Product Edge Upselling

Our observations about product edge–related upsells include:

• Twenty-six percent of the companies we studied employ some form of warranty, protection plan, or extended repair and maintenance plan.
• Twenty-three percent of the companies accessorize the core purchase, and 4 percent do so in a way that deploys a discrete set of customized options (for example, from monogramming clothing to customizing military electronics).

Journey Edge Upselling

Our analysis also identified a range of journey edge–related upsells:

• Seventeen percent of companies offer to advise their customers on how to best deploy their core offering (for example, designing enterprise network systems, configuring prescription drug benefit plans).
• Fifteen percent of companies involve training, particularly in business-to-business settings.
• Eight percent of companies incorporate some form of installation-based upsell, ensuring the product is assembled, enabled, and fully functional relative to the ultimate goal the customer is trying to achieve.²

Lesson 1: Focus on the Choice before the Charge

RCL starts by selling a vacation that creates accessible luxury for a fixed base price. If you buy a ticket for a seven-day cruise around the Caribbean on the Allure, you can expect to pay about $800 to $900.¹⁰ This gets you a 172-square-foot interior stateroom with a bed for two, a private bathroom, and a sitting area.¹¹ It also includes all-you-can-eat dining for more than eight meals per day at various restaurants, all the soft drinks you want, a range of onboard activities—from sports to shows—and access to exotic ports. Most customers don’t need to go beyond this to have a truly rewarding vacation.

However, RCL also provides many choices to help those who are relaxing their minds (and wallets) indulge even further in ways that are most appropriate to them. While all passengers have access to the spa complex, higher-end spa services beckon. For gamblers, there is a big casino. Most famously, there are shore excursions. While anyone can amble off the boat into the port towns on their own, arranging a tour directly through RCL comes with the comforting assurance that the experience has been curated and preapproved, and with a guarantee that the ship won’t leave without you if the tour is running late.

The key to all this is that none of those items is essential to having a great vacation. The business calculus does not start with “what else could I charge for?” but rather “where do some of my customers want to choose a different level of service?” Issuing charges for something that is required to complete a core experience is a clumsy upsell at best. But creating a differential, sometimes indulgent, higher-end choice is the subtle psychological construct that cruising has been able to tap. Every business should ask itself how it can address this natural human desire in the context of its own offer.

Lesson 2: Most Customers Really Do Want More

Even when it’s “all included,” most people end up wanting more. A popular misconception in upselling is that it only appeals to a minority of affluent, or perhaps irrational, customers. The truth is that, given enough degrees of freedom and the right offer calibration, most businesses can find a way to upsell most customers most of the time. The definition of “more” just varies by customer segment.

For example, RCL offers a range of seven beverage programs, focusing on premium plans that allow customers to select top-shelf liquor or wine at any time.¹² For shoppers, there is a mall, arranged over three decks, with brand-name boutiques selling jewelry, perfumes, and apparel.¹³ On some Royal Caribbean ships, Park West Gallery, a specialist auction house, presents and sells art.¹⁴ Most remarkably, even in an all-you-can-eat format, which includes lobster, steak, and midnight buffets, many foodies trade up to an even more exclusive dining experience.¹⁵ The thing that RCL has done exceptionally well is avoid the trap of presupposing a single customer archetype. Instead, it has discerned needs that vary across customer segments and built the ability to flex its offer accordingly.

Type 1: Convenience Options

Convenience upselling is all about removing the hassle associated with the transaction. When you make things more convenient for your customer by helping her access or enjoy your product, you are often capitalizing on an opportunity to participate at the outside edge of your core offering. For example, when a customer rents a car from Hertz, she often doesn’t want to worry about filling up the tank before returning the car, as she may be in a rush to catch a flight. Hertz recognized this need by analyzing in great detail the entire arc of each customer segment’s interaction with the company and realized that it could create more convenient forms of the same service for a subset of customers who require it.

