The Power of Product Recommendations: Mastering the Art of Cross Selling

Cross Selling to Existing Customers vs Converting New Customers

An average of 10-30% of eCommerce revenue comes from product recommendations. Amazon makes highly personalized product recommendations based on customers’ browsing behavior and purchase history. In fact, Amazon has reported that 35% of its revenue is generated by upselling and cross-selling.

The objective of brands is to sell more products and increase revenue. Cross-selling helps brands achieve exactly this. Cross-selling is profitable since it offers a higher chance of selling to existing customers, who have a 70% chance of converting, compared to new customers, who have only a 20% chance of converting.

Retaining existing customers is generally less expensive than acquiring new ones. Cross-selling to existing customers helps brands increase revenue without spending much on marketing and acquiring new customers. Businesses also possess richer data on their existing customers. This data encompasses purchase history, preferences, and behaviors, enabling more personalized and accurate marketing efforts. Personalization increases the likelihood of successful cross-selling, as customers are more inclined to purchase products that align with their needs and interests.

Furthermore, cross-selling boosts the Average Order Value (AOV). When customers purchase additional products or services, the total transaction amount increases, enhancing overall revenue without the need for proportional increases in customer base or marketing spend.

Ultimately, it can be said that cross-selling helps increase customer lifetime value (CLTV), thereby increasing the business's profitability.

Cross-selling vs Upselling: Key Differences

Cross-selling focuses on selling complementary or related products to a customer who might have initially not intended to buy the recommended products. A classic example would be asking customers to add a soft drink with their popcorn in movie theatres. Upselling, on the other hand, focuses on selling a higher-priced version of the product that the customer already intends to buy. An example would be asking a customer to upgrade from a small to a medium bucket of popcorn in movie theatres.

Cross-selling at any point of the purchase journey or even after the purchase. Upselling occurs during the purchase process when the customer is already committed to buying a product.

The effectiveness of cross-selling and upselling can vary based on the business, products and context. Cross-selling is often more effective in increasing the overall basket size and enhancing customer satisfaction, as it provides value by meeting multiple needs simultaneously. It tends to be more acceptable to customers since they see additional items' immediate relevance and benefit.

Upselling, while potentially more lucrative per transaction, can be more challenging. It requires convincing the customer of the added value and justifying the higher price. This strategy works best when the benefits of the higher-end product are clear and compelling and when customers perceive significant value in upgrading.

Businesses can A/B test both upselling and cross-selling to determine which strategy yields more benefit to them and put more effort into the more value adding technique. This, however, does not mean that businesses must adopt one technique and completely abandon the other. Identifying the contribution of both these techniques in their revenue stream can help businesses determine a perfect mix of both.

Illustration: An online jewelry brand, Bejeweled (name changed), notices that its average order value (AOV) is currently not desirable. They decide to test upselling and cross-selling. For the cross-selling variation, they recommended earrings to customers who purchased necklaces under a “frequently bought together” section. In the upselling variation, they recommended customers a more premium necklace with precious stones under an “Upgrade your look” section. Upon A/B testing, they found that the cross-selling yielded an AOV of $100, and the upselling yielded an AOV of $80. This indicated that customers exposed to the “Frequently bought together” section were more likely to purchase something than the “Upgrade your look” section customers. The company then prioritized their marketing efforts to recommend product bundles.

Identifying the Right Products to Cross-sell

Cross-sell products are complementary or related products to the customer's original purchase but address different needs. These products usually enhance the value or functionality of the original purchase.

In contrast, upsell products are typically upgraded or premium versions of the originally purchased product, offering additional features, higher quality, or advanced capabilities. These products directly replace the original purchase.

Businesses analyze customer purchase data, product usage patterns, and complementary needs to identify effective cross-sell products. They explore products that solve additional problems, provide convenience, or enhance the overall experience related to the primary purchase. Cross-sell products often address adjacent or related pain points, expanding the customer's solution ecosystem. The customer usually sees these products as logical extensions of the initial purchase, making the decision process smoother and more intuitive. A few examples would be:

1. Recommending earphones, phone cases, or chargers to a customer purchasing a phone.
   
   

2. Recommending a laptop bag to customers purchasing a laptop.
   
   

3. Recommending pillows and bedsheets to customers purchasing a mattress.

However, for a customer who has shown interest in multiple product varieties, recommending products based on similarity might not be effective. Especially in the case of online bookstores where if a customer buys a non-fiction book, it is not necessary that cross-selling another non-fiction book is the right way to do it or in the case of a clothing store where cross-selling a t-shirt to someone who added a t-shirt to their cart might not be effective.

