Cross-Selling on the cheap: A practical guide for small enterprises

Business intelligence, data mining, forecast models, on-demand analytics, CRM, complex database systems, SOAP servers…

If you are the owner or manager of a small or medium size business, all these terms are enough to make your head spin! You might be asking – what exactly are these and how do they relate to actually getting product out the door? And more importantly, why should they be of any importance to you?

Now, consulting firms like the one I work for would like you to believe that you need ALL of these, and that without them your analytics efforts will fail… Of course, selling projects to our clients is the reason we are in business, and so it befits most IT and Management Consulting firms to go down that route.

But the truth is that you do not need fancy schmancy systems or an elaborate infrastructure in order to have an analytics operation in place. And since analytics is one of the key components of an effective cross-sell strategy, that’s good news for most small businesses!

If you have ever read a book like Competing on Analytics, you might be under the impression that effective cross-selling strategies are only a byproduct of high-cost database systems, large-budget departments, innovative management, and high-tech companies. Indeed, many of the examples mentioned in that book (such as Netflix) reflect companies whose whole value proposition is significantly based around using analytics to generate revenue or lower cost.

But even a small business can use “scratchwork” analytics to try to gain insight into which products and services generate a disproportionate percentage of the revenue, and if there are any strategies that allow for cross-selling between high-margin and low-margin products. Several of these businesses unfortunately gain the wrong insight from their data, and develop the wrong strategy (think of the daycare center mentioned in the first few pages of Freakonomics), but that is a result of using data incorrectly rather than setting up the system.

So, how does a small business start harnessing the power of analytics? Here are my five tips to start a core analytics operation for a small enterprise:

- Obtain a scalable, but simple (and low-cost), database system. MySQL and MS Access are the front-runners, especially for companies that run primarily on a Windows platform. I have heard that Filemaker is particularly effective for Mac, although most enterprises usually don’t run on an Apple platform. There are numerous applications for Linux and Solaris platforms, including MySQL.

- Establish concrete goals and targets, both for the overall analytics operation as well as the component strategies (i.e. go-to-market, cross-sell, etc.). By concrete strategies, I mean the following:

1. We will reduce our go-to-market time by 20% on all new product launches by optimizing distribution channels
2. We will aim for a 20% conversion rate after packaging Product A with Product B (cross-selling)
3. We will aim to increase our branding relevance by X percent (where X can be measured by search popularity, customer retention, etc.)

- Know your resource constraints. This includes the budget (both fixed and recurring for monthly expenses), the people, the technology, etc. Many of the small businesses I have run into outside of my job as a consultant or through contacts from school completely underestimate the time commitment to setup even a basic product tracking system in Access.

- Have a staggered deployment plan. Deploying an analytics system at once (and especially going live in the middle of a business cycle) is a sin. It doesn’t allow you to incrementally check for mistakes, and to correct your missteps.

- Understand what your system can’t do. An Access database system that calculates ROI on distribution channels and targeting campaigns is NOT going to help you forecast demand after a certain point, no matter how you try to spin it. And similarly a Sales tracking system in MySQL is not going to be “integrated” with other business functions, unless you are willing to invest more resources into it.

Shopping @ Sam’s Club

I went shopping at Sam’s Club in Evanston yesterday — mainly for contact lenses and gasoline. Yes, it probably is a bit strange to go shopping for only two items at a warehouse store, but being single, I don’t tend to buy in bulk. The only reason I go there at all is because of their savings in gasoline, contact lenses, and clothes, and occasionally for the cakes, pizzas, and free food samples. In gas, it’s about 10 c cheaper per gallon, and the contact lenses are cheap at 6 pair for under $30, while clothes tend to be on discount most of the time (ralph lauren polo’s were on sale for $19.99 to 24.99).

But I digress. This piece is not about shopping per se. Rather, it’s about the way that Sam’s (and to a lesser extent, Walmart) cross-sell goods and products. Cross-selling is absolutely vitalif you are in the retail area. Anybody in my field who has worked on a client engagement for one of the big retailers (Kohl’s, Limited Brands, Federated…) or the wholesalers (BJ’s, Price, Costco’s) can tell you that there are three big areas in retail sales strategy:

• Product Promotion
• Cross selling and Upselling
• Branding, Pricing, and Inflection Points

All three are topics in and of themselves. Focusing on Item #2 by itself in enough to take up a few pages, so let’s start with that (and I promise to try to abbreviate my analysis as much as possible, to not make it a few pages!).