Hertz operates in 10,300 locations in approximately 145 countries around the world.¹⁶ In the United States alone, it has a fleet of approximately 500,000 vehicles that it rents out from airports, city centers, and other convenient locations.¹⁷ When it rents these cars and trucks, it requires customers to return them with a full tank of gas. If customers fail to do this, Hertz charges a price per gallon that is typically two or three times the price local gas stations charge.¹⁸ This discourages customers from returning cars less than full, a phenomenon that adds both operational cost and cycle time to how quickly Hertz can turn around a vehicle for the next rental. While this may motivate the type of behavior that Hertz wants, it also creates an inconvenience for customers in a rush. Hertz has therefore devised convenient alternatives such as the Fuel Purchase Option, or FPO. With FPO, the customer can prepurchase a full tank of gas at a locally competitive price before driving the rented car off the lot.¹⁹ This is appealing to some customers: they know that they won’t have to spend valuable preflight time searching for a gas station.

As an outside edge strategy, the FPO is well designed and effective. Prepaid gas fits nicely on top of the core offering of the car rental. It also satisfies an important customer need—that of convenience and time savings. In order to activate this edge, Hertz did not need to make a major new investment, as it is delivered through the company’s existing assets of sales associates and refueling infrastructure. The effort is incremental; it is refueling the cars anyway, and the upsell option is easily presented at rental initiation. Most importantly, the upsell is quite natural. A customer doesn’t need the upsell to enjoy a Hertz rental, but for those who value the convenience, it is an intuitive redefinition of the offering from renting a vehicle to renting a vehicle with carefree fueling service included.

Type 2: Comfort Options

Comfort upselling means extending greater levels of ease or relaxation as customers enjoy your product. What many companies find is that two customers can enjoy the same product but desire very different degrees of pampering. A great example of this is JetBlue’s “Even More Legroom” option.

A self-styled value airline, JetBlue generated $5.8 billion in revenue in 2014.²⁰ The company has built its brand around bringing “humanity back to air travel” and is known for its egalitarian customer service and providing a passenger experience enhanced by live television.²¹ Until 2013, JetBlue offered only one class of service (that is, all coach seating).²² This was aligned with the brand during the airline’s rise in the early 2000s, but was somewhat incompatible with an edge philosophy that acknowledges customers are different and have differing demands.

Owing to a cost-cutting decision in January 2007, the layout of JetBlue’s Airbus A320 fleet featured more legroom in about half the cabin. While some passengers experienced industry-leading (thirty-four inches) legroom in coach, others were randomly assigned to a roomier thirty-six-inch pitch. The differential was caused by reducing seat density so that JetBlue could fly with one fewer flight attendant (a savings of about $30 million per year at the time), but it also inadvertently created an opportunity to differentiate customers based on needs.²³

In a moment of inspiration, JetBlue announced a branded “Even More Legroom” (EML) product in March 2008.²⁴ By respacing its seats yet again, a relatively simple job, the company created a comfort-based option.²⁵ JetBlue could now offer coach service, but also create an option to upgrade to an even roomier thirty-eight-inch pitch, which was considerably more spacious than the industry average of thirty inches.²⁶ “Free TVs, generous snacks, and friendly service are all part of the core JetBlue experience, and these in-flight perks will always be provided at no extra cost to the customer,” said Dave Barger, then CEO of JetBlue Airways. “Our new value-added legroom product gives customers the option to make their flight even more comfortable and enjoyable.”²⁷

By 2011, an Even More Space product (rebranded from EML) was bringing in over $120 million in annual revenue and rising rapidly.²⁸ The vast majority of this incremental revenue flowed to the bottom line, because there was essentially no direct cost of providing the additional comfort to passengers. The core assets (planes and passengers) already existed. JetBlue’s unique circumstances also meant it did not even need to drop the seat count to offer this feature. The seats cost $10 to $30 or more for one way, depending on the length of flight, and the option was presented à la carte, after the base fare was selected.²⁹ In November 2014, Jet Blue announced that it would reduce its base coach legroom to 33.1 inches and increase seat count from 150 to 165 on its A320s.³⁰ However, the company will continue to offer the comfort product as an edge upsell.

