Trend: Cross-SellingBy Jeffrey Rothfeder | Posted 07-01-2003
Allied Office Products Inc. doesn't have the luxury of waiting for revenue to walk into its store. The $300 million Clifton, N.J.-based seller of office supplies and services to small businesses throughout the Northeast has a team of more than 200 salespeoplefeet on the street, as they're called by company executiveswho work door-to-door and phone call by phone call to line up new customers and squeeze additional orders from existing ones.
"We're a head-count business: I know that if you have a 60-person office, you should buy $300 worth of basic office suppliespaper, pens, staplesfrom us with each order," says Mike Palmer, Allied's CoO. "But if that's all we get, we stagnate. For us to grow, we have to convince the customer, who already likes our products and service, to buy more than just basic supplies; we have to increase the order by 10, 20 or 30 times."
That job is given to Allied's "specialists": salespeople who are trained to push the company's less traditional, higher-margin lines such as coffee and refreshments, printing and forms management, and office furniture. Specialists split the commission with their local account executives, who in the past were responsible for alerting
specialists to customers they should contact. With that approach, however, a lot of opportunities slipped through the cracksoften because the specialists were never told about them. Some account execs were wary of other Allied sales staff coming into their territories, even if it meant the possibility of additional income, while others simply forgot to pass along the leads.
So last year, Palmer installed a new sales-force system that automatically does what many account executives didn't do: It generates ranked lists of customers based on order size, type of business, items purchased and other categories. As these leads are received, specialists are required to follow up and enter into the system the results of their contact with the customereverything from "no interest," to "left a message," to "set up an appointment," to "signed up an additional $12,000 order for printing services." These outcomes are then collected in reports that provide Allied management with a day-by-day analysis of sales efforts, viewed through any number of variablesrevenue by specialist, size of customer orders, and length of time a lead remains opened, for instance.
"The system has energized our sales force," says Palmer. "It relieves the account executive of having to reach out to the specialist, while vastly increasing our company-wide knowledge of sales opportunities and improving our ability to send the sales specialist in after them. It's made a big difference in our performance."
Divide and Conquer
Divide and Conquer
It's called cross-selling, or up-selling: a data-driven technique companies use to increase revenue by targeting existing customers with fresh products and services that will most likely match their preferences. As a concept, cross-selling isn't new. For the past decade or so, companies have been touting the benefits of tapping old customers for new revenue, primarily because it makes good strategic sense. In a 2001 study, Harvard Business School professors Robert S. Kaplan and V.G. Narayanan examined the marketing adage that 20 percent of customers provide 80 percent of sales. Their conclusion: Not only is that ratio on the mark, but 20 percent of customers also account for well over 100 percent of profits. Combine those numbers with the fact that it costs companies five times less to cross-sell an existing client than to acquire a new one, and it's hard to deny that cross-selling is a profitable approach, particularly when a tough economic environment is making consumers finicky.
The problem is, as much as cross-selling has been a desirable goal, few companies do it well. According to MarketSoft Corp., a provider of cross-selling technology, nearly three-quarters of all businesses say they have cross-selling programs, but as many as 70 percent of such efforts fail to increase revenue in any significant way, according to Gartner Inc. One prominent reason: Lots of corporations spent the 1990s bulking up through acquisitions, but integrating the companies and divisions involved in these deals and finding the vaunted synergies that might lead to cross-selling has been tough. Instead of cooperation and data-sharing among business units, information silos have emerged. And in the process, individual business units have grown in influence. They're held to specific performance yardsticks and control their own sales-generation techniques and costs, including technology expenditures. What is typically viewed as cross-selling by many companies is little more than internal referrals within highly segregated divisions. Sometimes that results in incremental sales, but nothing substantial, because essentially the same products are being offered to the same customers over and over again.
"It's like a soccer game. If everybody plays as individuals, the team loses," says Mike Kozub, vice president and chief marketing officer of MarketSoft Corp., a cross-selling technology provider. "For instance, Citicorp has dozens of independent business units that all have insights into the same customers. If they shared what they know, Citicorp would be much more formidable. But not many business units in any company are able to communicate across lines of business very well."
