Ancillary Revenue: What it is, How it Works, Examples

Definition

Ancillary revenue is income from supplementary goods or services that complement a business's core offerings.

Description

Ancillary revenue refers to additional income a business generates beyond its primary revenue sources. In various industries, ancillary revenue often comes from supplementary goods or services that complement the main products or services offered. These additional offerings may be related to the core business or entirely separate.

For example, in the airline industry, ancillary revenue can come from fees for services such as baggage handling, in-flight meals, and seat upgrades. In the hospitality industry, hotels may generate ancillary revenue through services like room service, spa treatments, or conference facilities. 

In e-commerce, ancillary revenue might include fees for expedited shipping or additional features.

Ancillary revenue plays a crucial role in enhancing the overall financial performance of a business by capitalising on complementary offerings and diversifying income streams.

Importance of Ancillary Revenue

The importance of ancillary revenue is multifaceted and plays a crucial role in businesses' financial success and sustainability across various industries. Here are detailed reasons highlighting the significance of ancillary revenue:

• Diversification of Income Streams:

Ancillary revenue allows businesses to diversify their sources of income beyond their core products or services. This diversification helps mitigate risks associated with dependency on a single revenue stream and makes the business more resilient to market fluctuations.

• Enhanced Profitability:

Ancillary revenue often carries higher profit margins than core products or services. By capitalising on supplementary offerings, businesses can improve their profitability and achieve a healthier bottom line.

• Competitive Advantage:

Companies that effectively leverage ancillary revenue gain a competitive edge in the market. Offering additional services or products can attract and retain customers, providing a unique selling proposition that sets the business apart from competitors.

• Customer Satisfaction and Loyalty:

Ancillary services can contribute to an enhanced customer experience. Satisfied customers are more likely to become loyal, repeat customers. The convenience and value of ancillary offerings can strengthen the relationship between the business and its customer base.

• Adaptation to Market Trends:

Ancillary revenue strategies enable businesses to adapt to evolving market trends and consumer preferences. By identifying and capitalising on emerging opportunities, companies can stay relevant and meet the changing needs of their target audience.

• Revenue Maximisation:

By upselling additional products or services, ancillary revenue helps maximise the overall revenue potential per customer. This is particularly beneficial in industries where the primary products or services have a limited profit margin.

• Financial Stability:

Ancillary revenue acts as a stabilising factor during economic downturns or challenging business periods. The diverse income streams buffer against fluctuations in demand for core products or services.

• Innovation and Creativity:

Pursuing ancillary revenue encourages businesses to innovate and think creatively about complementing their existing offerings. This fosters a culture of innovation that can lead to new, successful revenue streams.

• Cross-Selling Opportunities:

Ancillary revenue strategies often involve cross-selling, where customers are encouraged to purchase additional items or services related to their initial purchase. This not only boosts revenue but also increases the average transaction value.

• Investor Confidence:

A business with a solid ancillary revenue stream will likely attract more investor confidence. Investors view diversified revenue sources positively, indicating a well-rounded and adaptable business model.

How to start ancillary services in banking?

Starting ancillary services in banking involves careful planning and execution to ensure success. Here are five steps to guide you through the process:

• Market Research and Analysis:

Conduct a thorough market analysis to identify potential ancillary services that align with customer needs and market trends. Understand your target audience, their preferences, and the demand for supplementary financial services. This research will help you make informed decisions about the types of ancillary services to introduce.

• Regulatory Compliance and Risk Assessment:

Ensure that the introduction of ancillary services complies with all relevant banking regulations and guidelines. Perform a comprehensive risk assessment to identify potential challenges and develop strategies to mitigate risks associated with new services. Compliance with regulatory requirements is crucial to maintaining the trust of customers and regulators.

• Technology Integration:

Evaluate and upgrade your banking infrastructure to support the new ancillary services. Ensure your technology systems seamlessly integrate with the additional services and provide a secure and efficient customer experience. Invest in robust cybersecurity measures to protect customer data and financial transactions.

• Employee Training and Communication:

Train your staff on the new ancillary services' features, benefits, and operational aspects. Effective communication is critical to informing employees and customers about introducing these services. Clear and transparent communication builds trust and encourages customer adoption of the new offerings.

• Marketing and Promotion:

Develop a targeted marketing strategy to promote the new ancillary services. Highlight the value proposition, benefits, and convenience they offer to customers. Utilise various marketing channels, including digital platforms, in-branch communication, and other promotional methods to raise awareness and attract customers to explore and use the new services.

Future trends that can impact ancillary services

Some of the future trends that can impact ancillary services:

Digital Integration: Technology, like AI and mobile apps, will shape how ancillary services are delivered, making them more efficient and user-friendly.

Personalised Services: Ancillary services will be more tailored to individual preferences, providing a personalised experience for customers.

Sustainability Focus: Ancillary services may shift towards eco-friendly and socially responsible options, reflecting a growing awareness of environmental and social issues.

Regulatory Changes: Evolving regulations can impact the types of ancillary services banks offer, requiring adaptability to stay compliant.

Open Banking Collaboration: Increased collaboration with fintech and other partners will expand the range of ancillary services, creating a more interconnected banking experience.

Example 

Imagine a bank, XYZ Banking, offering ancillary services like "XYZ Travel Guard," which provides travel insurance for account holders. This supplementary service ensures peace of mind during trips, covering unexpected events. 

XYZ Banking offers "SmartSaver," a financial wellness app providing personalised budgeting tips and savings goals. These ancillary services enhance the customer experience, demonstrating the bank's commitment to convenience, security, and financial well-being beyond traditional banking offerings.

FAQ

What are ancillary products in the context of business?

Ancillary products are additional goods or services a business offers to complement its core offerings. These supplementary products enhance the customer experience and may include add-ons, upgrades, or related items.

How do ancillary activities contribute to a company's revenue?

Ancillary activities refer to secondary or supplementary functions that support a company's core operations. These activities, including services, partnerships, or diversification efforts, can contribute significantly to the company's overall revenue and profitability.

What role do ancillary services play in the ancillary revenue model?

Ancillary services are critical components of the ancillary revenue model, representing the supplementary offerings that contribute to a business's diversified income streams. Whether related to the core products or not, these services play a vital role in maximising revenue and meeting evolving customer needs.