Upselling can be critically important in certain industries – providing additional revenue opportunities for each product or service that is sold. This article explores some important considerations associated with upselling of goods.
The principle of upselling
Upselling is the practice of attempting to increase the value of the sale that a customer is making – either by buying more, a better version, or additional features and products. Upselling is a common sales tactic used across industries including restaurants, automotive, retail, and the travel industry.
Importance of upselling
A key reason that upselling works is that you have captive customers. Someone that is actively considering your product and willing to make the purchase. When making a large purchase, small additions may not seem like a significant cost. Paying a small amount extra for some additional features at the time of sale may not feel like a significant expense because they become buried as part of a much larger purchase (relative to paying only for those features in isolation).
The tendency for individuals to upgrade is often further heightened because this is their only opportunity to make the decision. In cases such as automotive or experiential services, it is not possible to upgrade at a later point – unless you get these features now, you will miss out on them.
High margins: Often much more than the original purchase
Upsold items are often associated with high margins. Because the customer is often willing to pay for additional features and add-ons, companies are able to charge a high price for the additional features. While a large proportion of the cost of the original purchase may be allocated to various fixed costs, the upselling is all bonus sales.
It may be a big contributor to your bottom line
Upselling can have a significant impact on a company’s bottom line. For a firm that only makes a modest return, being able to squeeze a little more out of customers (particularly if the upsold features are sold at a high margin), can be the difference between making very little money and a decent profit.
A key thing to remember with upselling is that the sales are all in addition to the original purchase. Getting customers through the door, and willing to buy a product takes a significant amount of time and effort. At a restaurant, having a table dedicated to a group has a big fixed cost associated with it. Being able to gain slightly more money from each customer can make a huge difference, especially in situations where margins are already thin.
Final thoughts: Avoid souring the deal
Of course, while there are big benefits for firms associated with upselling, it is also important not the sour the deal by being overly pushy on upselling. Being constancy pushed to add additional features can be very off-putting, with the practice also risking that the product or service becomes so expensive that customers are no longer interested in the product. Certain upsold items, such as insurance, have also been criticized due to the high costs involved (with a large proportion of the sales often retained by the retailer). A presumption that the company is making undue profits from pressuring customers into additional features that they don’t need or want can not only damage the firm’s reputation but may also result in legal or regulatory scrutiny.