In my last post on 8/8/13 I pointed out that Amazon doesn’t optimize for percentage margin. That’s significant because it allows Amazon to lower prices as far as they want. But if we examine the bottom line of digital retailers, they appear to be healthy. How is it possible to remain profitable in a market where prices don’t matter? The answer is ancillary products.
What kind of products are ancillary? Ancillary products are typically products in the “3E” categories:
- They ENABLE the core product purchase — this is mostly the area of financing. Credit lines, credit cards, 90 days same as cash, etc. All of these ancillary products enable a consumer to purchase a product more easily. Financing comes with nice profit margins for the retailer, low risk and high purchase rates. These products also enable consumers to purchase items of value greater than the consumer could afford without the additional financing.
- They ENSURE that the core product delivers value to the consumer — this is mostly the area of insurance. Warranties, service agreements, price protection, etc. This family of products makes sure that if something happens to keep a product from working, the product can be repaired or replaced without the consumer footing the bill. Good margins, good purchase rates and low financial risk for the ratailer.
- They ENHANCE the value of the core product — this is the area of optional product features. This could be a protective cover for a phone, a special parking pass for an event, new HD service to go with a big-screen television, and so on. This area of ancillary products lets you enhance or extend the capabilities of the product purchased. Very good purchase rates, good margins and low risk.
Ancillary products are increasingly important to all kinds of businesses. Often, the most successful companies in a given space also are those that are leveraging ancillary revenue most effectively.