store, where the “Add to Cart” option is placed, a list of optional accessories can be found in close proximity.
- Apple AirPods Pro
- Apple Pencil
- Apple Magic Keyboard
Upon the customer adding the iPad to their cart, Amazon will also recommend more related products like a protective cover or an extended warranty plan, which are complementary to the iPad that can enhance the customer’s experience.