So, let’s start by looking at what Sam’s did right and wrong in the area of crossselling (I will also bring in my experiences shopping at Walmart into a few of the following points, since both Sam’s Club and Walmart are part of the same company — the only difference is that one is a wholesaler and the other a retailer):

- When I first entered the store, after presenting the membership card to the card-checker, the first thing I saw was the electronics “department.” Now, the electronics section in these warehouse stores consist of a limited number of high-priced (TVs, computing systems, etc) and moderately-priced (DVD systems, printers, fax machines, etc) sold at discounts with a very low selection of both extremely low-priced items (print cartridges and CD-R’s) and extremely high-priced items (72″ home theater systems). Most of these items are arranged by category and by price, which is definitely not the way to go, since by doing that, you sever the relationships between different components in a larger system. And by severing these relationships, you limit your opportunities for both cross-selling and up-selling right off the bat.

For example, the DVD players and the TV’s were in two completely different areas (separated by a few aisles). Also, there were no “package” systems that brought together the different components (TV, surround sound, DVD, cable box, satellite, etc) in order for a novice to get a preview of what a system would look like. Now, if you had walked into a Best Buy or Circuit City, I guarantee that you would:

a) have a packaged system in the front of the store, or in the front of the home electronics section

b) you would have a Best Buy/Circuit City/… associate trying to cross-sell you on different products every step of the way, as well as up-sell you on better models or extended warranties while you were looking at the different products that he cross-sold to you

c) you would never see a pure-category or pure-price arrangement of products. Rather, the high-margin package products would be presented a lot more favorably than the low-margin discrete components

Furthermore, none of the systems at Sam’s Club (and also at Walmart) had any options for extended warranties, enhancements, bells-or-whistles, or any after-the-sale, add-on, or follow-up products or services. From a consumer viewpoint, a no-frills approach may be a godsend. From a wholesale perspective (Sam’s Club), it may be a strategic differentiation ploy. But from a retail perspective (Walmart), it is a mortal sin.

Indeed, I believe that one of the mistakes that Walmart (and somewhat, by extension, Sam’s Club) has made (and continues to make) in their electronics product strategy is that they have no high-margin followup-sales unlike Best Buy or Circuit City. And while that may cement a reputation for low prices and a “no-frills” experience, it is a detriment when trying to win-over novice customers (who, by and large, prefer the package deals and the safety of extended warranties), or when trying to achieve as much margin as possible from a particular product (this includes after-sales support ala “Geek Squad”.

- Ok, so then, I went past the electronics department to the optical department. No complaints there. Actually, optical is one of the few areas within Sam’s Club (don’t know about Walmart, I don’t trust them enough for me to take my eyes there), where they do a great job cross-selling and up-selling, even in a warehouse setting. Normally, for a first time customer, they package the eye-exam and contact-lens/glasses into one “product.” Furthermore, if you pick the glasses option, they try to up-sell you rigorously on the carbon-fiber, poly-carbonate, ultra-tinted, UV, and a million other options.

- Unfortunately, the associate for optical was on break (for an hour, of all things). And since I had already made a significant detour, I decided to spend the hour browsing through the store. The next section I visited was the home furnishings section. Now, if you were ever under the impression that Sam’s or Walmart would absolutely kill Bed, Bath, and Beyond or other “niche” stores, I can tell you at least three reasons why that would never happen:

a) Like with electronics, there were no packaged deals. No beds-in-a-bag. The discrete components that were there were all over the place. Shams in one aisle. High thread count sheets around the corner. No sign of bedskirts or pillows. Nothing was matching, there were “no sets.” This shows that there wasn’t even an effort made to cross-sell different items.

b) Items were mislabeled, prices were missing, and associates were completely clueless. An employee can not cross-sell or up-sell a customer if he/she (in this case, it was a she) doesn’t even know what products you carry or whether a product is in stock!

c) There was no categorization by margin. There was no effort to prioritize, place, or price things based upon the profit-margin to the store. Even in a wholesale environment, this is absolutely inexcusable. After all, the store has a set amount of space. Not using it efficiently is equivalent to not using some of it at all!

- Trying to find an associate who could help me in the home furnishings took about 40 minutes, leaving me about 15 before I had to get back to optical. Even though I wanted to check out the free food samples (one of the things I absolutely love about Sam’s and also about Costco), I decided to swing by the clothing section.

