HBR.

ORG December 2012

reprinT f1212A

Idea Watch

The Dark Side

Of Cross-Selling
Companies work hard to persuade existing
customers to buy additional products.
Often that’s a money-losing proposition.
by Denish Shah and V. Kumar

This document is authorized for use only in PGDM - 01222014 by Prof. Pankaj Priya at Bimtech from January 2013
to July 2013.
 For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org

I magine you’re a marketing manager for

a national catalog retailer—a company
that sells a wide array of wares, includ-
ing apparel, furniture, bed and bath prod-
ucts, 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 cata-
logs, and each is modestly unprofitable.
According to your data models, if you start
sending those customers catalogs for your
other product lines, they’ll probably start
cross-buying. You could entice them with
e-mailed discounts and coupons as well.
At an intuitive level, this makes sense:
Once you’ve done the hard work of acquir-
ing a customer, why wouldn’t you try to
sell her more products? That’s what a U.S.
retailer we studied (the model for the sce-
nario 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 cus-
tomer, sure that more sales means more
profits. And cross-selling is profitable in
Marketing the aggregate. But our analysis, to our

The Dark Side knowledge the first of its kind, found that
firms that indiscriminately encourage all

Of Cross-Selling
their customers to buy more are making
a costly mistake: A significant subset of
Illustration: Andrew Bannecker

cross-­buyers are highly unprofitable.

Companies work hard to persuade existing We interviewed dozens of managers
from 36 firms across industries in the U.S.
customers to buy additional products. Often and Europe. More than 90% of the firms
that’s a money-losing proposition. had run cross-selling campaigns, and all
by Denish Shah and V. Kumar found that their efforts increased average
per-customer profit. Every manager said

Copyright © 2012 Harvard Business School Publishing Corporation. All rights reserved. December 2012 Harvard Business Review 2
This document is authorized for use only in PGDM - 01222014 by Prof. Pankaj Priya at Bimtech from January 2013
to July 2013.
Idea Watch
Know your
problem customers
Our study of five Fortune 1,000 firms re-
vealed 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 there’s 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
companies—a B2B financial services firm,
a B2B IT services firm, a retail bank, a cata-
log retailer, and a fashion retailer—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 one in five cross-buying
customers is unprofitable. That group ac-
counts for 70% of a firm’s total “customer
loss”—the shortfall when the cost of goods
and of marketing to a given customer ex-
ceeds the revenue realized. And the more
cross-buying an unprofitable customer
does, the greater the loss.
Bad Apples
Who are these profit-destroying custom-
ers? Our study revealed four distinct pro-
files. 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-to-
face interactions. The more they cross-buy,
the more service demands they make—and
the more your costs rise. At the retail bank
we studied, requests from service demand-
ers for things such as assistance with on-
line 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 typi-
3 Harvard Business Review December 2012
This document is authorized for use only in PGDM - 01222014 by Prof. Pankaj Priya at Bimtech from January 2013
29%
B2B financial
services firm
4%
67%
cally happens through returns. In many
cases, the more a revenue reverser buys,
the more he returns. At firms selling ser-
vices, revenue reversals generally involve
defaults on or early termination of loans
or contracts. At the retail bank—where
revenue reversers cost about $5 million a
year—about half of the customers in this
group had defaulted more than once.
Promotion maximizers. These cus-
tomers 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 fi-
nancial 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 re-
allocate it among a greater assortment of
products or services. This generates cross-
selling 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 reve-
nue from the more-profitable products was
not enough to cover the cross-selling costs.
Cross-selling is profitable in the aggregate.
But one in five cross-buying customers is
unprofitable—and together this group accounts
for 70% of a company’s “customer loss.”
to July 2013.
6
27
B2B IT
services firm
58
9
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 be-
fore 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
practices—and 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 incentives—in-
ternal or external—created by your market-
ing strategy. For example, sales reps at the
financial services firm were rewarded for
increasing the number of products each
customer bought, rather than for increas-
ing revenue. As a result, they aggressively
cross-sold. Our examination of the cus-
tomer data set showed that the propor-
tion of customers who merely reallocated
their fixed spending with the firm across
a greater number of products and services

22
31
Retail
bank
47
increased. We found a similar effect at the
fashion retailer.
The IT services firm we studied, mean-
while, 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 shouldn’t have a blanket
prohibition against cross-selling market-
ing tactics, some of which, after all, are best
practices. Instead, they should determine
whether specific practices encourage prob-
lem customers and adjust their approach
accordingly.
For example, the electronics retailer
Best Buy discovered that among the cus-
tomers who had high rates of product re-
turns were a subset who brought items
back without the packaging and then vis-
ited 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 customer’s transaction
history.
Don’t cross-sell—smart-sell. State-
of-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 cross-
selling initiatives, firms need to analyze
transaction data for each customer to de-
termine 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-
This document is authorized for use only in PGDM - 01222014 by Prof. Pankaj Priya at Bimtech from January 2013
For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
3 6
24
24
Catalog 51 Fashion
retailer retailer
12
61
19
clude her from cross-selling campaigns. If company’s toll-free number might be left
it determines that a customer is a spending on hold longer times.
limiter, it might try to increase her spend- Use the right metric. The most com-
ing through upselling—for example, up- mon metric for assessing cross-selling
grading a banking customer from a regular campaigns is the average number of differ-
to a premium checking account. ent products (or product categories) sold to
“Demarket” when necessary. Not all each customer. Wells Fargo publishes this
customer cross-buying occurs in response information in its annual reports and cites
to cross-selling; some customers cross-buy its desired cross-buy level—the number of
on their own. When problem customers do, products it wants each of its customers to
firms might be wise to “demarket” them— own—as a key strategic goal. Like the finan-
to limit or terminate the relationship. cial services firm discussed earlier, compa-
Ending bad customer relationships isn’t nies commonly use this metric to create
uncommon; researchers have found that employee incentives.
as many as 85% of executives in an array of But as we’ve demonstrated, cross-sell-
firms and industries have done so (see “The ing as an end in itself is a bad idea. Before
Right Way to Manage Unprofitable Custom- cross-selling to any customer or segment,
ers,” HBR April 2008). When firms have determine whether the effort is likely to be
contracts with their customers, they can profitable. Otherwise you may find losses
sever the tie in writing. Sprint, for instance, mounting even as sales volume grows.
sent letters to 1,000 of its problem custom- Remember our catalog retailer? When
ers in 2007 canceling their wireless service we examined its customer data, we dis-
contracts because they had made what the covered a group of problem customers
company deemed an unreasonable number who could have been identified two years
of customer-service calls. In the absence of into their relationships with the company.
a contract, and particularly in a brick-and- The retailer had unsuspectingly nurtured
mortar retail setting, ending relationships them, mailing them multiple catalogs and
can be trickier. In 2003 Filene’s Basement engaging in other cross-selling efforts. And
prohibited two sisters with histories of ex- regrettably, the promotions worked: Those
cessive returns and complaints from shop- customers bought 44% more items, on
ping at its stores. However, enforcing such average, over three years—but during that
bans is obviously difficult, and they can time the average loss per customer more
draw negative publicity. than doubled, resulting in an additional
A more feasible approach is to limit the loss of $41 million.
resources devoted to problem customers. Before you launch your next cross-­
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
use. (Many cable internet service provid- marketing, and V. Kumar holds the Lenny
Distinguished Chair in marketing, at Georgia
ers impose caps on heavy users.) Similarly, State University’s J. Mack Robinson College of
service demanders who repeatedly call a Business.
December 2012 Harvard Business Review 4
to July 2013.