Type 3: Relief Options

The corollary to providing greater levels of comfort is alleviating pain points that customers experience coincident with the delivery of your product or service. This pain point may have nothing to do with anything your company is doing; it might simply be an accident of the circumstances in which you interact with your customer. However, if you can partner with your customer to relieve this annoyance, you might have an important upselling opportunity.

One of the most famous historical examples is the innovation of caller identification—or Caller ID for short. Today, when you can learn a surprising amount about the person calling you, the idea of a simple Caller ID system, which transmits a caller’s number while the telephone is ringing, seems quaint. It is easy to forget how revolutionary it was when introduced. In 1987, New Jersey Bell, part of Bell Atlantic, one of seven regional telephone companies that had been spun out of AT&T three years earlier, won the right to offer a Caller ID service to residents in Atlantic City and in Hudson County, just across the river from Manhattan.³¹ There were noisy opponents, who feared that this new service would be a threat to civil liberty, forcing people to reveal information about themselves that they did not want to share. Nonetheless New Jersey Bell spelled out its unique selling point. Peter Ventimiglia, a company official, told the New York Times: “We perceive it as the best technology available for thwarting obscene and threatening and harassing phone calls . . . It enhances the privacy of the called party. We’ve used the analogy of the peephole in the front door. We believe you have the right to know who’s calling you before you pick up the phone.”³²

At the time, the service was clearly not an obvious part of the core telecom offering. “Call ID Service Makes Science Fiction a Reality,” declared a headline in the Los Angeles Times in January 1990, after it was launched by New Jersey Bell. It was likened to the moment in Back to the Future II, a Hollywood movie released in 1989, when the character played by Michael J. Fox receives a call in 2015. On a screen, the caller’s face appears, alongside his name, address, age, job title, and a list of his favorite foods.³³ It proved to be an instant hit with New Jersey Bell’s customers. Asked by a New York Times reporter why he had subscribed to the service, which cost $6.50 per month plus a one-off payment of $60 to $80 for the special display box, Kevin Moore, a twenty-something from Jersey City, had a one-word answer: “Girls.”³⁴ Some he wanted to hear from, others he didn’t.

By 1992, some 192,000 people subscribed to the service, and other telephone companies had launched Caller ID services.³⁵ Bell of Pennsylvania, also part of Bell Atlantic, spent $20 million on upgrading the telephone system in Philadelphia and, in return, was expecting to generate “tens of millions of dollars” in revenues over the first five years.³⁶ The phone companies realized that a customer pain point was the anonymous nature of incoming calls. For a relatively modest investment, they introduced an optional add-on service to their core product of monthly phone subscription. Customers could pay a separate fee and—like magic—the name and number of the incoming caller would be revealed.

Why was this relief-oriented upsell an application of the edge mindset? The product met four key criteria. First, it leveraged the foundational assets of the telephone company: an existing subscriber base and telephone infrastructure. Second, it was delivered with incremental effort; after a relatively small capital expenditure, the phone companies only needed to flip a switch to activate the service. Third, the edge was sold for a separate financial consideration; the $5 to $10 monthly fee was incremental to the price of the core offer.³⁷ Fourth, the product appended naturally to the core as an option; Caller ID is useless without a corresponding phone subscription, but the base offer of the phone subscription is enhanced by the Caller ID feature.

Type 4: Peace-of-Mind Options

Peace-of-mind upselling is focused on ameliorating the anxiety that often accompanies a big-ticket purchase. Paid assurances fall into this category. Sellers of consumer electronics and white goods have long known that a customer is most susceptible to pitches for extended warrantees at the moment she is shelling out a big investment on something she could easily see malfunctioning. Our analysis across sixty-two industries of the global economy found that this type of upsell existed in 47 percent of industries; however, only 14 percent of companies within our sample have truly exploited the opportunity.³⁸

