October 28, 2020 Growing & Complex Businesses en_US Learn how businesses are using upselling to offer more value to customers and drive growth. Read the complete guide from QuickBooks. https://quickbooks.intuit.com/cas/dam/IMAGE/A7yALsxKV/What-is-upselling-and-how-can-you-use-it.jpg https://quickbooks.intuit.com/r/growing-complex-businesses/upselling/ What is upselling and how can you use it?
Growing & Complex Businesses

What is upselling and how can you use it?

By Katrina Dalao October 28, 2020

Upselling is a sales technique where customers are encouraged to purchase upgrades or more expensive products to generate greater revenue.

A strategy applied across various industries, upselling does more than raising the value of a one-time sale. Upselling can effectively increase a customer’s lifetime value, average order value, and maximize a company’s overall profit.

Understanding how to upsell, how it differs from other sales methods, and the best practices for integrating upselling into your existing sales strategy can help you find ways to offer more value to your customers while increasing revenue.

What is upselling?

Upselling is the act of recommending product or service upgrades to customers. In contrast to marketing efforts meant to attract target audiences and new customers, upselling focuses on earning more revenue from existing customers.

The upsell strategy doesn’t require high cost or time investments. Companies have already attracted the customer, who is in the process of making a purchase—upselling simply offers them higher-value alternatives that might be of interest.

For this reason, upselling is a common practice, especially among retailers. The sales tactic follows the existing customer journey and can happen during any of the following three stages:

  • Pre-purchase: This occurs as the customer’s shopping, such as a targeted pop-up featuring additional products on ecommerce pages or more expensive versions of an item displayed on physical store shelves.
  • During purchase: Product recommendations made as the customer is making their purchase, including within online store shopping carts and during the checkout process, or in-person upselling by the cashier at checkout.
  • Post-purchase: Even after a customer makes a purchase, follow-up emails and messages can be sent to customers inviting them for an upgrade.

What are the benefits of upselling?

The main benefits of adding upselling to your company’s sales strategy are outlined in the following three points:

Lowers customer acquisition cost

Customer acquisition costs (CAC) are your marketing expenses per customer, calculated by dividing the total marketing spend by total new customers in a given period.

According to Harvard Business Review, the cost of acquiring a new customer is five to 25 times greater than the cost of retaining an existing customer. By targeting customers already in the purchasing process, upselling can reduce your reliance on outbound sales and contacting new prospects.

Existing customers are also familiar with a company’s offerings and don’t require as much assistance as a first-time customer. With a lower CAC, existing customers bring in more profit for a company with every purchase.

Increases the value of individual customers

Every time a customer makes a high-value purchase, they raise their average order value (AOV). AOV is calculated per customer or for an entire store using a simple formula: total revenue divided by the number of orders.

For example, a customer purchases $4,000 worth of items across 25 transactions, yielding an AOV of $160. If the customer’s purchases increase to $4,750 for the same number of transactions through upselling, the AOV will rise to $190.

In time, all these AOVs add up to the customer lifetime value (CLV). CLV is the total revenue a single customer brings to a company throughout their entire relationship.

Increased AOVs and CLVs allow companies to be more profitable with the same amount of customers. By offering high-value items to existing customers, companies can ultimately generate higher value and revenue with every purchase.

Builds long-term customer relationships

Upselling works by adding value to a customer’s purchase. Upselling adds customer value by suggesting related products with a more significant premium, better quality, or more upscale service.

Aside from being a sales tactic, upselling increases the likelihood of customer satisfaction and retention and cultivates a deeper long-term relationship with a company.

What are the potential flaws of upselling?

Upselling is a last-mile sales strategy that relies on timing. When done at the wrong moment or too frequently, upselling fails to build customer engagement and may result in bad customer experiences. For example, customers short on time or firmly decided on a particular item aren’t likely to respond well to upsells.

On the other hand, if a customer is responsive, upselling may also cause them to delay their purchase altogether, especially if it’s a big-ticket item. Upselling techniques also aren’t always applicable to companies with a small or niche product selection.

