What is Upsell Rate?
The Upsell Rate is the proportion of upsell revenue generated relative to a company’s total revenue, expressed as a percentage.
How to Calculate Upsell Rate (Step-by-Step)
Since selling a product or service to an existing customer, or a customer on the verge of completing a purchase, tends to be far easier than selling to a new customer, companies attempt to capitalize on existing customers via upselling.
Therefore, the upsell revenue derived from existing customers that have already purchased an item – i.e. the incremental revenue in excess of the baseline revenue prior to the upsell – is perceived to be an easier method of bringing in more recurring revenue, as well as building customer loyalty.
- Higher ARPU: A company effective at converting their upsell opportunities will not only see an uptick in their average revenue per user (ARPU), but also the total number of initial purchases would also increase as a side benefit.
- Customization: The increase in the number of orders is attributable to the fact that customers are presented with more customization and the option to upgrade, rather than the traditional constraint where additional features or services must be bought, irrespective of whether the customer needs them or not.
- Continuous Product Development: A company continuously integrating new upselling strategies into their business model implies that more innovative features (R&D spend) will continue to be added to the product itself. Therefore, the product is not a one-time order in which the capabilities as of the date of the original purchase remain unchanged. Instead, the continued product development and new updates to improve the offering results in more value to the end user over time, which of course comes at a price to the customer. But to reiterate, the decision to upgrade to a higher tier is still at the customer’s discretion.
The process of calculating the upsell rate can be broken into three steps:
- Step 1. Determine the Upsell Revenue and Total Revenue Over a Given Period
- Step 2. Divide the Upsell Revenue by the Total Revenue
- Step 3. Convert into Percentage Form by Multiplying the Decimal Figure by 100
Upsell Rate Formula
The formula to calculate the upsell rate, expressed in terms of revenue, is as follows.
Customer Upsell Rate Formula: Conversion (%)
The upsell rate can also be expressed in terms of customers using the following formula.
Upsell Example: Tesla Premium Connectivity Tier Plan
The Premium Connectivity package offered by electric vehicle automaker Tesla (NASDAQ: TSLA) is an example of upselling, where accessing additional features comes at an incremental cost billed on a monthly subscription basis.
While Standard Connectivity comes with basic features like map navigation, Premium Connectivity enhances the driver experience by offering other features such as providing live traffic navigation, sentry mode, satellite-view maps, and access to an internet browser.
Tesla Upsell Example (Source: Tesla Support)
Upsell Rate Calculator – Excel Template
We’ll now move on to a modeling exercise, which you can access by filling out the form below.
Upsell Rate Calculation Example
Suppose you’re tasked with calculating the upsell rate of a consumer electronics company that sells phones.
The optional upgrade to the premium plan is priced at $250, with the add-on benefits consisting of an extended product warranty, increased cloud storage for photos and videos, and more features related to interconnectivity (e.g. integration with other 3rd party music and media streaming applications).
- Standard Plan Pricing: $1,200.00
- Tier Upgrade Cost: $250.00
- Premium Plan Pricing: $1,200.00 + $250.00 = $1,450.00
As a reward for their loyalty and decision to upgrade to the higher tier plan, customers also receive early access to new internal software updates before other customers that chose to remain on the standard plan.
In 2022, the total number of customer orders was 200,000, with a customer upsell rate of 25.0%, i.e. the conversion rate in convincing existing customers to upgrade.
- Total Number of Orders: 200,000
- Customer Upsell Rate (%): 25.0%
The total number of upsell orders can be determined by multiplying the total number of orders by the customer upsell rate, which comes out to be 50,000.
- Total Number of Upsell Orders = 200,000 × 25.0% = 50,000
- Total Number of Non-Upsell Orders = 200,000 – 50,000 = 150,000
Using the figures that we’ve calculated thus far, the total revenue generated in 2022 can be computed by multiplying the pricing of each plan by the corresponding number of customers under the plan.
- Total Revenue = ($1,200.00 × 150,000) + ($1,450.00 × 50,000) = $252.5 million
The upsell revenue is the incremental revenue derived from existing customers, so we can subtract the standard plan pricing from the premium plan pricing to determine the upsell revenue per order.
In the final step, we’ll multiply the tier upgrade cost ($250.00) by the total number of customer orders with an upsell conversion (50,000) to arrive at $12.5 million as the incremental upsell revenue, which implies a 5.0% upsell rate on a revenue basis.
- Upsell Rate (%) = $12.5 million ÷ $252.5 million = 5.0%