Upselling and Cross-Selling to More Profits?

Up-Selling and Cross-Selling to More Profits?

by c.j. Ng

     Imagine you are going on vacation and are in the process of checking into the resort hotel. The counter staff smiles at you, and enthusiastically tells you that if you were to add an additional €10 per night, you can upgrade to a bigger room. Thinking that you will be hosting a barbeque pool party with some friends, and the extra space will be rather useful in such occasions, you gladly accept the offer. Win-win for both.

    Except that if you are the hotel operator, you have sold the bigger room, but you haven't increased your margins much since you sold it at a large discount. In some cases, you may even be making lesser revenue per square meter of room space.

     The bigger problem for most hoteliers is that, most hotels are actually business hotels, and the decision to upgrade to bigger or better rooms would have been made way before the guest steps into the lobby. Up-selling at the front desks of business hotels seldom work, if at all. At best, the front desk staff gives away the bigger and better room (otherwise known as a suite) to a loyal customer. In most cases however, in the verbatim words of my hotelier friend, "the suite is given free to a customer who least deserves it".

The Popularisation of Up-Selling

     Up-selling is probably used most in Food & Beverage outlets such as fast-food restaurants, cafes and bars where the counter staff or the bartender would ask the customer pay just a little bit more for an up-size or a better brand of whisky. McDonald's does that, so does Starbucks, to great success.

     However, when you probe further, you'll understand the reasons for their success in such cases. Beverages usually command a very high amount of margin (esp. for soft drinks and coffee) such that even if the up-size is given free, it would hardly hurt profits. The extra €0.10 you pay for the up-size may seem small to you, but it can actually worth up to tens if not hundred times the costs for providing you the additional amount of liquid.

      Hence, up-selling by enticing the customer just to pay a bit more may not give you your just returns. Unfortunately, up-selling by asking the customer to pay a lot more doesn't make your deal attractive anymore.

Cross-Selling Other Products

     It used to be rumoured that McDonald's used to have 20% of its revenue are attributed to french-fries sales, and all the counter staff has to say are the 5 magical words "Would you like fries with that".

Whether this rumour is true or not, McDonald's is indeed really successful in cross-selling french-fries, apple pies and other stuff that you didn't think of buying, but bought nevertheless just because the counter staff suggested to you.

Beyond the fast-food industry, cross-selling has been used successfully in many other industries, e.g.

Motor insurance and credit packages are sold when customers buy cars;
Printers (and reserve cartridges) are sold when customers (both consumers and business buyers) buy computers;
Warehousing facilities, land transport distribution and other supply chain services are sold when customers buy air or/ and sea freight;
Neck ties are sold when customers buy shirts and suits;
Executive coaching and conference packages are sold when customers buy corporate training, etc.

While more likely to succeed than up-selling, most companies' cross-selling efforts still have lots of room for improvement, according to McKinsey's Quarterly in December 2007. The operating units of an industrial-products company, for example, had a track record of rebelling when asked to share customer-specific sales records.

The implications are:

Desktop computer sales people do not engage their IT solution sales colleagues to target at the same customer;
Air and/ or sea freight sales people do not engage their land transport or warehousing counterparts to jointly visit key accounts; or
Hotel sales staff of one property do not engage colleagues of other properties in different regions to make sure guests stay at the same hotel chain wherever they go.

     As a result, cross-selling is still firmly entrenched largely in the Food & Beverage industry, where french-fries are sold together with Coke and burgers, and muffins are sold together with coffee.

   In Crowne Plaza Zhengzhou, however, moon cakes are sold at the front desk, F&B outlets, during corporate sales calls and any other cross-selling opportunities. Small wonder that they generated €500,000 worth of moon cake sales within 2 months in 2007. That's almost the equivalent of 5,000 room-nights' revenue, and is achieved at a much lower cost.

   Moon cakes aside, hotels can cross-sell a wide range of products and services including:

Meeting rooms (different sizes to cater different meeting needs);
F&B packages (esp. for guests who need to entertain their customers);
Business center services (special arrangements for guests who need to be in touch with their head offices or customers in a different time zone); etc.

     Hotels that are not exploring ways to cross-sell their existing facilities are under-utilising their assets, and hence, will be less profitable than they deserve to be.

   Many companies across multiple industries are now looking into ways to device ways that make their sales people share customers information, and efforts are on the way to make sales people see themselves as part of a bigger team, rather than operating alone. The initial transformation of the sales force will be painful, but IT companies from HP, IBM and Dell are leading the way, and the eventual returns will be well-worth the initial effort.

The Exception to the Rule

      Is up-selling then doomed to fail?

      Fortunately not. It's just that the way to implement it needs to be modified. A real example lies in the pricing policy of a serviced apartment in Shanghai (the one known to hold monthly Power Breakfast Hour sessions). Instead of reducing the prices for the bigger and better suites, they increase the prices of the smaller (and less attractive) standard rooms such that the price difference between the 2 types of rooms is still about €10 - 15.

     Needles to say, the strategy works. It is one of the few cases outside of the F&B industry where the more expensive products consistently sold much faster than the cheaper one.

     Price is as psychological as it is emotional, but NEVER, ever rational.

     Now imagine this scenario. You are on business travel, and you arrive late at the hotel. The counter staff smiles at you, but tells you that all the suites are taken up and enthusiastically informs you that if you were to "downgrade" to a standard room, you will get €10 off plus another €10 voucher for any of the hotel's F&B outlets (moon cakes included). If you gladly accept the offer, it will be a fresh new way of looking at up-selling and cross-selling.

      For more information on how you can up-sell and cross-sell to more profits, please e-mail info@directions-consulting.com or call +86-136 7190 2505 or Skype: cydj001 and arrange to buy me a mocha. All information shall be kept in confidence.