One of the more salient examples is the sale of “ding protection” during the purchase of a car; the customer worries about nicks and scratches in parking lots that will lead to big charges at the end of the lease. In the example of our colleague Tom, the very act of researching and negotiating his core BMW purchase makes him vested. By the time he is signing papers, he is emotionally past the transaction and already thinking about his future interaction with the vehicle, mostly anticipated enjoyment, but also some worries. The company Dent Wizard has effectively partnered with BMW dealers and encouraged them to apply an edge-based lens to sell its protection plans at the point of sale.³⁹ The dealers’ core business is clearly not car repair. Nor is it a risk management business. However, these services do not exactly fall outside the core either. Upselling (and earning good margin on) a ding-free experience through Dent Wizard is a natural complement that simply extends the original value proposition.

Asbury Automotive Group, a publicly traded company based in Duluth, Georgia, is among the largest sellers of cars in the United States, with dealerships carrying many brands, including BMW.⁴⁰ As we discussed in the case of our colleague Tom, customers have become savvier about shopping, using comparison websites to find the best price. Over time, this price transparency has put severe downward pressure on the profit margin that was historically realized by sellers.⁴¹ Asbury’s advantage is in being acutely attuned to the concerns of customers as they contemplate the significant purchase of an automobile. Asbury, like other dealers, recognized the opportunity to provide its customers peace of mind to relieve these anxieties. The solution was developing a system of insurance policies, assurances, protection plans, and warranties to combat every imaginable eventuality a potential car buyer fears: theft protection, crash and repair insurance, and tire-puncture coverage all fall into this bucket.

According to industry estimates, approximately 40 percent of customers who bought a new car in 2014 took out some dealer insurance—up from less than 30 percent in 2002.⁴² We estimate that most dealers add about $1,000 of gross profit per vehicle from their finance and insurance (F&I) products.⁴³ In fact, recent industry estimates note that income from F&I products is what swings dealers from the red into the black on each new car sale; without these ancillary revenue streams, dealers would lose about $200 on each new car sold.⁴⁴ In fact, Asbury revealed that its F&I business generated 4 percent of its $5.9 billion revenues in 2014, but 23 percent of its profits. “While new vehicle sales are critical to drawing customers to our dealerships,” it told its investors, “[ancillaries] generally provide significantly higher profit margins and account for the majority of our profitability.”⁴⁵

What makes this an edge strategy? The assurance plan is a material, but incremental, financial consideration on top of the original transaction. It leverages the dealership’s foundational assets of the inventory-intensive car lot and steady flow of customer foot traffic; the infrastructure is already there. The incremental effort to sell the plans is relatively low. In the case of Dent Wizard products, the entire ancillary offer is outsourced, and the dealer can focus on what it does best—distributing the offering in exchange for a markup. While they remain extra charges with separate value propositions, these plans naturally complement the transaction that the dealership has already established with the customer.

Type 5: Passion Options

Passion upselling is focused on creating options that expand the experience for those customers who are the biggest fans of a brand or product. The Las Vegas show Cirque du Soleil offers insight into this approach. The circus operator, founded in Canada in 1984, aims to give super-fans the opportunity to buy into an amplified version of the show that provides the special treatment that they crave.⁴⁶

When you go to one of its touring shows—under the Big Top—or one of its resident shows in Las Vegas, Orlando, or Los Angeles, you can pay for a VIP package that gets you insider access to the show’s performers. Take The Beatles Love show, which is staged at the Mirage in Las Vegas. As you buy a seat to the show, the company offers a trade-up option that grants direct access to the performers. If you select the premium package, you can get preferred seating, a faster entrance line, an insider access lanyard, and a one-hour backstage tour.⁴⁷ You’ll see acrobats practicing, dancers rehearsing, and costume designers making last-minute repairs to some of the 331 costumes and 110 wigs used by the 68 performers.⁴⁸ “It’s a perfect way to celebrate an anniversary or even impress a group or a date,” say the promoters of the VIP package for The Beatles Love show.⁴⁹

One of the most compelling aspects of Cirque’s strategy is that it almost entirely leverages existing foundational assets. The company didn’t need to build new attractions or seating; it simply gave some guests, who were willing to pay, access to what was already there. This is a classic outside edge strategy. By studying fan engagement, Cirque du Soleil realized that some circus goers wanted deeper, richer interactions with the brand. This second tier of service does not take anything away from original value proposition; it merely provides an even better offering for those who are most passionate. In our lexicon, it challenges the periphery of the customer permission set and finds that there is indeed a segment of customers who are willing to redefine, just a bit, the edge of Cirque’s core offering.

