Let's first establish what cross-selling really is: Selling new offerings to existing customers. It is about deepening and extending the customer relationship to new offering areas and use cases (=Jobs-to-be-done). This means the individual customer is buying more, their ARPA (Annual Revenue Per Account) grows, their engagement with your company widens and your collaboration becomes deeper.
This is why cross-selling has a retaining influence; the customers that are using wider range of your offerings and services are likely to stay longer as your customer and become less vulnerable to errors or pricing changes. Combined, both the annual billing value of your customer and length of your customer relationships grow, increasing the lifetime value of your customer relationships.
The most well known and practical approach to cross selling benefits is Ansoff Matrix (video explaining Ansoff Matrix here). The Ansoff matrix is a 2x2 planning tool for sales teams to identify growth strategies based on market (existing or new) and product (existing or new). The four strategies are: Market Penetration (more of existing product to existing market), Market Development (existing product to new markets), Product Development (new product to existing market), and Diversification (new product to new market). Sales teams can use this to guide their efforts and understand the associated risks of each approach, with market penetration being the lowest risk and diversification being the highest.
Although Igor Ansoff in 1957 named his paper "Strategies for Diversification" and had concentration on product-market strategy, the model has also been very successful when applied to the analysis of B2B sales effort required to close deals with customers. The effort required to close a deal is much lower on average when you are selling to an existing customer compared to new customer (Effort = time, meetings, contacts, preparation work , proposals, negotiations, agreement prep, etc. which all translate as cost.). The numbers in this table represent the effort level:
So, selling to an existing customer takes less effort and hit rates (=conversion from offer to billing, NOTE! Lost deals create costs, too) are likely to be higher. This means that the salesperson who cross-sells to existing customers is likely to make more new revenue compared to a salesperson who is selling to new customers. This is a fact that would be smart to take into account when defining incentive models for sales. However, in order to implement this approach effectively, we need to have data and measurement methodology to steer these efforts.
The first thing to understand is the current value and number of customers buying different levels of offerings:
As this visualisation from 180ops above demonstrates, the largest number of customers is only using one offering and their annual billing is in average only 350 USD. On the other hand, there are customers with much stronger offering penetration, they are only few, but their annual billing is in average more than 200KUSD and their contribution to the company's overall revenue is significant. The most relevant question is, how do we develop the vast majority of customers who only use few offerings further to represent the significantly higher annual revenue levels?
The next level of understanding is to understand how the customer base and markets in general map out in Current value and Potential value matrix:
Logically thinking, its obvious that different size of companies operating in different industries have different needs and thus their potential has significant variation. As a concept it is easy to understand, but in practice more difficult to act on.
Currently, the widely accepted best practice is to segment customers based on their existing value in a pyramid format. The A customers on top of the pyramid are few, but they represent significant share of total revenue. B customers have greater numbers, but their share of revenue is often smaller than A customers. The C and D customers represent majority of customer base, but they only represent small share of total revenue. The pyramid model is based on past billing and has nothing to do with future growth.
We want to replace that practice with the Current and Potential value matrix above. The difference is in time perception. It has the current billing value on the lines and the future growth potential in columns allowing you to also understand the potential future value of customers.
Apart from the bottom line, which represents New Business targets and new customer hunting activity, all the other cells are about up- and cross-selling activity. Here is an example of an individual account:
This individual customer-level view explains the opportunities in detail. "Net Sales" column indicates rolling 12-month invoicing by subsidiary and offering. These are the offerings the customer is currently buying and paying for. The demo data represents a telco, which has four subsidiaries and often it also means four ERPs and difficulties in creating situational awareness of the groups performance. Combined in one, the view delivers full view of the customer relationship.
"Potential" column = Wallet size at offering level. Although the customer already has 750K annual billing, it is predicted to almost double to 1.37M€ in the next year, there are stil 21.8M€ to up- and cross-sell.
For a salesperson, the potential values are the key to optimize his time allocation: What to talk about to which customers. The additional signals: Readiness indicates customers increased likelihood to get interested in some offering and Risk indicates the increased likelihood of defecting offering relationship. In the Pulse section, there are the explanations available, why we consider the customer's likelihood of buying or defecting to be increased and what to do about it. These views are distributed to CRM for salespeople, so that they have all relevant information available in the primary customer relationship management tools.
In order to make management insights as well as steer operations, both sides of the equation need to be solved. At 180ops, we are serving both macromarket-level management perspective and micro-level operations.
If we think about the fundamental purpose of sales, the primary role is to create new value: A) by extending customer relationships to new offering areas and to B) win new customers. Upselling means selling more of the same to the same customer and renewal sales means extending the collaboration to new subscription period. These represent relationship maintenance and stability rather than creation of new value.
In most organizations, measuring and managing the sales operations in this perspective is easier said than done. That is why we at 180ops have created a method of mapping each opportunity and then monitoring its output:
As the Ansoff matrix explains, the upselling and renewal sales are likely to represent higher hit rates (conversion from offer to billing) and shorter time to money. Cross-selling is likely to have lower hit rates and longer time to money. New Business (hunting activity) requires a lot more effort to close a deal, which means that the time to money is often longer and the hit rates are lower.
It is good to understand that these figures vary depending on the customer segment you are targeting, as well as by which offering you are selling to the customers. Some offerings perform much better as "door openers," or the first offerings to sell to new customers. On the other hand, there are offerings that should NOT be used for new customer acquisition because they require very long time to money and may have significantly lower hit rates. As a business case, selling those offerings can be very difficult or impossible to do profitably (cost/deal is higher than the profit margin).
For the purpose of analyzing these phenomena, we are offering an offering performance analytics in sales operations:
As the visualization shows, NB success cases are mostly on the right side, meaning longer time to money. Upselling and renewal sales cases are mostly represented on the left side, which means fast time to money. Cross-selling cases are mostly in the middle. These insights are incredibly practical and can influence your sales performance improvement significantly, but quite difficult to surface and analyze. That is why we consider our proposition to be quite transformative and highly valuable.
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In order to optimize your sales performance, customer care models, resourcing and goal setting, it is imperative to understand these underlying influencers and dynamics. It is also important to understand that these behaviors change over time. When your offerings mature and gain a stronger position in the markets or face new competition, their performance will be affected, too. The same applies to macroecomic changes, in case inflation, interest rates, energy prices and other factors change significantly in your customers' operating environment, these figures will adjust to show the current situation.
According to Gartner, 60+% of sales directors struggle to stay up-to-date on the changes in the operating environment and feel difficulties in adapting to the changes. Ways of analyzing and understanding change as shown above are becoming critical management imperatives. The only way to thrive in a rapidly changing environment sustainably is the capacity to adapt quickly.
I hope you found this article insightful. If you wish to continue discussion, please contact me via LinkedIn or email me to toni(at)180ops.com