CULTURE26

The role of trust in

global negotiations

DEFEND YOUR
RESEARCH28
Wall Street doesnt
favor firms that are
good at innovating

VISION
STATEMENT30
How vital are the
worlds great urban
centers?

COLUMN36
Ronald Coase on
saving economics
from the economists

New Thinking, Research in Progress hbr.org

ILLUSTRATION: ANDREW BANNECKER

MARKETING

The Dark Side

Of Cross-Selling

Companies work hard to persuade existing

customers to buy additional products. Often
thats a money-losing proposition.
by Denish Shah and V. Kumar

magine youre a marketing manager for

a national catalog retailera company
that sells a wide array of wares, including apparel, furniture, bed and bath products, and outdoor items. Every category
has its own catalog. You have before you
data on two customers. Each currently
buys products from just one of your catalogs, and each is modestly unprofitable.
According to your data models, if you start
sending those customers catalogs for your
other product lines, theyll probably start
cross-buying. You could entice them with
e-mailed discounts and coupons as well.
At an intuitive level, this makes sense:
Once youve done the hard work of acquiring a customer, why wouldnt you try to
sell her more products? Thats what a U.S.
retailer we studied (the model for the scenario above) did. But although one of the
customers ultimately became profitable,
generating $297 over the next few years,
the other cost the company $315 during the
same period.
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 U.S.
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
December 2012Harvard Business Review21

Idea Watch

Know your
problem customers

Our study of five Fortune 1,000 firms revealed four distinct types of unprofitable
customers; the more they cross-buy, the
greater the loss. The proportion of each
group varied with the kind of firm.
Service demanders
Revenue reversers
Promotion maximizers
Spending limiters

that because of this lift, he would cross-sell

to any customer.
But theres a deep flaw in the managers
logic. To tease out the impact on profits of
individuals cross-buying, we analyzed the
customer data sets of five Fortune 1,000
companiesa B2B financial services firm,
a B2B IT services firm, a retail bank, a catalog retailer, and a fashion retailerover
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 dont,
we discovered that one in five cross-buying
customers is unprofitable. That group accounts for 70% of a firms total customer
lossthe shortfall when the cost of goods
and of marketing to a given customer exceeds the revenue realized. And the more
cross-buying an unprofitable customer
does, the greater the loss.

Bad Apples

Who are these profit-destroying customers? Our study revealed four distinct profiles. Identifying customers who fit these
profiles is the first step toward neutralizing
their impact.
Service demanders. These people
habitually overuse customer service in all
channels, from phone to web to face-toface interactions. The more they cross-buy,
the more service demands they makeand
the more your costs rise. At the retail bank
we studied, requests from service demanders for things such as assistance with online banking and balance transfers more
than doubled after the customers began
cross-buying.
Revenue reversers. Customers in this
segment generate revenue but then take it
back. At firms selling products, this typi22Harvard Business ReviewDecember 2012

29%
27

B2B financial
services firm
67%

B2B IT
services firm
4%

58

cally 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. At the retail bankwhere
revenue reversers cost about $5 million a
yearabout half of the customers in this
group had defaulted more than once.
Promotion maximizers. These customers gravitate toward steep discounts
and avoid regularly priced items. At the
catalog retailer and the fashion retailer we
studied, the average annual loss from each
promotion maximizer 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 dont increase their
total spending with the company; they reallocate it among a greater assortment of
products or services. This generates crossselling costs without increasing revenue.
At the financial services firm we studied, a
number of business customers who kept
about $5,000 in their checking accounts
responded to cross-selling promotions for
products such as insurance or CDs simply
by drawing down their checking accounts
to buy the products. The increase in revenue from the more-profitable products was
not enough to cover the cross-selling costs.

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 behavior 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. (See the exhibit Know
Your Problem Customers.) Our research
indicates that it depends in part on how
companies implement common marketing
practicesand suggests four ways to help
prevent losses and maximize profits from
cross-selling initiatives.
Examine your incentives. Having a
substantial segment of problem customers
may be a sign of flaws in the incentivesinternal or externalcreated by your marketing strategy. For example, sales reps at the
financial services firm were rewarded for
increasing the number of products each
customer bought, rather than for increasing revenue. As a result, they aggressively
cross-sold. Our examination of the customer data set showed that the proportion of customers who merely reallocated
their fixed spending with the firm across
a greater number of products and services

Cross-selling is profitable in the aggregate.