A note of caution also applies. Edge plays, by definition, test the near-field opportunities that your foundational assets are largely equipped to enable. When companies step even further out into adjacent, but different spaces, the foundational asset leverage that defines the edge starts to break down quickly, and the risk profile increases. Cirque du Soleil learned this lesson firsthand. For a time, in the early 2000s, it tried to branch out, offering circus-themed hospitality and spa offerings. This was a big mistake. As Daniel Lamarre, the company’s CEO, acknowledged, “Prospective partners would ask: ‘What does Cirque know [about] hotels or restaurants?’”⁵⁰ The company wisely took a step back in order to focus on, as Lamarre put it, “creating incredible shows” and offering selective product enhancements for a subset of the 15 million spectators that see them every year.⁵¹ The company regressed from a risky (and failing) move into adjacent businesses, but now drives stronger economic performance and engenders customer loyalty by focusing on the profits at its edge.

Type 6: Knowledge Options

Knowledge upselling means providing education, training, or simply situational awareness around the core offering. It is not a stretch to assume that some customers will pay for you to impart advanced know-how related to the product you are selling. When Apple sells an iMac, iPad, or iPhone, it includes some access to its Genius Bar, where customers can become acquainted with the product in a retail store through hands-on exercises with assistance and instruction.⁵² These free, hour-long workshops are a cost of business for Apple since they ensure greater usage and improved loyalty from a segment of consumers who are less technically savvy. However, the company also very effectively upsells unlimited “One to One” service for $99 per year, per product.⁵³ By observation, many people who elect this service become less active after the first few sessions. Indeed, many never go to the sessions after purchasing the service. Accommodation of those who do is an incremental investment for Apple, though, since it tends to leverage the same staff that sells its product and provides the free clinics. Using a careful scheduling process, the company ensures it maximizes utilization of these individuals and drives to much higher margins than a third party would achieve by offering the training service.

Knowledge-based upselling is even more prevalent in the business-to-business world. For example, Nielsen N.V. is a company that is focused on providing information. The Dutch giant has over forty thousand employees, and its core offering is focused on delivering media and marketing information and analytics on what consumers are buying and watching.⁵⁴ For example, its retail measurement services estimate market share and competitive sales volumes and provide insights into the pricing and promotion activity that allows consumer-facing companies to drive their marketing and advertising strategies.⁵⁵ The knowledge-based upselling for Nielsen is clear. Initially, it began with off-the-shelf insights, but then quickly translated this into higher-margin custom research. If it is already trusted enough to provide the data that serves as the background to a marketing team’s customer segmentation, it uses this basis to sell more holistic solutions to the customer. For example, it might begin with a package to provide TV usage data and then upsell online and mobile usage data, creating a much richer consumer perspective. By layering on analysis and interpretation of this data, it adds significant value for customers and greater profits for Nielsen.⁵⁶ By leveraging its relationships and the data it is selling to take one step further down the customer journey to interpretation of this data, Nielsen is exploring the fuzzy boundary of its offering by allowing some customers to buy a little more.

Our studies revealed that nearly a quarter of companies offer some knowledge-based upsell at the edge of their core product, with consulting and training being the two most common varieties.⁵⁷ In industrial sectors, it is most prevalent, with nearly 70 percent of companies offering some kind of ancillary offering through design support, certification, or other forms of supplemental advice and assistance. Nevertheless, we find the consistency of implementation is inconsistent, at best. With all the major economies becoming increasingly knowledge-based, the best practice adoption of knowledge-based options is far too varied within individual sectors, and many organizations are underexploiting this natural add-on profit stream.