What is Ancillary Revenue?
Ancillary revenue is the revenue generated from goods or services that differ from or enhance the main services or product lines of a company. Ancillary income is defined as the revenue generated that’s not from a company’s core products and services.
Examples of ancillary revenue could be an ice-cream company that gets into the business of selling ice-cream scoopers, or a printer company that starts selling printer ink. Ancillary revenue is important because it can help companies diversify a company’s revenue stream.
Ancillary Revenue in the Airline Industry
Perhaps the best and most widely-known example of ancillary revenue comes from the airline industry. Ticket sales remain the leading source of revenue for airlines. However, ancillary revenue in the industry comes from the sale of things like in-flight pay-per-view movies, the headphones used to listen to these movies, and special meal packages.
In more recent years, airlines have seen declines in sales from ticket purchases. To compensate for the lower ticket revenues, additional ancillary revenue is earned from added charges for checked bags and luggage in general.
To the consternation of many flyers, competing airlines that had previously avoided such charges have also adopted the practice. For airlines that already had luggage charges in place, higher prices and additional fees have also been instituted.
Regardless of what industry or space a company operates in, it most likely generates some form of ancillary revenue. In the event that the additional revenue surpasses the company’s former primary means of earnings, the company’s business model may be changed to help the company thrive.
Advantages of Ancillary Revenue
- Source of extra income apart from the primary income for sellers.
- Income can also be generated from bye products, which are otherwise waste for the manufacturer.
- It generates the scope of employment.
- Increases revenue for other manufacturers or services which support the ancillary product or service;
- Upon providing ancillary services, the company can improve its market reputation as well.
- Improves the balance sheet of the firm and creates wealth for better utilization or reserves.
Sometimes acts to offset the higher prices of products. For example, in the above case, consider Luxury Hotel has a higher room rental than other similar hotels in that city. But the ancillary services it provides may or may not be served by other hotels. On these, Luxury Hotel acts as a pioneer, and higher prices do not seem to divert its customers to other hotels.
Disadvantages of Ancillary Revenue
- In some cases, ancillary charges to customers are not standard. It leaves the scope of doubt amongst customers on the validity of such service and the service provider.
- Expecting ancillary revenue can be risky, as this is highly reliant on probability. A customer may or may not opt for such additional service. Hence this revenue should always be treated as an additional source and not the primary income source.
- Future plans for the growth of such additional services or products may not be entertained due to these being just for additional benefit to customers.
- Ancillary Revenue, in most cases, cannot compete with primary revenue in terms of the amount.