Cross-selling and category-penetration techniques increase sales by 20 percent and profits by 30 percent.
A leading online retailer was well known for its wide selection of merchandise and its highly competitive prices. It knew relatively little, however, about its customers, which limited its ability to target them with emails or to customize offers to them on-site. As a result conversion rates and revenues per customer were declining in key categories and competitive benchmarks across nearly every product type were lagging.
The retailer asked McKinsey for help in understanding the drivers of customer value and behavior—and to develop an online marketing strategy to optimize conversion rates both on-site and by email.
We started by delving deeply into the analytics, correlating the number of purchases with the quantity of product categories bought across the industry. We used this segmentation to calculate the likelihood that customers in each product category would “cross the aisle” and buy in other categories—and what it would be worth economically when they did.
We found some surprises: The lifetime value of toy buyers, for example, skyrocketed when they bought across categories, but this retailer didn’t have many toy-buying customers. Conversely, the lifetime value of the retailer’s many shoppers in the pet category didn’t rise very much when they widened their purchase patterns.
Right in the middle, however, were a number of sweet-spot customer categories, such as sports and fitness, garden, and pharmacy.
To make the most of these insights, we worked with the retailer to develop advanced cross-selling and category-penetration techniques. One approach analyzed customer purchase history to recommend other products customers were likely to buy; another identified and predicted attitudinal preferences based on customer purchases, which among other things helped inform the retailer’s purchasing decisions.
After proving the value of these approaches through a set of pilot tests, we worked with the retailer to build the organizational, process, and IT capabilities necessary to support them.
An analysis 6 months after conducting the pilots showed sustained “aisle-crossing” in the customers we’d targeted. A broader rollout yielded a jump in email conversions of 25 percent and a 60 percent increase in on-site conversions. Overall marketing ROI rose nearly 30 percent.
These improved metrics translated into an increase in overall yearly sales of about 20 percent and increased annual EBITDA of roughly 30 percent.