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 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.
- Ancillary revenue is important because it can help companies diversify the sources of total revenue.
Understanding Ancillary Revenue
Companies often generate ancillary revenue by introducing new products and services or by modifying existing products to branch into new markets. As a result, companies can create new opportunities for growth in addition to the ancillary revenue.
Most companies have some form of ancillary revenue. These revenues can vary from car washes at gas stations to advertisements placed on air planes. In some cases, what begins as ancillary revenue can become the main source of revenue.
For example, snacks and beverages at gas stations were initially considered secondary product offerings that generated ancillary revenue. However, when the price of gasoline fell, items sold in the stores of gas stations, such as snacks and beverages, began to make up a greater share of total revenue. Eventually, food and beverage sales at gas stations surpassed gasoline revenues.
Other industries use actively look to enhance ancillary income. The banking sector has traditionally earned its revenue from the interest rates charged on loan and credit products. Although the majority of the industry's revenue is still from credit products, banks also generate ancillary revenue, including from wealth management services, wire transfers, and equipment leasing services.
Real World Example of Ancillary Revenue
Apple Inc. (AAPL) is well known for its iconic iPhone, but the company has diversified its sources of earnings over the years by creating ancillary revenue.
Below is a table showing the product sales as reported by the company in its 10Q earnings report for the quarter ending on December 28, 2019. The numbers were reported in millions.
We can see that the company generated most of its revenue from its hardware products, such as the iPhone, Mac, and iPad.
- Nearly $70 billion out of the $91.819 billion in total product revenue reported in December 2019 was from the company's core hardware products.
- However, ancillary revenue from wearables, such as earphones and home accessories generated over $10 billion in 2019 up from $7.3 billion in 2018 (highlighted in green).
- Services revenue, including from iTunes generated $12.715 billion in 2019 up from $10.875 billion in 2018.
Apple is a great example of a company that's strategically growing its ancillary income so that it comprises a greater share of the company's total revenue. We can see from the table above that Mac, and iPad revenues were lower in 2019 versus 2018. However, revenue growth from the company's ancillary products and services more than offset any revenue declines from fewer Mac and iPad sales.
Companies that generate ancillary revenue can weather periods of sales declines in their core products more effectively, helping to generate steady earnings growth over the long term.