The hidden danger of Cross-Selling

You’ve likely heard the adage that it is far easier to cross-sell an existing customer a new product than it is to find a new customer.

And if your goal is to grow at all costs, then cross-selling makes sense.

However, all of that sales growth may not do much for the value of your company. If you cross-sell your existing customers too much stuff, it could make your business far less valuable.

When you cross-sell a customer so many things that they begin to account for more than 15–30% of your revenue, expect your value to drop. If a single customer represents more than 30% of your sales, expect an even deeper discount.

Customer concentration is one factor that makes up your score on The Switzerland Structure — one of eight drivers the folks over at The Value Builder System™ have discovered drives your business’s value in an acquirer’s eyes.

To summarise in simplistic terms, the least valuable companies focus on selling lots of stuff to a few people. The most valuable businesses do precisely the opposite: by selling less stuff to more people.

How 3D4Medical Made the Switch

As an example, let’s look at the medical technology firm 3D4Medical. Founded in 2004 by John Moore, the company built 3-D models of the human body, photographed them, and sold or licensed their images to textbook publishers.

By 2010, 3D4Medical was selling images to a handful of large publishers around the world. Then the recession hit, severely impacting the entire publishing business.

To make things worse, new generations of students increasingly wanted to learn online, rather than through textbooks. The advent of inexpensive digital photography, and the resulting increase in competition for the same customers, also didn’t help Moore.

Moore had built a successful company on a handful of customers, but when that segment began to dry up, so did his business. Despite working harder than ever, Moore’s revenue plateaued for four straight years. Instead of punching through to the next level, Moore had his hands full just keeping his company going.

But while Moore had relied on too few customers, he still had something no one else had: thousands of 3-D models of the human body.

Then Moore had an idea.

He decided to re-purpose his 3-D images into a mobile app that medical students could use on their phones. Moore expanded the idea to include professors and medical professionals, who could use his 3-D images on an individual basis to learn, teach, and share with patients and students.

By 2019, 3D4Medical had become the biggest producer of medical apps on every app store. The company boasted over 300 of the top universities in the world as clients. Their app served 1.2 million paying customers and had 25 million downloads.

Thanks to having a diverse set of customers, Moore sold 3D4Medical in 2019 for $50.6 million.

The takeaway? Customer concentration is seen as a significant risk when a potential buyer determines the value of your business. That’s why the most valuable companies are the ones that sell less stuff to more people.

3 Ways to Flip Repeat Customers into Subscribers

Repeat business drives the value of your company, and you can categorize these sales into one of two buckets:
1. Reoccurring revenue comes from customers who purchase from you sporadically. They’re satisfied with what you offer, and they buy regularly yet not according to a specific timeline.
2. Recurring revenue is predictable, and you get it from customers who buy on a cadence. Usually in the form of subscription or contract revenue, the main difference is your recurring revenue comes in on a regular rhythm.

Recurring revenue is more valuable than reoccurring sales because of its predictability. Therefore, it’s worth considering how to turn repeat customers into subscribers.

HP Instant Ink

For an example of an organisation that turned reoccurring sales into recurring revenue, let’s look at the “HP Instant Ink” program. HP had been in the business of selling printers for decades before launching their toner replacement subscription.

HP would sell you a printer in the old days and hope you would come back and buy your toner cartridges from HP. As cheaper replacement options became available, HP started to lose reoccurring revenue from people who owned HP printers but chose a more affordable alternative to refill their cartridge.

In response, they launched the HP Instant Ink program to solve this problem by offering a toner subscription. HP sends subscribers new toner for their printer each month. You can sign up for a plan based on how many pages you print. If you exceed your page allotment one month, you can top up your account. If you fall short, HP offers to carry over your unused pages. Pricing plans start at $0.99 per month.

How does HP ensure you never run out of toner? They have embedded a reader in their printer’s hardware that sends a message to HP fulfillment when your cartridge dips below a predetermined threshold. Hence, you never run out.

It’s a brilliant little program and gives HP some recurring revenue while driving loyalty to HP printers.

Inspired by the HP Instant Ink program, here are three secrets for turning repeat customers into subscribers:

1. Offer plans based on volume: At HP, their $0.99/month plan allows you to print just 15 pages per month. At the top end, their $24.99 plan gives you 700 pages, and they have a variety of options in between. This range of options gives customers the ability to pick a plan that will work for them most of the time.
2. Allow carryover: Customers who buy from you on a reoccurring basis will appreciate your various plans. However, they may still hesitate to subscribe if they anticipate their volume will fluctuate. That’s why HP allows you to seamlessly buy overage if your printing volume is higher than expected. Subscribers can also carry over unused pages if they don’t need their entire allotment.
3. Never let them run out: One of the reasons consumers prefer buying on a subscription over a one-time transaction is that they never want to run out of what you sell. That’s why HP’s integrated toner gauge reads when your cartridge dips below a threshold. Find a way to measure your customers’ supply of what you sell in real time to ensure subscribers never run out.

Repeat customers are the lifeblood of any business. If you want to jack up your company’s value, consider ripping a page from HP’s playbook, and turn your reoccurring customers into subscribers.