Secondary revenue no longer a secondary thought

These are tough times for retailers with a race to the bottom being seen in many areas of the industry, which is eating dangerously into margins and forcing companies to work more creatively or face severe problems in the future.

This creativity is driving activity in the area of secondary revenue (known as ancillary revenue in the airline industry) whereby companies earn money outside their core business. Webloyalty has just launched its second report looking at this area: ‘Beyond the Core II’ – How UK retailers drive profitable secondary revenue streams’.

The key finding is that interest is definitely growing in this space. Last year we found 26% of retailers had a secondary revenue strategy while this year it has jumped to 34%. Among the major factors behind retailers’ focus here is the threat from online competition, tightening of margins, more awareness of secondary revenue as an opportunity, and also Brexit (because there is clearly no escaping this one as a bugbear).

This is leading to hard evidence of secondary revenues growing. Last year we found 18% of companies surveyed were getting 10-20% of their revenues from these secondary routes whereas this year it has jumped to 25%. Equally notable is the fact that last year 13% of retailers considered secondary revenue as either very important or important compared with a significantly bigger 29% this year.

The reality is that the main areas of secondary revenue today – advertising, affiliate marketing, loyalty & reward programmes, and cross-selling – mirror the things that retailers have been doing offline for years. It’s just that they are now looking to replicate this online with their increasingly important digital real estate.

As retailers have developed their online businesses the levels of traffic they drive has meant the ‘eyeballs’ they now have on their websites has value beyond them simply being buyers of the core products and services.

One of the problems for many retailers considering secondary revenue opportunities has been the unwillingness to send people away from their websites. But the fact is this is the way people shop on the high street – they wander in and out of different shops. To think shoppers can be kept in some walled garden is a flawed strategy.

What has made things easier for retailers of late is the growth in the number of third-parties that specialise in the different areas of secondary revenue – whether that is providers of affiliate marketing services or operators of loyalty programmes. This availability has pushed up the number of retailers using these third-parties from 23% last year to 36% this year. Handling things in-house has gone out of favour.

But care has to be taken with secondary revenue because there have been warnings from some in the airline industry who have been the pioneers in this space. Ryanair has been at the forefront and got so carried away with the opportunity that it inserted myriad offers into its checkout process with the result that it lost sight of the core of what it was selling – airline tickets!

It has addressed this by limiting the number of partners it works with. It recognised that if it annoyed customers then its core would contract and this would ultimately lose it revenues from secondary components too.

The travel market earns significant sums from secondary revenues but it has learnt the lessons from what it should be presenting to customers and how it should be doing so. Retailers should take note of this, especially as the travel market has much more obvious secondary revenue sources (e.g. insurance, car hire etc…).

But with care it is clear that secondary revenue offers a tremendous opportunity for retailers to generate extra income at a time when they are under pressure on various fronts. The signs from our research suggest that an increasing number of retailers are wising up to its upsides and making secondary revenue a part of their strategic objectives.

Richard Piper, business development director at Webloyalty