Upselling vs. cross-selling

Upselling and cross-selling are two commonly confused sales techniques, both intended to offer additional value for customers and increased revenue for companies.

Rather than recommend an upgrade or higher-quality alternative, cross-selling encourages customers to consider additional complementary items to add to their purchase. As a product can have several potential add-ons, cross-selling offers more room for suggestions.

Some examples of cross-selling techniques include:

  • Suggesting car insurance together with a vehicle purchase
  • Recommending speakers to go with a new TV
  • Offering a set of pillows along with a mattress
  • Pairing socks together with running shoes
  • Adding fries, a drink, or dessert to a meal

The most potential profit comes from combining upsell and cross-sell strategies, thereby maximizing customers’ chances of increasing their purchase throughout their shopping journey.

Upselling best practices

Successful upselling requires an understanding of the customer and selecting products that provide added value to their purchase. Here are a few upselling best practices to apply:

Solve over sell

In his book, To Sell is Human, Daniel Pink advises readers to think of upselling as “up-serving.” Whereas an upsell focuses on the product or service, an up-serve prioritizes the customer’s needs. This subtle shift makes a big difference in the approach taken during an upsell.

Find the right moment

Examine your customer touchpoints for times they’re most open to product suggestions: while adding items to cart, reaching out to sales or customer support, nearing the end of a subscription plan. The opportunity to upsell doesn’t just present itself during checkout but can occur throughout the sales cycle, customer service chats, or after-sales support.

The 25% rule

As a general rule of thumb, the price of an upsell shouldn’t be more than 25% above the original order. For example, if the customer’s item costs $200, a reasonable upsell is a maximum of $250. The exact percentage may vary, however, upsells shouldn’t be too far from what a customer was expecting to spend. This pricing strategy is similar to what is known as cost-plus pricing.

Limit the options

Offer 2–3 upsell products, narrowing it down to ones that typically receive good feedback and align with the customer’s purchase history. Already at checkout, customers are not interested in seeing more products—unless they see it as a significant value.

Create a sense of urgency

Including a limited time or quantity to an upsell offer motivates customers to see them as more valuable and adds a compelling reason to purchase quickly.

Upselling examples

Upselling is a sales strategy popular in every industry. From professional service providers to retailers, companies effectively use upselling in their everyday sales operations. Here are a few examples:

Peloton’s product and package comparisons

In 2014, Peloton launched its first product, a stationary bike. Six years later, Bike+ came out, featuring a larger rotating touchscreen, a better audio system, auto-follow resistance, and Apple GymKit integration.

As potential customers browse their product pages, Peloton places the two bikes side-by-side comparisons, with a link to the differences between the original Bike and the newer Bike+. Each bike version is also available in four different packages, with options to add cycling shoes, bike weights, and a yoga mat.

Each of these upsells provide more value, with a corresponding increase in revenue.

Delta’s priority seat upgrades

When planning for travel, people are often more budget conscious and in search of a good deal. As the travel date nears, however, their plans may change. Delta invites customers to upgrade even after they’ve already purchased their tickets, either through the site or a Delta sales representative. This pricing strategy is also known as dynamic pricing.

Upgrades include Delta Premium Select, First Class, Delta Comfort+, and other priority seating, and can be selected per segment or for the entire trip. Customers can also elect to use miles or another payment method.

GoDaddy’s privacy and protection upsell

Domain registration can cost as low as $0.99 on GoDaddy. After customers search for their desired domain; however, the resulting list includes premium domains at a one-time price averaging a few thousand dollars. As customers proceed to the checkout page, adding Full Domain Privacy and Protection is recommended to their total purchase.

Adding value through upselling

The most successful upsells are relevant to the customer and offered at the precise moment when they’re most likely to see value in the premium version of a product. By focusing on current customers and ways a company can better meet their needs, upselling cultivates existing relationships at a relatively low cost.

With a well-planned upselling strategy, companies can effectively increase their average order value, customer lifetime value, and bottom line.

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Kat Dalao is a content manager based in New York. She spent the majority of her career in magazine publishing, first as a features writer and then a creative director, before making the move to digital. Read more