In such cases, brands should use the Bayesian theory for product recommendation. To use the Bayesian model effectively, brands must create consumer profiles using consumer data and segmentation. The core idea is to leverage Bayesian methods to model user preferences and predict which products a user will likely be interested in based on their historical data and behaviors. A simplified illustration for this would be:

Illustration: Barneys & Probel is an online bookstore that tracks customers' past purchases, browsing history, and other behavior to personalize their experience and recommend relevant cross-sell products. The brand has books of 5 different genres: crime, sci-fi, romance, business, biographies. The brand has identified a customer segment called "Multi-Genre," consisting of customers who regularly purchase from the store (with an average time of 20 days between purchases) and have shown interest in multiple genres.

The brand has noticed that when a “Multi-genre” customer visits the website, there is a 80% probability that they will pick a romance book and a 20% probability that they will pick a biography. The brand also analyzed that after ordering a romance book, the probability of ordering crime, sci-fi, and business books are 50%,40%, and 10%, respectively. While after ordering a biography, the probability of ordering crime, sci-fi and business books are 60%, 25%, and 10%, respectively.

This can be visualized as:

If a customer from the “Multi-genre” segment adds a sci-fi book to their cart, then due to conditional probability, the probability of them reading a romance novel increases to approximately 86.5%. Hence the bookstore decides to cross-sell romance books to customers from this segment when they add a sci-fi book to their cart.

Cross-selling tips and techniques

Effective cross-selling requires brands to present customers with the right product recommendations at the right time in their purchase journey while ensuring the recommended products are at the right price to increase CX.

Brands can cross-sell the right products that are relevant to the customer by:

1. Tracking customer buying and purchase behavior: Since businesses already have data on customers' past purchases, preferences, tastes and browsing history, cross-selling is more likely to convert. To fully grasp a customer’s purchasing behavior, monitoring their buying patterns across various channels (email, website, app) and devices (desktop and mobile) is essential. By collecting and analyzing this comprehensive customer data, brands can gain insights into various aspects of their shopping habits, such as:
   
   

   1. Product Pairings: Identify which products are frequently purchased together, helping to uncover natural cross-selling opportunities.

2. Consideration Phase: Determine which items customers view and consider before purchasing, providing insights into their decision-making process.

3. Repeat Purchases: Track which products customers return to buy after their initial purchase, indicating probably dependency of the original product on other products or increased efficiency of the original product with a complementary product.

4. Cart Activity: Analyze when and how customers add products to their carts during their shopping journey, revealing critical moments for targeted promotions.

Answering these questions will allow brands to create personalised product bundles for customers that they can recommend to the customer. Businesses can also track and identify customers' tastes, such as preferring a particular colour, style, aesthetic, or variety, while creating product bundles.

Illustration: An online bookstore notices that customers have purchased 2 books in the Harry Potter series monthly. When the customer purchases their last book in the Harry Potter series, the bookstore can recommend a book from the Lord of the Rings series as a cross-sell.

2. Customer segmentation to recommend relevant products

Customer segmentation allows brands to identify groups with similar purchasing behaviors, enabling brands to recommend complementary items effectively.

Various customer segmentation models exist, and their effectiveness can vary based on your brand and industry. Selecting the appropriate segmentation approach offers significant advantages. For example, a “high-value customer” segment might help pinpoint which customers will likely deliver the highest return on investment. Another segmentation can be “technology enthusiasts”, who could be recommended complementary tech products. “Minimalism” could be another customer segment that prefers minimalist styles.

Illustration: The online bookstore segments customers based on the customer preference (fiction or non-fiction), then further categories them on genres (Fiction- Romance, Fantasy, Mystery, Stories and Non-Fiction – Science, Self-Help, History, Business), frequency of purchase, average number of pages in the books purchased, price, etc., to recommend the right book to the right customer. A customer falling in the “Fiction, Crime&Law, Average 350 pages” could be recommended books by John Grisham.

3. Demonstrating how the complementary product will increase efficiency of the original product

Sometimes, just recommending the right product isn’t enough. Brands must show the customers how this product will add value to their initial purchase. This is more true for unconventional product bundles. A brand might not need to convince a customer to purchase a phone case with a mobile, but it might be required to convince the customer to buy a shoe with a pair of trousers. The brand can show how people pair and style the shoes with trousers and a shirt. This illustrates how all three, the original trousers and the shoe and shirt, would make for a well-put outfit, encouraging the customer to make two more purchases to complete their look.

Illustration: If any book is a part of a multi-book series or had a sequel, the book store recommends that additional book to the customer. If any customer purchases Freakonomics, then, SuperFreakonomics is the appropriate cross-sell product.