Ancillary Revenue

A company generates revenue through selling products or services that do not come from a part of the company's primary product lines or operations.

For example, a movie theater complex's primary revenue source is selling movie tickets. In this case, the ancillary revenue for a theater would be generated through the sale of food and beverages, which are generally sold at a premium price compared to the product prices in the market.

Every company or even a tiny entrepreneur generates ancillary revenue through different sources. It helps a company to boost the revenue generated through the primary source of income.

However, sometimes, a company's ancillary revenue exceeds the revenue generated through its primary source of income, and the company might have to look into its sales strategies or change its business model altogether.

Thus, too much of it is also not suitable for a company as it might mislead investors about its business model.

Examples of Ancillary Revenue

Let's take an example of a carbonated drinks shop. The product primarily offered by the store is different types of drinks. However, it is most likely to sell products such as wafers, chocolates, etc.

It is helpful in the expansion of the revenue generated by the primary product offered by the company.

Let's take a recent example involving 7-Eleven convenience stores. The company's business model is to provide consumers with a wide variety of products that people consume in daily life under one roof for customer convenience.

7-Eleven started producing inexpensive cosmetic products, increasing the company's ancillary revenue. Although it has not been able to grow more significantly than a primary source of income, it is proliferating, thus increasing the ancillary revenue drastically.

The addition of new products in the store constantly would indicate to an analyst that the management is trying to expand its revenue by adding products that consumers would prefer to purchase from a convenience store.

How to Increase Ancillary Revenue?

The supplier should review its product lines vertically and horizontally and determine the products with a higher perceived utility for the customers.

For example, a building products marketing firm can provide homeowners with videos regarding do-it-yourself models of building projects, or they could offer building site safety wear to its customers.

A company should look to provide additional services to earn ancillary revenue. Services that can add value to the customers should be identified and added to the product or service offered. For example, training services would lead to better productivity of the labor.

Suppose a company does not have enough resources to manage the ancillary services. In that case, it should outsource the supply of these services as the company can boost its ancillary revenue without making too much investment.

Customers can be charged for ancillary services the company provides to increase ancillary revenue. For example, airline companies charge customers for various ancillary services such as booking by telephone and excess baggage charges.

However, the constituents of these charges should be disclosed to the customers so they are aware that hidden charges can lead to chaos and unhappy customers. In addition, maintenance services help reduce the risk of downtime and efficiently run the equipment.

Advantages & Disadvantages

Some of the advantages are the following: 

• Ancillary revenue can act as a way to earn income other than the primary source.
• Materials that are waste for a manufacturer might be helpful for someone else and thus generate revenue.
• It enhances the employment level in the economy.
• By providing ancillary services, the company can also improve its market reputation. The company can build on its reputation by providing ancillary services.
• Creates shareholder wealth by enhancing the company's financial statements. 
• Ancillary services can be used to justify higher prices. For example, a hotel can charge higher rentals for its rooms because of the ancillary services not provided by the other hotels. Thus, customers who prefer these services would not hesitate to pay a much higher price.

We can enlist a few of the disadvantages below: 

• Sometimes, the customers are suspicious of the prices charged for these ancillary services. Thus it may result in a loss of sales.
• This type of revenue should always be treated as an addition to the primary source as the customers may or may not want such services and thus cannot be guaranteed.

Researched and Authored by Kunal Goel | Linkedin

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Annualized Income Installment Method (AIIM)
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• Assertions in Auditing
• Assurance Services
• Auditing