Behold the power of upselling. Here are some compelling findings from Bain, Marketing Metrics, and McKinsey:
- The average conversion for a first-time purchaser is just 5-20 percent, while conversion on upsell offers is 60-70 percent.
- The average new e-commerce customer spends just $24.50, but the repeat customer spends $52.50 — more than double!
- It costs six to seven times as much to acquire a customer relative to retaining or upselling them.
If all this is true, why aren’t we more focused on the art of the upsell? There’s something obvious that sometimes impedes a company’s ability to upsell customers: they don’t have enough different products to sell!
That’s why we’ve developed an approach called the product pyramid. It’s a practical framework for ensuring you have the right portfolio of products to offer your customers.
What Is a Product Pyramid?
A product pyramid allows you to create a suite of products that encourage conversion and retention of your customers. At the base of the product pyramid, you have low cost, low margin (or even free, negative margin) products to attract an audience. As you move up the pyramid, the number of customers in each level decreases, but the margins increase. Chances are, a bulk of your overall profits come from the top few layers of your product pyramid.
Developing a membership program is a fantastic way to structure your product pyramid. It allows you to create packages at each level that provide your customers a clear path to bigger and better offerings and you a clear path to greater margins.
How Do I Build My Product Pyramid?
Take It From the Top
Start top-down! If you don’t have an attractive, high margin offering at the top of your pyramid, you should reconsider your entire business model.
Once you’ve decided the offering that you’re working your way up to, it’s a lot easier to fill in the other lower levels of the pyramid with offers the build sequentially to the biggest and best products.
How do you know which products and offerings will get the greatest response at the top of the pyramid? Go straight to the source: your whales.
Work With Your Whales
Your whales—your most engaged and enthusiastic customers—are the key to understanding which products make sense at the top of your pyramid, and then deciding what fits on each subsequent level.
Nielsen has done research that shows that the top 10 percent of your customers account for as much as 70 percent of overall sales. In addition to their spending power, there are other benefits to focusing on whales:
- Whales are less price sensitive, so you can earn higher margins by meeting their needs.
- They generate credible word-of-mouth marketing with non-whales.
- These customers love being part of your product development process. We sent a product development survey to some whales on behalf of one of our clients, and we got a 38 percent response rate! Normally you only get a low, single-digit response rate from surveys sent to your entire customer base.
- Whales behave more predictably. Because they are so passionate about your space, they give more honest feedback. When they say they will buy, they are more likely to actually buy, unlike less enthusiastic customers who might say “yes,” but never follow through with a purchase.
When you speak to your whales, they’ll tell you what problems your business can solve for them. It then becomes your job to create offerings that leverage your brand, products, and core competencies in the format that appeals best to your whales’ needs.
Consider Your Entire Customer Base
Not all customers are created equal. It’s possible, depending on your business and operating model, that you have several personas, or segments, in your customer base.
If this is the case for you, you should be interviewing whales from each persona and developing a unique pyramid for each group. There may be some overlap in terms of individual products offered in each pyramid, but the offerings should be persona-appropriate.
Pay Attention to Profit Margin
Be sure to create economic models for each product—confirm that expected gross margin increases as you move up the pyramid. At the top of the pyramid above is “events and experiences.” These are not small, localized events that you might be lucky to break even on (that could be a bottom of the pyramid idea). These are exclusive, high-priced, premium national events that monetize your deepest customer relationships.
Take a Membership-Based Approach
Why do membership programs work so well when you’re creating a product pyramid? Because memberships are all about capturing the attention of your whales. Not only that, they provide you the flexibility to create offerings that get bigger and better for each level of the pyramid. You can structure your membership however you’d like, and the offerings at each tier should be more and more enticing for your whales.
Memberships allow you a concrete way to create these more premium offerings as you move up the pyramid, which in turn provides you with a clear path to driving customers up to the top of the pyramid.
Metrics: How Do I Know I’m On the Right Track?
Measure your conversion rate from one level of the pyramid to the next. You should see the conversion rate increasing as you get higher up the pyramid. For example, using the sample pyramid above, while only 10 percent might convert from free offerings to introductory products or services, you’d want to see more than 10 percent of those purchasing introductory products or offerings to convert to a basic membership. If 20 percent of customers join the basic membership program, then you’d want to see more than 20 percent of those customers upgrade to the premium membership.
If you see a decline in conversion rates as you move up the pyramid, you have identified a bottleneck. You then want to begin experimenting with your approach to find the right product, price, and marketing message.
Added ROI Benefits of the Pyramid
Customers are unlikely to take the leap directly from free to premium products. View the pyramid as a path for your customers. Remove the barriers to making that first purchase—wow them, impress them, give them what they want. Then you’ll see them move up the pyramid to the higher priced products. It takes some patience, but if you stay disciplined, you will end up better off.
About the Author
Rob Ristagno, Founder and CEO of the Sterling Woods Group, previously served as a senior executive at several digital media and e-commerce businesses, including as COO of America’s Test Kitchen. Throughout his career, his focus has been on embracing technology and analytics to spur strategic development and growth.
At the Sterling Woods Group, he and the team are passionate about helping clients understand their best customers through data, and developing products and membership programs that exceed expectations – and generate impressive revenues.
Committed to spreading this message, Rob is the author of A Member is Worth a Thousand Visitors and is a regular keynote speaker at conferences around the world. He has been featured on ABC, NBC, CBS, Fox, and Digiday.
He holds degrees from the Harvard Business School and Dartmouth College and has taught at both Harvard and Boston College.