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Selling additional products to existing customers is the most efficient path to profitable growth. That’s the conventional wisdom espoused by bank marketers and consultants. Bump up your customer-to-product ratio, they say, and your profit margins will head skyward.

Intuitively, this makes sense. Once you’ve done the hard work of acquiring a customer, its much easier and cheaper to sell more products. Generally, it works out, but theres a big problem that most marketers overlook.

Professors Denish Shah and V Kumar of Georgia State University conducted a comprehensive study on cross-buying and determined that firms which indiscriminately encourage all their customers to buy more are making a costly mistake because a significant subset of cross-buyers are highly unprofitable.

In a study of 36 firms across the United States and Europe, Shah and Kumar confirmed that the general practice of cross-selling products increases the average profit per customer. But what they also found when doing a deep dive into five Fortune 1000 companies including a retail bank was more ominous. One in five of the cross-buying customers is unprofitable. In fact, those 20% of unprofitable customers account for 70% of a firms total customer loss, a situation in which expenses exceed profits. The more cross-buying campaigns reach unprofitable customers, the greater the loss to the bank.

Unprofitable customers fall into four categories:

  • Service demanders who overuse service in various channels?web, phone and face-to-face interactions
  • Revenue demanders which for banks means requesting fee reversals and frequent overdrafts
  • Promotion maximizers who seek special rates and extra services, rarely using full-priced products
  • Spending limiters those with small accounts at many institutions, never large enough to make any account profitable. When cross-buying, spending limiters transfer funds internally, never generating enough income to cover cross marketing efforts.

Cross-selling to members of those four categories builds losses that significantly undercut the generally positive effect of selling to existing customers. By eliminating unprofitable clients, income from cross-marketing campaigns can double or triple.

How do you measure success?

In addition to being indiscriminant in selling to customers, banks often get into trouble by using the wrong metric for gauging success.

Banks typically look at the average number of different products sold to each customer. Their goal is to increase the product/customer ratio. As we saw with the recent cross-selling scandal, an incentive for boosting product sales missed the real objective, which was to increase customer profitability. Selling more accounts doesnt automatically generate more revenue. Fulfilling client needs is the surest way to increase income.

Before launching a cross-marketing campaign, marketers should ask if they want more accounts from all the customers in a target group. Then run a client profitability assessment that includes channel usage and service support. Analyzing transactional data will help determine which customers fit a problem profile. Even a simple review of balances, over-activity, or overdrafts can highlight problem accounts that need to be eliminated.

Cross-selling as a blanket strategy is a bad idea. Before cross-marketing to any customer or segment, determine whether the effort is likely to be productive. Otherwise you may find losses mounting even as product volume grows.

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