Why Cross-Selling Could Be Bad Business

Marketing Viewpoint by Ruth Winett

Selling more to existing customers -- cross-selling -- is a sound way to improve revenues says the conventional wisdom. Yet, in cross-selling, you may be making "a costly mistake: A significant subset of cross-buyers are highly unprofitable," report Denish Shah and V. Kumar. ("The Dark Side of Cross-Selling," Harvard Business Review, December 2012, p. 21)

Shah and Kumar studied the practices of five Fortune 1,000 companies in five different industries and identified four types of "profit-destroying customers." The more these "profit-destroying" customers buy, the more they cost the companies. "Profit-destroying" customers

"Overuse" services
Return purchases
Exploit discounts
"Limit" the amount spent

Some cross-selling is beneficial. However, to prevent cross-selling from eroding profits, companies should take several measures:

Review incentives: Incentives for salespeople may result in encouraging customers to buy additional products without increasing total profits. If you invest in providing more IT support services, you may cause customers to over-use these services. Generous return policies are another costly incentive.
"Smart-sell" not "Cross-sell": Maintain and study transaction data for each customer to see if the customer fits into one of the "profit-destroying" categories. Do not include customers who frequently return items in cross-selling campaigns. Do not cross-sell a "spending limiter." For instance, a bank should try to upgrade such a customer to a premium checking account, say the authors.
"Limit or terminate relationships": Companies can devote fewer resources to problem customers. For instance, cable companies, such as Comcast, can "impose caps on heavy users." Another tactic is to put heavy service users on telephone hold for longer times.
"Use the right metric": Targeting an average number of products sold per customer is a common practice; yet, it fails to take into account the actual cost of these sales.
Investigate how much cross-selling is costing your company by comparing the revenue and expenses, such as services, for individual customers. Then limit cross-selling to more profitable customers, and develop other strategies for more costly customers.

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