Leading-Edge Companies Now Offer a Full Menu of Add-On Products and Services That Increase Customer Satisfaction and Profit Margins at the Same Time, According to a New Book by L.E.K. Consulting
Boston, MA — March 8, 2016 — Companies are on a constant quest to try to get customers to spend more. But the upselling techniques that work today are very different from what many companies are actually doing.
Traditional upselling is based on what is known as the "Good-Better-Best" strategy. Companies create a product line starting with a basic model, adding several upgraded versions, each with improved features and a correspondingly higher price tag.
As a complement to this traditional merchandising framework, companies should increasingly be offering a menu of discrete products and services. These "enhancements" can be added to a core product, designed to satisfy a wider variety of customer needs, according to research in a new book, Edge Strategy: A New Mindset for Profitable Growth (Harvard Business Review Press, January 2016), by Alan Lewis and Dan McKone, managing directors at L.E.K. Consulting.
Industries as diverse as automobiles, cruise ships and cable TV have successfully employed "options" that go well beyond the simple framework of quality/price tiers. Once decisions are made around base solutions, customers are presented with additional choices that can enhance their experience in different ways, depending on their needs. Lewis and McKone argue that, in this way, companies can get increasingly efficient at capturing what economists call the "consumer surplus" more often and across more customer segments.
"Offering just a few products in a good-better-best lineup is often too limiting in today’s hyper-competitive marketplace," McKone says. "You make it harder for your customers to get exactly what they want and easier for competitors to copy any innovations you have. The key is striking the ideal balance between managing down the complexity of both presentation and delivery while still allowing just enough calibration to better serve more customers."
Edge Strategy argues that businesses need a new way to look for growth by exploiting capabilities that are close to, but not the same as their core offerings, thus are on the "edge" of their business.
The Edge Strategy® approach turbocharges upselling by more carefully considering how companies expand the scope of what they provide. Following are examples of this strategy in action:
- Best Buy sells consumer electronics, but then also sells "peace of mind" through a warranty or "convenience" by arranging to install or repair devices through its Geek Squad unit.
- BMW offers peace of mind to lease customers with optional plans to apply protective shields to prevent small dents and scratches, others to fix tires and rims or others to simply cover the cost of dings at end of a lease.
- Apple sells myriad devices, but has also built an enormous profit stream by upselling music, movies, apps and accessories for its devices, which allows customers to calibrate the utility of these devices to their liking.
In most cases, these additional services have much higher profit margins than the base offering. Yet customers are often amenable to paying the extra price for add-on services.
Lewis says, "You can't start by asking 'What else can I charge for?' Ask, 'What else do some of my customers want?'"
McKone and Lewis detail an easy framework for business leaders to identify the edges of their business. It starts by considering different groups of customers and asking what they may want that your current offer doesn't provide.
- What else would customers like when they are buying your product? This can be a complementary product, such as a scone to go with the coffee. Or it can be an additional enhancement to the experience, like "inside access" to a show.
- What are your customers doing before and after they buy your product? By understanding what your customers are actually trying to accomplish, you can extend your relationship with them. To get the most out of your product, customers may need installation, training, protection or simply the service that naturally follows in sequence. If you sell ski apparel, why not consider ancillary offerings like lift tickets and ski vacation packages?
L.E.K.’s research has found that most successful upselling addresses one of six fundamental human needs:
- Convenience — making life easier while using the product or service
- Comfort — adding a bit of luxury to the product experience
- Relief — mitigating the frustration of using a product or service
- Peace of mind — protecting from the risk of loss for an expensive product or service
- Passion — connecting to an aspirational aspect of the product or service
- Knowledge — providing information to get the most about a product or service
"It's a myth that you can only upsell to affluent or perhaps irrational customers," McKone says. "The truth is that when presented with the right offers, many people really want more, much of the time."
About L.E.K. Consulting:
L.E.K. Consulting is a global management consulting firm that uses deep industry expertise and rigorous analysis to help business leaders achieve practical results with real impact. We are uncompromising in our approach to helping clients consistently make better decisions, deliver improved business performance and create greater shareholder returns. The firm advises and supports global companies that are leaders in their industries — including the largest private and public sector organizations, private equity firms and emerging entrepreneurial businesses. Founded more than 30 years ago, L.E.K. employs more than 1,000 professionals across the Americas, Asia-Pacific and Europe. For more information, go to www.lek.com.
Edge Strategy® is a registered trademark of L.E.K. Consulting LLC.
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