What Is A Cash Cow And What Are Its Characteristics?
Updated 30 September 2022
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When working in business strategy and marketing, you may interact with the term cash cow, which business professionals use to describe a product or brand with a specific type of success. Understanding this jargon can be helpful to orient yourself in the professional setting. If you are interested in working in business, you may want to know the meaning behind terms like a cash cow. In this article, we discuss what a cash cow is, its characteristics, benefits and alternatives while providing an example.
What Is A Cash Cow?
The answer to "What is a cash cow?" is that it is a product or brand that is very successful with very little investment or work on the part of the company. The phrase relates to when farmers used to sell dairy from cows, which are fairly low maintenance. The term references a business that continues to produce consistent cash flow through its lifespan. It is one of the four categories in the BCG matrix, which business professionals use to evaluate the different units within a corporation. The cash cow quadrant is within the growth-share section for the matrix because it represents a profit-building aspect of the business.
Related: Growth Product Manager Skills (And How To Develop Them)
Characteristics Of A Cash Cow
here are some of the characteristics of a cash cow on the BCG matrix:
A cash cow exists in a mature market, meaning sales and growth have plateaued, and there isn't likely to be a new actor driving competition. These markets have established market shares, and the sales and growth are occurring slower than in emerging markets. A mature market allows the company to trust their market share in that sector than in a rapidly changing market with new companies entering it all the time, stoking competition.
Large market share
A cash cow has a large market share that results in sustained profit for the company or product owner. This large market share provides the cash that makes the cash cow so valuable. The mature market indicates that there won't be any other competition growing their market share, so the large market share is stable and can produce sustained profit numbers.
Related: What Is Market Share And How To Increase It In Business
A cash cow requires minimal investment because one of the characteristics is that it continues to bring in a sustainable profit with little to no investment from the company. Low investment means the profit margin is higher because the overhead of research and development and marketing aren't required for a cash cow.
The company doesn't have to strategise how to increase its market share or compete with other actors in the market, and they don't have to invest more money or time into innovating within the market. They can essentially leave the product alone and allow word of mouth or an existing customer base to continue selling the product.
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Sustained profit over a long time
A cash cow provides sustained profit over a long time with minimal continued investment from the company to innovate new products or market the existing product to the same customers. Sustained profit over a long time continues to reinforce the stability of a cash cow. A cash cow can continue to earn money regardless of how old the product or brand is because of the loyal customer base.
Example Of A Cash Cow
Cash cows typically describe segments of a corporation. So, for example, if an international corporation had four divisions, one of which sold soap. The soap division of the corporation sells 80% of its products within India and other countries in Asia and has a return on assets of 20%. This division of this corporation is a cash cow. The market is mature as the soap product has been around for 15 years, and it may have a slow growth rate, like 4% each year, but the soap division has a large share of the Asian soap market.
This soap business makes a profit with little involvement, making it an ideal cash cow product. It meets the criteria of being a cash cow because the market has a slow growth rate, meaning it doesn't require investment from the parent corporation to hold onto its market share. It already has a large market share that is growing instead of decreasing, so there is no need to change the strategy within this market, meaning the parent corporation can focus on other sectors. It continues to be profitable and has a high return on investment.
Benefits Of A Cash Cow
Here are the benefits of a cash cow:
High return on investment
A profit margin is a difference between how much profit you make and how much you spend developing, manufacturing, and marketing the product. It is a huge benefit for the corporation or company that owns the cash cow because it has a high return on investment. If your product or brand already has a built-in customer base, you can cut back on marketing costs, and if the product has already been successful for a long time, there are no development or research costs. You can continue making a higher profit margin on a cash cow than in a new market.
Good for investing
A cash cow is a good investment because it can slowly grow your portfolio without you having to adjust your shares or worry about your investment crashing. You can trust that it will continue to bring in a profit, and the share will have value as you receive dividends from the cash cow company. If you don't own the cash cow, it can still be good to identify them in different markets because you can invest in them.
Related: Top Investment Banking Skills With Tips To Develop Them
Sustain business during risky ventures
You can rely on a cash cow to continue to generate profit while adjusting other business strategies in other areas of your corporation. Divisions that aren't cash cows may need further investment and experimentation to find out how to make them as profitable as possible. Changing business strategies or implementing new initiatives always carries some weight. Having a cash cow division can be a good support during risky business ventures and may even pay for the investment into other divisions. It can be an integral part of a well-balanced business.
Alternatives To A Cash Cow
The Boston Consulting Group Matrix is a tool that business strategists use to evaluate the products or divisions of a company. They separate them into sections based on their market share and market growth. This tool helps strategies understand how to allocate resources to maximise profits. The cash cow is the bottom right quadrant of the matrix, where the market share is high, and the market growth is low. Here are some alternatives to a cash cow in the BCG matrix:
The star is in the top right quadrant of the matrix, where market growth is high, and market share is high. This quadrant generates a huge amount of cash because of its large market share. This means it is an asset to the company and increases overall profitability. It also requires a larger investment than the cash cow because the market growth is still large. Stars are in less stable markets than cash cows because growth is still happening at a fast rate, meaning market shares may still be available for competitors to pick up. However, the company can maintain their market share, and a star can become a cash cow over time.
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The question mark is the top left quadrant, where the market growth is high, but the market share is low. Products and brands in this quadrant grow rapidly, consuming a large amount of investment. However, they don't yet generate as much cash because they have a low market share. They are question marks because it's unclear how they may perform over time.
Business strategies may wait to see how this product performs, or they may alter their approach to this product to increase the market share, making this product a star. However, if it fails to succeed in the market, it can become a failure. Products in this quadrant are usually closely monitored to see how they are performing. If they don't grow their market share, they may not be worth the investment they require.
The final quadrant in the matrix is the bottom left quadrant, where the market share is low and the market growth is low. This is called the dog. These products are generally not profit makers at a company, but typically money was already invested in them during the development stage when they were a question mark. However, a dog has little to no potential in the market. The next option for a dog is to divest in the product or the brand to prevent further investments from being wasted and make room for more question marks that may become stars or cash cows.
Please note that none of the companies, institutions or organisations mentioned in this article are associated with Indeed.
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