Despite its stutter-start, the full promise of cross-selling is finally being put to the test by many companies, especially those in the financial-services, telecommunications, high-tech and services industries. As the economy has shrunk, the value of existing customers has increased; they're one of the few avenues for revenue growth companies have. Consequently, many senior executives are increasingly determined that no customers slip through the cracks without every appropriate business unit getting a chance to see what else they might buy. At the same time, it's almost impossible for a consumer to stay anonymous anymore. Shopping on the Web, call centers and third-party firms that collect virtually every transaction from hundreds of companies have vastly increased the amount of information available about individual customer activities and preferences (see "Connecting the Dots"). Put all that together and a tipping point for new and more ambitious attempts at cross-selling has been reached.
"Companies have amassed a tremendous amount of data about their own customers, mostly through the implementation of new technologies to gather this information," says Darius Vaskelis, a vice president at strategy consultants Inforte Corp. "Now, executives are demanding that better use is made of this data and that their companies focus on selling a broader portfolio to their customers."
Cross-selling's inroads have come in the wake of increasing disenchantment with customer relationship management (CRM) systems. By automating record-keeping and access to data, these expensive systems were supposed to drive the handling of interactions with customers and maintained account information to a new level of efficiency. While CRM by and large has succeeded at making it easier to provide services to customers through data-rich call centers and account records readily available on desktops throughout the company, it has generally added very little to the top or bottom line. In a 2002 survey of 23 users of CRM software from Siebel Systems by analysts at Nucleus Research Inc., 61 percent said they had not yet achieved a positive return on investment after at least two years with the technology.
"Typically, CRM systems just look at data from a historical perspective," says Heidi Lanford, senior vice president of analytics at KnowledgeBase Marketing Inc., CRM and cross-selling consultants and a subsidiary of advertising agency Young and Rubicam. "It's hard to measure a return on investment from that."
By contrast, cross-selling at its best depends on a forward-looking, even predictive technology. Drawing upon the vast amount of poorly used data captured by most companies in their CRM systems, cross-selling's biggest advantage comes when it is used as an übersystem, gathering information from each business unit to produce a broad, company-wide assessment of customer purchasing behavior and propensity. Based on this, cross-selling can attempt to forecast which customers are most likely to buy which additional products.
Fleet of Foot
Fleet of Foot
FleetBoston Financial Corp. is an apt example. Since 1988, Fleet has acquired nearly 30 financial-services firms, including the $1.6 billion acquisition of discount broker Quick&Reilly in 1998 and the $16 billion purchase of BankBoston a year later. By 2002, this hodgepodge had left Fleet with a set of four distinct product linessecurities brokerage, mortgages, small-business banking and personal bankingeach with its own sales force, call center and consumer contact points in branches and on the Web. With tens of thousands of employees spread among these units, account representatives infrequently broadcast leads by e-mail or fax to people in other departments; usually they didn't know the correct contacts. And with Fleet operating an increasingly streamlined operation, they often didn't have the time.
"The most basic illustration of this is when a teller, during a routine transaction in which he learns that you may be needing a mortgage, advises you to go see the lending officer behind the desk," says MarketSoft's Kozub. "Nine times out of ten, or more, you don't have the time and you leave the bank without following up. That's a lead between two separate departments that's lost within a branch, within ten feet maybe. Imagine how many leads evaporate when they have to travel long distances to reach an anonymous person someplace else."
In January 2002, Fleet announced plans to pilot software from MarketSoft that, simply put, links up the CRM systems in each of the firm's four units. Using a Web interface, employees can enter potential customer leads, which are then enhanced with information from corporate databases and delivered to the sales-force automation system in the division with the most appropriate sales rep. A call center employee in personal finance can type into the computer the name of a checking account customer who happened to mention that he plans to open a Segway HT and scooter store. The system seeks any other information in Fleet's computers about this customer and ranks him by such things as activity with Fleet; history of responding to telemarketing calls, e-mails or paper mail; and any known financial data, such as assets or outstanding loans. Having set a priority rating on this lead, the system then sends the customer's information to an agent in the small-business unit, who contacts the customer. Each lead includes a tag that tracks its location as it moves through the system, helping monitor the outcome of sales efforts.
MarketSoft's system employs a series of programmed rules to regulate the ranking of leads as well as how they should be generated and distributed. These rules can be changed frequently and quickly with natural language input to suit, for instance, specific sales campaigns or new-product testing. Most cross-selling systemswhether proprietary or from PeopleSoft, KnowledgeBase Marketing, Siebel or any of the other numerous suppliersoffer similar dynamic, macro-based programming approaches that respond rapidly to changing business conditions and avoid the months-long programming efforts that traditional IT departments require.
