Ancillary Revenue Definition
Ancillary Revenue is the additional income earned (or expected to be realized) from revenue sources apart from the main source of income for a particular firm, institution or any financial body or individual, and serves to be eligible for tax deduction under relevant tax laws for sale of that product.
Types of Ancillary Revenue
The following are the various types of ancillary revenue.
#1 – Additional Services
A particular service provided to the customer can be accompanied by an additional service and additional income can be earned on 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.
#2 – Seasonal Sales
Ancillary revenue can be earned by the sale of tertiary seasonal products apart from the sale of the main product, and 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.
#3 – Kiosks and Vending Machines
By letting that small area 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 type of arrangement not only benefits in terms of revenue but also from the services offered by such vendors.
#4 – Additional Schemes
A type of marketing stunt, schemes offered occasionally by companies proves out to generate ancillary revenue for them. For example, an umbrella free with winter wears just before the winters. This can add to revenue for the umbrella seller, the winter wear seller and other marketers who provide marketing space for such products.
Examples of Ancillary Revenue
Below are some examples of ancillary revenue.
ABC Corp is a gasoline station that has other shops like a grocery store, a dollar shop, and a florist in its premises. Although these services are not directly related to car fueling, rental revenue earned from such premises serves to be ancillary revenue for ABC Corp.
The primary product sold by Best Textiles is cotton yarn. However, with the manufacture of such yarns, there are some chemicals released as bye products which can be used as fertilizers for crops. Hence Best Textiles sells out their bye products in the market.
The revenue earned is an additional income generated from otherwise its waste, and hence called as ancillary revenue.
Luxury Hotel is a 3-star hotel in a prime city. It earns its primary revenue from hotel room rentals and some hospitalization services it provides to its customers. Consider that a customer Jake checks in and opts for their basic room which charges $1,000 per night.
Apart from such services, below are additional paid services provided by them:
- Inhouse laundry service at $3.00 per garment
- Refrigerator in the room with refreshments inside $1.00 per item
- Cab services for movement in and around the city at $500 per day for 10 hours.
- Dinner night passes for a couple at $700 for 1 night with unlimited food and drinks.
Jake wishes to opt for a 1-night stay here and additional services including laundry for 4 garments and cab service for a day.
Another customer Joe checks in for a similar room for 1 night, however, opts for a dinner night pass. Can you calculate what is the ancillary revenue earned by Luxury Hotel from these customers?
Revenue earned from Jake:
- Room Rental: $1,000
- Laundry service: $12 = $3.00 * 4
- Cab service: $500
- Total primary income: $1,000
Total ancillary income: $512 = $500+$12
Revenue earned from Joe:
- Room Rental: $1,000
- Dinner night passes: $700
- Total primary income: $1,000
- Total ancillary income: $700
Total ancillary revenue earned from Jake and Joe: $512 + $700 = $1,212.
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 like 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. This leaves the scope of doubt amongst customers on the validity of such service and on 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 of the cases cannot compete with primary revenue in terms of the amount.
Ancillary revenue is majorly exhibited by the service industry, especially by hotels and airlines. Services in airlines include seat upgrade, opting for food on the flight, hotel accommodation along with travel, assistance on customer’s disabilities, and so on.
However, the concept can be applied to a varied number of products and their sellers. Each seller tries to maximize its returns from its available resources, and ancillary revenue successfully provides them with an unlimited scope of creating a surplus for themselves and their firm.
This has been a guide to Ancillary Revenue and its definition. Here we discuss the top types of ancillary revenue along with the examples. You can learn more from the following articles –