Ancillary revenue is revenue that is derived from goods or services other than a company’s primary product offering. Examples include concessions at sporting events, baggage handling or seat selection revenue received by airlines, restaurant revenue received by hotel owners, and car-wash services sold by gas stations. Ancillary revenue may exceed primary revenues, leading to changes in business models.
Ancillary revenue refers to revenue that companies earn from sales of products or services that do not represent part of their main activity. Airlines provide a good example of the value of ancillary revenue.
By offering passengers in-flight services such as food, drinks, videos, or Internet connection, the top-performing airlines earned ancillary revenue that represents almost 20 percent of their total income, according to a report by airline technology provider, Amadeus. Ancillary revenue benefits both provider and customer when the ancillary products or services represent added value for the customer or improve the customer experience.
Understanding Ancillary Revenue
Companies often generate ancillary revenue by introducing new products and services or by modifying existing products to branch into new markets. As a result, companies can create new opportunities for growth in addition to the ancillary revenue.
Most companies have some form of ancillary revenue. These revenues can vary from car washes at gas stations to advertisements placed on airplanes. In some cases, what begins as ancillary revenue can become the main source of revenue.
For example, snacks and beverages at gas stations were initially considered secondary product offerings that generated ancillary revenue. However, when the price of gasoline fell, items sold in the stores of gas stations, such as snacks and beverages, began to make up a greater share of total revenue. Eventually, food and beverage sales at gas stations surpassed gasoline revenues.
Types of Ancillary Revenue
The following are the various types of ancillary revenue.
An additional service can accompany a particular service provided to the customer, and additional income can be earned from such service. Examples include designing services provided by a carpenter apart from providing furniture building services. For designing the furniture, the carpenter may charge an additional cost to the customer. Sometimes such services are more expensive than the primary service required.
Ancillary revenue can be earned by the sale of tertiary seasonal products apart from the sale of the main product. Hence, this income serves to be in addition to the primary income. For example, setting up a candy stall at a Christmas fair. Candy may not be the primary product for the seller, but the revenue generated may be like an additional income to them.
Kiosks and Vending Machines
By letting that small area be required for a kiosk or similar structure, the owner of that area can generate additional income. Such an area can be set up at multiple places in a company’s premises, from which the company generates its ancillary revenue. Such arrangements not only benefit in terms of revenue but also from the services offered by such vendors.
A type of marketing stunt, schemes offered occasionally by companies prove to generate ancillary revenue for them. For example, an umbrella free from winter wears just before the winter. It can add to revenue for the umbrella seller, the winter wear seller, and other marketers who provide marketing space for such products.
Ancillary Revenue Across the Different Industries
Ancillary revenue is often associated with the airline industry.
If you search “ancillary revenue” in Google, you’ll find that most search results will include articles relating to the airline industry.
However, businesses from other industries have also started to give more importance to ancillary revenue.
Here are some examples of ancillary revenue across different industries:
- Apple Inc., well-known for its ever-popular iPhone, mainly sells tech hardware products such as the aforementioned iPhone, Mac, and iPad. However, Apple has also started to offer other products and services. In 2019, Apple generated over $10 billion in ancillary revenue from its wearables (e.g. earphones) and home accessories. Not only that, but Apple also earned $12.715 billion from ancillary services (including iTunes)
- Banks mainly earn revenue from interest charged on loans and other credit products. However, they also earn ancillary revenue from other services such as fund management services, wire transfers, and even equipment leasing services
- Hotels mainly earn revenue from renting out rooms. In addition to that, hotels earn ancillary revenue from extra products or services such as high-speed WiFi, in-room dining, room entertainment, valet services, etc. Hotels may also double as a restaurant or a bar, earning even more ancillary revenue from non-hotel services
- The airline industry earns ancillary revenue from non-ticket sales such as baggage fees and in-flight products (e.g. food, beverage) and services. Some airlines may also offer customer-centric services (for an extra fee) such as the ability to reserve/choose seats, option for early boarding, frequent flyer programs, etc. Aside from that, airlines can also earn ancillary revenue from advertising (e.g. in-flight magazines, advertising on the aircraft’s interior and/or exterior, etc.)
- Fast-food chains, such as McDonald’s mainly earn revenue from their food products. However, some of these stores may also earn ancillary revenue by becoming conference or party areas
Ancillary Revenue Examples
Consider a liquor store. The company’s primary offering is its stock of liquor, and it depends on revenues from liquor sales to stay open and potentially grow the business. However, most liquor stores sell additional items, such as cigarettes, lighters, and shot glasses. The ancillary revenue earned from the items is used to expand the revenue the business generates from the sales of its primary goods.
A more recent and specific example involves 7-Eleven convenience stores. The convenience store company is well known for selling a wide range of goods because the brand is built on stocking and selling items that people use and consume daily, keeping everything in one place for convenience.