Chapter 7 said the value of cross-buying is smaller than the slide claims. This chapter says some of it is negative. Denish Shah, V. Kumar, Yingge Qu and Sylia Chen went looking for the customers conventional wisdom ignores: the ones who buy across categories and lose money doing it.

What they found

They analyzed the customer databases of five firms, in consumer and business markets. Between 10% and 35% of each firm’s cross-buying customers were unprofitable, and those customers accounted for 39% to 88% of the firm’s total loss from customers. The unprofitable cross-buyers shared “persistent adverse behavioral traits”: limited spending, “excessive revenue reversals” (returns and cancellations), excessive service requests and buying on promotion. For these customers, more cross-buying meant bigger losses, a “downward spiral” Published.

PublishedShah, Kumar, Qu and Chen, Journal of Marketing, 2012. Shah and Kumar summarized it for managers as “The Dark Side of Cross-Selling,” Harvard Business Review, December 2012.

Every DTC brand has these customers: the buyer who orders three sizes and keeps one, the one who only buys in the sitewide sale, the one who opens a ticket on every order. They show up as multi-category, which is what the cross-sell flow was built to create.

A cross-sell flow that doesn’t know contribution works hardest on the customers who cost the most.

Contribution per cross-buyer

Revenue can’t see these customers. Contribution can: what’s left after discounts, product cost, returns, fulfillment and service. The calculator below takes one customer, or the average of a segment, and adds it up.

With the defaults, the customer keeps $168 a year in revenue and loses $15.60. Each extra order adds only $1.10, and at an average discount of 18% or less, instead of 25%, they’d break even Derived. On a revenue report this customer looks fine: four orders a year, several categories. On contribution they’re a cost, and a discounted cross-sell to a new category makes them a bigger one.

What to do with them

• Suppress, don’t punish. Take unprofitable cross-buyers out of cross-sell flows and discount campaigns, and nothing else. They may be fine core customers at full price.
• Launch new categories at full price. A launch discount recruits the promotion buyers Shah and colleagues describe; use early access instead. Discount training is covered in The First Offer.
• Watch returns by category pair. A second category with a new sizing system can raise a customer’s return rate. The returns guide in this series covers the fixes.

Do this

• Compute contribution per customer for everyone who bought from two or more categories last year, using the query in Appendix A. Count how many are below zero and what share of total losses they cause. Compare with Shah’s 10% to 35%.
• Build a “no cross-sell” segment from the negative group and exclude it from every cross-category flow by Friday.