Now, from a customer viewpoint, the clothing section in Sam’s Club is an absolute goldmine. It’s cluttered, but deals are there, like the 24.99 polos I was mentioning earlier. The sizes are all over the place, the different items are all over the place, but the deals are there.

From the perspective of a consultant, it is immensely frustrating. As mentioned above, you can’t cross-sell, if there isn’t a method to the madness in the first place about how you arrange your inventory!

After getting flustered with clothing, I finally went back to optical, put in the order and left. As a customer, it was frustrating because of the long wait. As a consultant, it was frustrating because of seeing so many missed opportunities.

Pizza and movies

When I was young, one of my favorite escapes for the evening with mom and dad was the whole order-in-a-pizza and pick-up-a-movie deal. It’s cheap. It’s quality family time. And as a kid, it was surprisingly fun. Today, things have gotten a lot fancier – DVDs, Satellite, On-demand, Streaming, DVR, TiVo, etc…. And the crowd has changed — instead of parents, it’s likely to be a group of friends or occasionally a special someone. But whatever the current technology and the companions in my life, the appeal of kicking back at the end of a long day, getting some pizza (Little Caesar’s personally, but if that’s not available, the other ones will do), and catching a quality flick is still there.

Which leads me to a lightbulb sort of an idea. Why haven’t companies exploited this recently? I know they did something like this years back (as in back when Pizza Hut had a cool program where you read three books and got a pan pizza). Today, the possibilities could be endless.

• You go to Blockbuster. You pick up a few movies or sign up for a deal. And, you get a coupon book for pizzas/snacks in return.
• Blockbuster comes to you as in through the Blockbuster direct to mail service (this also works with Netflix btw). For those of you who are too lazy to Google search, here is the addy: Blockbuster. And to be impartial: Netflix.
• You signup for one of those plans, and get discounts on food. Or better yet, every three movies you get a coupon for a free family dinner.

If you prefer the other way (as in going through the Pizza Place), you have a similar bevy of options available to you.

• Order a family pack (2-3 pizzas, appetizers, wings, pop, and dessert — comes out to around $50), and get a movie free. Or two.
• Order pizzas individually (for singles and small groups), and get discounts on movies.
• Order pizzas online enough times, and get a free pass to Blockbuster or Netflix.

Now, critics may give reasons why this probably wouldn’t work, namely:

• Both are low-margin and ultra-competitive businesses.
• There is a definite threat of shrinkage (commodity-mismatch) due to one DVD being a lot more valuable than one pizza (which due to its limited life has limited utility).
• It’s easy to game the system (especially if you are part of any organizations, particularly in college, that do pizza meetings/pizza nights, etc)
• Market potential and service-range is limited (i.e. potentially restricted by the delivery boy)
• And of course, the cost of the promotion eating into already-thin margins

I encourage any of you to think of reasons not on this list, and I’ll gladly debate you on each point (and concede defeat if necessary).

But now, let me tell you the advantages of such an arrangement, especially from my vantage point:

• Better branding. This can be good or bad depending upon whether your partner is a healthy, successful, and well-liked company.
• Better visibility. As mentioned, pizza nights often happen with families with young children. Get into their heads now, and they will be customers for life.
• Higher margins. This is exactly the opposite of one of the criticisms that people levy. Having a unique arrangement that leads to differentiation allows you to sell your product at a premium.Imagine the family pack mentioned above for $50 being offered at $55. Is there a dollar difference? In terms of what’s included, definitely. But the difference is only noticeable if you break the deal down into pieces — i.e. 2 pizzas, breadsticks (appetizer), wings, pop, dessert, and a movie. If you sell it instead as a family night package, you will be able to cover the premium and effectively add value with the theme. Most people don’t realize how powerful it is, but it’s being done all the time by advertisers and salesmen (Book to read: How to be a Rainmaker)
• Market more effectively – this ties into the other three points, but also opens doors in and of itself. Imagine the various marketing campaigns. You can tie it into holidays, specific movies, even specific foods (i.e. a Christmas magic package, a Lord of the Rings package, etc)

As you can see, the possibilities are definitely there, and all this new technology – streaming, direct-to-mail, DVDs, etc, is creating more opportunities for cross-selling with traditional businesses (i.e. pizza vendors). Many of the companies, however, need to wake up and smell the coffee, and try to get these partnerships together first so they effectively have a first-mover advantage in the marketplace.