Core Product Revenue vs. Ancillary Revenue

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We’ve been talking a lot about ancillary revenue in previous posts. What is the difference between ancillary revenue and core product revenue? Here’s a quick overview.

Core product margin is the operating profit percentage on the product most associated with the retailer. In the case of an airline, this would be the margin on a plane seat. If it’s an entertainment company, it’s the price of admission. If it’s an electronics retailer, it’s the price of some type of electronics device. You get the picture. Core product margins will be very low for most companies — 1% to 2%.

Here’s where ancillary revenue comes in: the reported operating profit margin includes not just the core profit margin but the profit from all of the other stuff that gets sold along with it. The “other stuff” included in the bottom line margin are typically called ancillary product sales. Most ancillary products have margins far above that of the core product. And they have very high purchase rates because most consumers shop and compare on core products but do not shop and compare on ancillary products — they are impulse buys.

It’s difficult to know by looking at a company’s bottom line if they are profitable from core product sales or ancillary product sales. But as I’ve noted before, there is often a strong correlation between profitability and ancillary product sales.

– Bob Dufour