What is Ancillary Revenue?
Ancillary revenue is income a company generates from selling goods and services that are not a primary revenue stream or core business operation. For example, a sporting arena is known for selling tickets to games and any other events being hosted in the space. In this case, ancillary revenue would come from concessions sales, such as the food and beverages sold at the arena.
Nearly every business – except, perhaps, for extremely small or new companies – generates some type of ancillary revenue. In most cases, it is used to bolster or complement revenue from the sales of the company’s primary goods and services. However, in some instances, a company may find that ancillary revenue surpasses those earned from their main offerings. In such cases, businesses may change their marketing and sales strategies – or their business model as a whole – to make ancillary sales the focus of their business.
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.
In 2017, 7-Eleven released its own line of cost-efficient (inexpensive) cosmetics. While the sales from cosmetics are unlikely to replace primary revenue sources, it’s quickly become a fast-growing source of ancillary revenue for the convenience store chain. The introduction of the new product line indicates that the company is continually seeking ways to increase its sales revenue by thinking of more products that consumers may be looking to purchase at a convenience store.
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.
We hope you enjoyed reading this CFI guide to revenue. CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)® certification program, designed to help anyone become a world-class financial analyst. The following CFI resources will be helpful in furthering your financial education: