Imagine you’re a marketing manager for a national catalogue retailer that sells a wide array of wares. Every category has its own catalogue. You have before you data on two customers. Each currently buys products from just one of your catalogues, and each is modestly unprofitable. According to your data models, if you start sending those customers catalogues for your other product lines, they’ll probably start cross-buying. You could entice them with emailed discounts and coupons as well.
At an intuitive level, this makes sense: once you’ve done the hard work of acquiring customers, why wouldn’t you try to sell them more products?
Most managers cross-sell to every customer, sure that more sales means more profits. And cross-selling is profitable in the aggregate. But our analysis, to our knowledge the first of its kind, found that firms that indiscriminately encourage all their customers to buy more are making a costly mistake: a significant subset of cross-buyers are highly unprofitable.
We interviewed dozens of managers from 36 firms across industries in the US and Europe. More than 90% of the firms had run cross-selling campaigns, and all found that their efforts increased average per-customer profit. Every manager said that because of this lift, he would cross-sell to any customer.
But there’s a deep flaw in the managers’ logic. To tease out the impact on profits of individuals’ cross-buying, we analysed the customer data sets of five Fortune 1,000 companies over periods ranging from four to seven years. Although we confirmed that the average profit from customers who cross-buy is higher than that from customers who don’t, we discovered that 1 in 5 cross-buying customers is unprofitable. That group accounts for 70% of a firm’s total customer loss – the shortfall when the cost of goods and of marketing to a given customer exceeds the revenue realised. And the more cross-buying an unprofitable customer does, the greater the loss.
Identifying profit-destroying customers is the first step toward neutralising their impact.
Service demanders: These people habitually overuse customer service in all channels, from phone to web to face-to-face interactions. The more they cross-buy, the more service demands they make – and the more your costs rise.
Revenue reversers: Customers in this segment generate revenue but then take it back. At firms selling products, this typically happens through returns. In many cases, the more a revenue reverser buys, the more he returns. At firms selling services, revenue reversals generally involve defaults on or early termination of loans or contracts.
Promotion maximisers: These customers gravitate toward steep discounts and avoid regularly priced items. At a catalogue retailer and a fashion retailer we studied, the average annual loss from each promotion maximiser was $300.
Spending limiters: Customers in this segment spend only a small, fixed amount with a given company, either because of financial constraints or because they spread their purchases among several companies. If they cross-buy, they don’t increase their total spending with the company; they reallocate it among a greater assortment of products or services. This generates cross-selling costs without increasing revenue. Cross-selling to any of these problem customers is likely to trigger a downward spiral of decreasing profits or accumulating losses, for two reasons: First, cross-selling generates marketing expenses; second, cross-buying amplifies costs by extending undesirable behaviour to a greater number of products or services. This happens even among customers who were profitable before they began cross-buying.
Halting the spiral
The size of each problem segment varies from firm to firm. Our research indicates that it depends in part on how companies implement common marketing practices – and suggests four ways to help prevent losses and maximize profits from cross-selling initiatives.