What is a cash cow? Definition and examples
Market growth, on the other hand, is used as a measure of the attractiveness of a given market. A growing market is basically a market experiencing increasing demand, which makes it easier for businesses to increase their profits, even if their market share remains unchanged. A low-growth market, however, leads to cutthroat competition between the companies. It may get harder to retain your market share without aggressive discounting.
- A low-growth market, however, leads to cutthroat competition between the companies.
- Cash cows can provide opportunities for cross-selling and up-selling.
- However, some firms, especially large corporations, realize that businesses/products within their portfolio lie between two categories.
- The stable cash flow from this product allows the company to invest in new product development, marketing, and expansion into new markets.
For instance, revenue from a cash cow can be used to nurture and develop Question Marks into future Stars within the BCG matrix. This strategic reinvestment can be crucial for long-term sustainability and market dominance. Out of many products, a particular product becomes responsible for generating a huge chunk of profits for a company. They become market leaders due to their huge customer base and low production cost. Experimentation is not recommended, and hence the required investment and maintenance costs are also minimal. A cash cow is a product, asset, or business that ensures a consistent cash flow.
The GE/McKinsey Matrix, for instance, evaluates business units based on industry attractiveness and competitive strength, providing a more granular view of market dynamics. The ADL Matrix assesses the competitive position and industry maturity, which can be particularly useful for businesses operating in rapidly evolving industries. Since the business unit can maintain profits with little maintenance or investment, a cash cow can also be used to describe a profitable but complacent company or business unit. For example, consider the following situation in a low-growth market.
A lover of all things tech, he writes a lot about the intersection of technology, branding and culture at large. A startup enthusiast who enjoys reading about successful entrepreneurs and writing about topics that involve the study of different markets. Cash cow may also refer to a company that is milked until it is dry.
The term ‘Cash Cow Matrix’ in the BCG framework represents a cornerstone of strategic business management, offering a clear pathway to sustained financial health and strategic advantage. Understanding this concept is crucial for businesses aiming to maximize their market potential and ensure steady revenue streams. A cash cow is also a reference to a business, product, or asset that, once acquired and paid off, will produce consistent cash flows over its lifespan. The BCG Matrix has its own limitations, since it’s a very simple tool using only two dimensions—market share and market growth. It’s printing division has brought the company substantial revenues.
Question marks are the business units experiencing low market share in a high-growth industry. They require large amounts of cash to capture more of or sustain their position within the market. Depending on the strategy adopted by the firm, question marks can land in any of the other quadrants. These companies are mature and do not need as much capital to grow. They are marked by high-profit margins and strong cash flows.
Examples of Cash Cows
Cash cows are known to be a company’s most valuable and competitive product or business divisions as they contribute to a significant chunk of a firm’s operating profits. These profits are a result of low investment and high revenue gains from such products. In simple terms, these offerings belong to markets that see less growth but have a substantial market share that generates enough revenue to support the company’s other business activities. Companies love cash cows, because of their income-generating qualities. They can ‘milk’ the cash cows with the minimum of investment because investment would be a waste of money. It would be a waste of money because it is a slow-growth industry.
Thus, it is no doubt that the printing division has been HP’s greatest profit generator over the years, making it the company’s cash cow. A dominant player in the printer market is HP or the Hewlett-Packard company. This company owns 42% of the global market share and has been ruling this market for over 20 years. The printing division alone earned the company a revenue of 17.64 billion U.S. dollars in 2020, making it one of its most important business segments. These markets have a sustainable demand but do not see significant growth or innovation any longer.
What Is A Cash Cow?
This dependence can lead to vulnerability if market conditions change or if the cash cow’s performance declines. When comparing sectors, consumer goods companies often have clear cash cows. These are typically products that have been in the market for decades, commanding a loyal customer base and consistent sales. These products provide the financial backbone for these companies, allowing them to explore new markets and product innovations. A cash cow is a product that produces steady ‘milk’ (profit) long after the initial cost of investment has been recovered!
Furthermore, companies can use them as leverage for future expansions, as lenders are more willing to lend money knowing that the debt will be serviced. These are successful products that enjoy a large market share in a well-established market. Since a cash cow demonstrates a return on assets greater than the market growth rate, it generates more cash than it consumes. These products should be ‘milked’ by extracting the profits and continuously managing them so that they keep generating strong cash flows, which can be further used to fuel stars. In the realm of economics, the term “cash cows” refers to products, services, or business units early payment discount reasons to offer accounting and more that have a large share in mature markets. Second, cash cows often have strong brand recognition and customer loyalty, which makes it difficult for competitors to enter the market and erode their market share.
What is the Cash Cow Matrix?
It can, therefore, be deduced that these products are cash cows for Apple Inc. A company that holds a moneymaker position needs to adopt strategies including careful budgeting, marketing, prioritizing, and innovation. This way, the company can keep generating cash flows out of it. A cash cow refers to a business or product that generates substantial and consistent cash flow over an extended period. In contrast, in the tech industry, cash cows are often older software or services overshadowed by newer technologies but continue to provide substantial revenue.
They usually bring in cash for years, until new technology or shifting market preferences renders them obsolete. HP’s printing division has dominated the market for about 20 years. The Apple products bring in most of Apple’s overall revenue. The iPhone accounts for 61.65% of its revenue, while the iPad and iMacs account for 8.39% and 11.27% of Apple’s total revenue respectively. For example, the Mexican government drew the income from its state oil & gas company PEMEX.
The funds generated are typically used to invest in other areas of the business that show potential for growth but require substantial investment, namely the “stars” and “question marks” in the BCG matrix. Since cash cows exist in mature markets, they are often at or near the point of saturation, offering little room for substantial growth. A plateau in sales growth might occur, and competition may increase as rivals seek to gain a share of the stable cash flows. This situation requires careful monitoring to ensure that the cash cow maintains its position and profitability. In contrast to a cash cow, a star, in the BCG matrix, is a company or business unit that realizes a high market share in high-growth markets. Stars require large capital outlays but can generate significant cash.
This revenue is crucial for funding ventures into emerging technologies or markets, as seen in our earlier example. Small investors love cash cow companies because they can finance their own growth and value. Bruce D. Henderson created the growth-share BCG-Matrix for the Boston Consulting Group in 1970. In the Matrix, a cash cow is a company with high market share in a slow-growing industry. A wider market share exhibits a higher degree of consumer confidence. These funds are maintained as reserves since money makers require less investment.
Its return on assets is far turbotax reviews greater than its market growth rate; as a result, Apple can invest the excess cash generated by the iPhone into other projects or products. Cash cows are products, product lines, brands or companies that are able to retain significant shares of their market and have consistently good returns. This is often the case in a mature or established industry with slow overall growth. The expression itself is a metaphor from the financial sector and can describe ventures or investments that can generate substantial income. It’s also part of the Boston Consulting Group (BCG) growth matrix, which defines products as belonging to one of four categories and is useful for company planning. The concept of cash cows is a critical part of portfolio management in the context of the Boston Consulting Group’s (BCG) Growth-Share Matrix.