Ancillary Revenue

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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. It serves to be eligible for tax deduction under relevant tax laws for the sale of that product.

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Types of Ancillary Revenue

The following are the various types of ancillary revenue.

#1 - Additional Services

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 a carpenter provides 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 selling 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.

#3 - 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.

#4 - Additional Schemes

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. As a result, it can add 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.

Example #1

ABC Corp is a gasoline station that has other shops like a grocery store, a dollar shop, and a florist on its premises. Although these services are not directly related to car fueling, rental revenue earned from such premises serves as ancillary revenue for ABC Corp.

ancillary-revenue

Example #2

The primary product sold by Best Textiles is cotton yarn. However, with the manufacture of such yarns, some chemicals are released as byproducts, 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.

Example #3

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:

  1. Inhouse laundry service at $3.00 per garment
  2. Refrigerator in the room with refreshments inside $1.00 per item
  3. Cab services for movement in and around the city at $500 per day for 10 hours.
  4. 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 four garments and cab service for a day.

Another customer, Joe, checks in for a similar room for one night; however, he opts for a dinner night pass. Can you calculate what the ancillary revenue earned by Luxury Hotel from these customers is?

Solution:

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; 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;
  • By providing ancillary services, the company can also improve its market reputation.
  • 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 a Luxury Hotel that 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 Hotels act as a pioneer, and higher prices do not seem to divert their 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.

Limitations

  • Plans for the growth of such additional services or products may not be entertained because these are just for additional benefit to customers.
  • Ancillary Revenue, in most cases, cannot compete with primary revenue in terms of the amount.

Conclusion

Ancillary revenue is majorly exhibited by the service industry, especially by hotels and airlines. For example, services in airlines include seat upgrades, opting for food on the flight, hotel accommodation, travel, assistance with customers’ disabilities, etc.

However, the concept can be applied to various 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.