Mastering Cross-Selling: Strategies of Top Performers
Table of Contents
What is Cross-Selling
According to Investopedia, “Cross-selling is the practice of marketing additional products to existing customers.” For IT solution providers (TSPs), their Predominant Business Model™ (PBM™) will determine the product(s) to cross-sell. A product-centric provider (VAR) will most likely have an extensive “line card” with products that span a variety of target customer profiles (TCPs) whereas an infra-structure managed service provider (MSP) may have older clients on time and material or block time contracts and needs to upgrade these customers to a monthly recurring revenue (MRR) model. These MSP's may also have legacy MRR customers on older managed service offerings that do not include some of the product and/or service features of their current, most inclusive “full meal deal” managed service offering. In either case, lower Operational Maturity Level™ (OML™) TSPs will continue to maintain their various separate products/services while best-in-class TSPs will endeavor to upgrade all their customers to their single, ”full meal deal” package. Independent of the product or PBM, the process of cross-selling is the same.
What is Best-in-Class Cross-Selling?
As long as the range of solutions and services can be delivered with good quality and gross margin, each and every customer account should be encouraged to consume as many of the different offerings as possible.
There are four reasons for this:
- Generally, the least expensive way to generate new revenue is to sell something additional to an existing customer with whom you already have a relationship.
- The more customers buy from you, the more dependent they will generally become on you. Partly, you are harder to replace and partly, each customer derives more value from the relationship. This increases the chances the customer will stay with you for a longer period of time.
- Every new account sales cycle results in the greatest possible revenue, as soon as possible.
- Service operations become increasingly simple, as all customers look more like each other.
The last three points are why top-performing TSPs only sell their fullest service packages to each new customer. That said, even the best-in-class, like everyone else, have customers who weren't sold the “full meal deal” up front, who must be pleasantly and persistently sold everything they have to offer (i.e., 100% cross-sold). The best-in-class accomplish this by having this single “full meal deal” offering that all legacy accounts are “upgraded” to. Even then, the best-in-class will also periodically add new offerings to their “full meal deal” offering and need to sell their existing customers onto that new offering.
Important to note: If the range of customer types (by size, vertical or some other dimension) you serve, is so varied that no one customer can buy all of your offerings, then you are attempting to serve a range of customers that is wider than you can build a business around that produces best-in-class profit, growth, service quality, and market differentiation. It is useful here, to calculate the average revenue for the sale of each of your offerings (that is, every solution offering and recurring offering). Then calculate what your company revenue would be if you sold every one of those offerings to each of your existing customers. Often, this will result in company revenue of 50% to 200% of your current revenue.
Granted, some of your customers today might fall outside your TCP, in which case, by definition, they can't buy all your offerings. But even if you narrow the calculation to just your current clients who match your TCP, often, your company revenue with 100% cross-sell will be substantially larger than your current revenue. This can help alleviate anxiety over “too narrowly” defining your TCP.
Low-performing TSPs often struggle to sell multiple, much less all, of their offerings to any given customer. In order to drive revenue growth for each of their solutions and services, these TSPs must obtain too many new customers.
These TSPs don't fully mine their own customers by capturing the fullest portion of the customer's entire IT “wallet” encompassed by their offerings. They sub-optimize their customer base, in terms of revenue generation. This undermines the effectiveness of sales and marketing, and, as we have seen, customer retention and service scalability and quality. These TSPs will likely have to over-invest in sales and marketing to secure each additional revenue and gross margin dollar.
In contrast, top-performing TSPs define their TCP carefully. That way, they can deliver all solutions and services in a way that all customers can consume all of the offerings. The methods for ensuring that most accounts buy more (or all) of the offerings of the firm are called cross-selling. Therefore, implementing effective cross-selling execution starts with defining a sufficiently narrow TCP that a supportable range of offerings can be sold to all of them.
If your reaction to this is, “But if I narrow the breadth of my TCP that much, I won't have enough sales opportunities,” you should know that top performers (both in profitability and in growth), follow this path. Doing more and better with fewer, is the most effective way to accomplish best-in-class profit and growth. In fact, data from the Service Leadership Index® (S-L Index™) indicates that strict adherence to TCP by the best-in-class leads to 151% greater adjusted EBITDA than the average MSP.
A TCP selection is necessary to then determine the products, process, skill levels, and tools needed to support this chosen TCP. These technology standards (tech stack) should be assembled into a single tech stack that together with your processes forms a single package with pricing based upon the value you provide. With this laser focus on TCP and tech stack, best-in-class TSPs are able to hire and train less skilled technicians which enhances customer and employee satisfaction, as well as profit. With this single tech stack, you can drive your sales and marketing efforts to cross-sell with increasing effectiveness over time. The S-L index data indicates that best-in-class adherence to a single tech stack affords them double the adjusted EBITDA of the average MSP.
Why Cross-Selling Execution
The two primary aspects of your company that play a role in cross-selling execution performance, are the profile of the customer that you are targeting and the portfolio of offers you are delivering to these customers.
Specifically:
- Aligning the offers so they can all be sold to the TCP, and
- Targeting the customers so they are increasingly “the same” against the characteristics that allow sales to sell and services to support the same offers.
Improving your cross-selling execution capabilities will drive a steadily improving ability to analyze your installed base of customers.
Additionally, you should change the measurement and the management of your company to increasingly deliver all offerings to a customer base that is increasingly of a common, targeted profile. These changes start externally with marketing efforts directed towards qualifying prospects within the TCP. Then the sales team can reconfirm the prospects are within the profile. This will drive a steadily improving ability to analyze your installed base of customers. You will more easily assess whether prospective customers are a fit for your TCP, and consequently, the whole portfolio of offerings. You will see significant improvements across the organization from strong execution in cross-selling.
With a focused TCP and single product, package, and pricing, marketing can now narrow their focus and bring leads for new customers that are truly qualified. Marketing will also work with the account management team to prioritize installed base marketing to drive qualified leads across the portions of your offerings that your installed base has yet to consume, that being your most fully managed offering.
Sales will similarly shift a significant portion of its efforts, if it hasn't already, to installed base cross-selling. These individuals are responsible for “farming” this installed legacy base. This is the role of your account managers and their first responsibility is to cross-sell all of your legacy customers on to your tech stack, your fully managed offering. Next, the account managers will also be assigned new customers. By the end of new customer on-boarding, they should be almost on your full meal deal. The project team would have delivered these customers to account management with a plan and budget to reduce the customers' risk, support their growth as well as continually cross-sell them to your next new fully managed offering, at such time as that is launched as a replacement for your current offering.
Sales will also evolve their new customer sales motion to only “hunt” for (i.e., sell to) the prospects that will consume the whole offering and to only those prospects in your TCP. They will recognize that cross-selling is indeed the most efficient path to maximizing their commissions, since selling more to each customer requires selling fewer customers. Those that are in the MSP PBM will be compensated fully on the full meal deal but will have reduced commissions if the company decides to accept a new customer that is outside of their TCP or tech stack.
Note that sales have two separate and distinct roles: “Farming” (account management) and “hunting” (new customer/logo reps). The lower OML often combine these functions into a “hybrid” sales function. Higher OML TSPs eventually learn that the personality type of a successful hunter is different than that of the farmer. As a result, the best-in-class certainly have these roles separated. As the TSP matures, eventually the account management function will migrate to the service side of the company. This occurs chiefly because they need consistent access to the pre-sales engineer, which should be part of the project team. In this manner, they are certain to only cross-sell into the customer with the most inclusive managed service package and tech stack that the company supports.
As a result, service will obtain more volume across a narrower set of offerings. Fewer customers will be outliers. Service can realize increasingly higher levels of standardization and automation. This drives operational efficiencies and customer experience up, and costs down on a per customer basis. Service will then be able to staff with lower cost resources. The narrowing of the offers and targeting of the customer base driven by cross-selling, results in being able to realize increasingly higher levels of services gross margins, standardization, and automation.