Fleet remains enthusiastic about the results of its cross-selling campaign. Brad Warner, Fleet Financial's vice chairman, describes the use of technology as an attempt to "seize the revenue potential of our existing customer base." Fleet's enhanced focus on cross-selling over the past 21/2 years has increased the company's cross-sell ratio to 3.7 products per house-hold from 2.7 in 2001. And Fleet trumpets this statistic in its annual report and in its presentations to Wall Street analysts to defend its claims that its financial performance is on the upswing.
More than anything, cultural issues at companies are the prime hindrance to a successful cross-selling effort. Creating an incentive program for salespeople that gives them a piece of the commission, whether they actually complete the transaction with customers or just refer them through a cross-selling program, is critical. But to do this often requires a radical rewriting of the way most organizations operate.
Consider the persistent conflict between the Internet, store and catalog sales channels at many companies. Too often, these are separate business units, so they tend to market to customers independentlyin effect, competing with each other. So it's not unusual for a company to have healthy annual Web sales growth of 25 percent or more, even on an established site, while sales increases for the total business remains stuck in the single digits. But if these separate sales units are forced to cooperate by using a cross-selling system as both an analytical tool and the foundation of a marketing campaign, it's possible to figure out how to drive customers from one channel to another without diminishing overall sales.
Home furnishings retailer Restoration Hardware Inc. was an entirely store-based operation until 1998, when it produced its first catalog. A year later, the company debuted its Web site. Sales quadrupled between 1998 and 2002, but so did costs: The company posted a record loss of $34 million in 2002. Concerned that high marketing costs, especially on the catalogs, were washing out revenue growth, management decided to investigate the impact of the catalog on the Web and retail sales channelsan analysis that, surprisingly, relatively few companies undertake. Working with consultants from Abacus, a provider of retail transactional data and other customer information, the company matched each of its Web, retail and catalog purchases to specific mailings. The results were extremely valuable and somewhat surprising: More than 40 percent of online purchases were linked to the catalog, and these customers spent 30 percent more than other Restoration Hardware Web shoppers. Also, consumers who received the company's catalog spent 25 percent more in its stores than those who didn't.
Based on these findings, Restoration Hardware increased its cross-selling effort significantly by doubling its catalog run last year and mailing 80 percent of these catalogs to existing customers, who were chosen on the strength of their past purchasing behavior and their potential as repeat customers. With the goal of raising the dollar value of purchases in each sales channel by at least 20 percent, the catalog was redesigned with higher-priced, higher-margin productsitems such as Moonpies and funny glassware were replaced with textiles, rugs, top-quality sheets and draperies.
"This analysis had an incredible impact in helping us make marketing decisions," says Christine Parish, the former director of catalog marketing and now a consultant to the Corte Madera, Calif.-based company. "And now that we can see how each channel's sales are impacted by catalog mailings, we have a methodology for calculating and charging each channel its fair share of the costs."
According to marketing experts, a successful cross-selling system demands three essential technological and cultural requirements: a comprehensive database detailing the purchasing activities of each customer; company-wide dedication to cross-selling led by senior executives and demonstrated by incentives to encourage employees to share data and the discipline to measure results in real time; and a computerized delivery system to generate and distribute sales leads throughout the company.
A system drawn from those criteria, MarketSoft's Kozub says, would view "sales opportunities as assets"valuable company property and the building blocks for revenue and earnings growth. "They should be treated the same way raw materials are assets on a factory floor," says Kozub.
That message has taken on some urgency recently as companies find it more and more difficult and expensive to generate new customers, while many have failed to develop deep and long-lasting relationships with existing customers. Ballooning sales in the 1990s led many companies to take their customers lightly, thinking there were plenty more where they came from. The increasing popularity and drive to finally make cross-selling work at more and more companies puts the lie to that attitude.
"In industry after industry, handling an account for the long haul wasn't a priority," says Inforte's Vaskelis. "There was too much money floating around and too many customers willing to spend it. So a company would install a CRM system and think that's enough spent on keeping customers happy. It wasn't. Now companies have to learn again how to manage customer relationships."
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