But one in five cross-buying customers is
unprofitableand together this group accounts
for 70% of a companys customer loss.

hbr.org

3
22

24

31

24

Retail
bank

Catalog
retailer
12

47

increased. We found a similar effect at the

fashion retailer.
The IT services firm we studied, meanwhile, invested heavily in customer service,
thus inadvertently encouraging overuse by
service demanders. And the catalog retailer
offered a liberal return policy that made it
easier for revenue reversers to abuse the
system.
Companies shouldnt have a blanket
prohibition against cross-selling marketing tactics, some of which, after all, are best
practices. Instead, they should determine
whether specific practices encourage problem customers and adjust their approach
accordingly.
For example, the electronics retailer
Best Buy discovered that among the customers who had high rates of product returns were a subset who brought items
back without the packaging and then visited the store again and bought the same
products at steeply discounted, open-box
prices. Best Buy now requires customers
who are returning items to present a photo
ID, and reserves the right to refuse a return
on the basis of a customers transaction
history.
Dont cross-sellsmart-sell. Stateof-the-art cross-selling uses predictive
models to determine which customers are
likely to cross-buy which products. Basing
marketing decisions solely on such models
is ill-advised. Before undertaking crossselling initiatives, firms need to analyze
transaction data for each customer to determine whether she fits a problem profile.
If she does, the cross-sell decision
should be turned into a no-sell or an upsell
decision, depending on her characteristics
and previous behavior. If a firm encounters
a habitual revenue reverser, it might ex-

51

Fashion
retailer

61
19

clude her from cross-selling campaigns. If companys toll-free number might be left
on hold longer times.
it determines that a customer is a spending
limiter, it might try to increase her spendUse the right metric. The most coming through upsellingfor example, up- mon metric for assessing cross-selling
grading a banking customer from a regular campaigns is the average number of differto a premium checking account.
ent products (or product categories) sold to
Demarket when necessary. Not all each customer. Wells Fargo publishes this
information in its annual reports and cites
customer cross-buying occurs in response
its desired cross-buy levelthe number of
to cross-selling; some customers cross-buy
on their own. When problem customers do, products it wants each of its customers to
firms might be wise to demarket them ownas a key strategic goal. Like the financial services firm discussed earlier, compato limit or terminate the relationship.
nies commonly use this metric to create
Ending bad customer relationships isnt
employee incentives.
uncommon; researchers have found that
But as weve demonstrated, cross-sellas many as 85% of executives in an array of
ing as an end in itself is a bad idea. Before
firms and industries have done so (see The
Right Way to Manage Unprofitable Custom- cross-selling to any customer or segment,
determine whether the effort is likely to be
ers, HBR April 2008). When firms have
profitable. Otherwise you may find losses
contracts with their customers, they can
sever the tie in writing. Sprint, for instance, mounting even as sales volume grows.
Remember our catalog retailer? When
sent letters to 1,000 of its problem customwe examined its customer data, we disers in 2007 canceling their wireless service
covered a group of problem customers
contracts because they had made what the
company deemed an unreasonable number who could have been identified two years
into their relationships with the company.
of customer-service calls. In the absence of
a contract, and particularly in a brick-and- The retailer had unsuspectingly nurtured
them, mailing them multiple catalogs and
mortar retail setting, ending relationships
engaging in other cross-selling efforts. And
can be trickier. In 2003 Filenes Basement
prohibited two sisters with histories of ex- regrettably, the promotions worked: Those
cessive returns and complaints from shop- customers bought 44% more items, on
average, over three yearsbut during that
ping at its stores. However, enforcing such
time the average loss per customer more
bans is obviously difficult, and they can
than doubled, resulting in an additional
draw negative publicity.
loss of $41 million.
A more feasible approach is to limit the
Before you launch your next cross-
resources devoted to problem customers.
For example, in 2003, after Comcast dis- selling campaign, pause and ask yourself,
covered that 1% of its broadband customers Do we really want these customers?
were using 28% of its bandwidth, it warned
HBR Reprint F1212A
those customers to limit their internet
Denish Shah is an assistant professor of
marketing, and V. Kumar holds the Lenny
use. (Many cable internet service providDistinguished Chair in marketing, at Georgia
ers impose caps on heavy users.) Similarly, State Universitys J. Mack Robinson College of
service demanders who repeatedly call a
Business.
December 2012Harvard Business Review23