Finance will improve delivery of the customer-level cross-selling measurement. Analysis of this information will indicate which offerings represent the best portfolio, as well as which customer profile is the best fit with the increasingly honed set of offerings, and vice versa.
The results from cross-selling are easy to see – more full meal deal offerings being consumed by the average customer. This results in higher revenue at a lower sales cost. It also results in higher gross margins, as the service team can support each customer more efficiently. Churn decreases, since it is harder for a customer consuming multiple offers to terminate your services than it is for a customer consuming just one offering, and they're getting more value from you.
OML Progression Considerations
Progressing on cross-sell execution is driven by three foundational factors:
- Aligning the customers so they are increasing “the same” against the characteristics that allow salespeople to sell and your services team to support the same offerings.
- Getting the offerings aligned so they can be sold to the same profile of customer.
- Providing the appropriate incentive to your team to drive cross-selling, which requires being able to measure cross-selling at the customer level.
Your company can drive greater cross-selling execution performance as fast as you can progress on these three factors. Indeed, you can make substantial progress within a year. With these factors in place, you can drive your company to the highest OML.
Having said that, each of these three factors is interdependent. Your service, sales and marketing, and finance teams must all partner to progress with the cross-selling execution. Driving to improve cross-selling without a consistent customer profile will fail or result in attempting to sell offers that are potentially inappropriate to a given customer. In addition, without the ability to measure and compensate the sales team for cross-selling, you will only make limited progress.
As you progress, marketing will get increasingly adept at communicating the full offering to the installed base and more laser focused on the profile of new prospective customers. The more astute account managers will mine the installed base to meet their performance objectives, in addition to selling the entire set of offerings to each customer. Finance needs to determine how to best measure and reward cross-selling execution at the customer level to drive the required behavior changes on the part of the sales team. Service benefits significantly since with greater volume across each of their solutions and services, they are able to drive improved operational effectiveness and efficiencies (gross margin and quality) – both overall and at the customer level.
There are few hard costs involved in maturing this – marketing collateral should already encompass the full offering. That leaves only the cost of finance and IT to build the ability to measure cross-sell at the individual customer level. Soft costs are also not significant. Cross-selling execution does depend on several related concepts, including your relative maturity in developing your TCP and marrying that target to your solution and service offering development. Your sales management methodology and quarterly business reviews are also critical to enabling and driving better cross-sell performance; as are the incentive compensation plans for the sales and service teams and executives.
As cross-sell performance is matured, the initial signs of success are spirited debates about what customer profile is on target and what solutions and services should be offered to them. In the early stages of maturation, you'll likely see sales representatives trying to shoehorn in marginal prospects, prompting additional debate.
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Measuring cross-sell is fairly straightforward. Setting it up the first time may take some effort, but repeating the measurement will get easier and quicker each period. As soon as you have developed the necessary cross-sell metrics, and your finance and internal IT begin reporting on the performance of each salesperson and each account against these metrics, you will know how you are progressing on this dimension with every sales report.
Blueprint for How the Best-in-Class Cross-Sell
To start, the best-in-class have greater than 70% of their customers in their TCP and on their full meal deal. What may be more instructive is how these high OML MSP's have brought their customer base to these numbers. Data shows that most MSP's start out at OML 1, doing anything for a dollar with low OML customers outside of their TCP and not on their full stack. What follows is a blueprint developed from the observed data and processes utilized by these MSP's that have continually evolved from low/medium OML to high OML (best-in-class).
A. Customer Concentration
The first step is to understand and quantify your customer based. Detail your trailing 12 months total revenue, service revenue (MRR, project labor, and time and material), and product resale revenue by customer. Next sort by largest to smallest total revenue. Finally, calculate percent of total revenue, running cumulative percent by revenue, and cumulative percent by number of clients. An example with comments is seen below.
