Cash Cow

A cash cow is a product, asset, or business that ensures a consistent cash flow. In the Boston Consulting Group (BCG) matrix, cash cows are placed in the bottom right position—high market share but low growth rate.

Out of many products, a particular product becomes responsible for generating a huge chunk of profits for a company. Such products are called cash cows or moneymakers. They become market leaders due to their huge customer base and low production cost. The low cost is made possible by economies of scale. Experimentation is not recommended, and hence the required investment and maintenance costs are also minimal.

The word cash cow is often used to denote a money maker. This could be any company, product line, division, asset, or product that generates superior and consistent profits. Profits are attributed to market share and consumer base. The money makers don’t have impressive growth rates but are well-established businesses.

Though these products yield regular and stable cash flows, there is little scope for experimentation. There is a risk of losing market share. However, an innovative product can gradually turn into a moneymaker, if it gains customer preference and holds a long-term market monopoly. Sometimes, these products become so popular that the product itself is known by the brand name. For instance, Cadbury chocolate bars are commonly referred to as “Cadburys.”

The Boston Consultancy Group (BCG) matrix, has four grids or divisions, i.e., the question mark, stars, dogs, and cash cows. Now, the BCG matrix runs across two parameters, market share on the x-axis and market growth on the y-axis.

On the BCG quadrant, moneymakers reflect the following:

1. Large Market Share: Such a product, asset, business unit, or firm captures the market substantially. They have been popular among consumers for a long period. They have customer loyalty, high production, economies of scale, and low manufacturing cost.
2. Low Market Growth Rate: The scope for growth, though, is meager. The product does not require increased investment. It continues providing consistent returns as it is.

Google Search Engine

The biggest example of a cash cow is Alphabet’s (earlier called Google) search engine, with a market share of 67.6% in the US.

Johnson & Johnson

Baby products and beauty products are the company’s moneymakers.

Moving on to a fictional example, let us assume that a company has two divisions—steel and alloy wheels. The steel wheels have a growth of 3%, and the alloy wheels have a growth of 8%. Using that data, the company wants to identify the cash cow, calculate its present potential and calculate cash reserves for the next five years.  

Solution:

Potential for next five years:

Explanation:

• The steel wheels division is the cash cow for the company. It has a lower growth rate, higher return on assets (ROA), and the largest market share.
• The alloy wheels sector is not a cash cow. However, as time progresses, the alloy wheel division can become one with a higher market share and higher returns.

Moneymakers are essential for any business; they fund other projects. Therefore, it requires smart management to reap the maximum benefit. Following are the prominent strategies to achieve that:

1. Marketing: In some cases, like when a new competitor enters the market with an identical product, marketing the money maker becomes crucial.
2. Budgeting: It is necessary to plan future revenue and spending to ensure an uninterrupted supply that can keep up with the market demand.
3. Prioritizing: The priority can be sales maximization or profit-making. The money maker cannot fulfill both.
4. Creating a Product Mix: The money maker can be improved by adding new features and by developing a unique product mix.

#1 - To the Business

A wider market share exhibits a higher degree of consumer confidence. Thanks to money makers, the money keeps flowing in. These funds are maintained as reserves since money makers require less investment. The funds, therefore, can be used to finance new projects, innovation, and expansion. Such organizations do not rely on external funds.

#2 - To the Investors

Cash cow investors are called risk-averse investors who do not expect higher returns but are concerned about the degree of uncertainty.

#3 - To the Market

Moneymakers are industry leaders; they often assure higher than normal returns. They set benchmarks for quality and sales. Therefore, they act as price makers in the industry. Price Leadership refers to a situation where the dominant firm sets up the price of goods or services in the market.

The limitations are as follows:

• Moneymakers are at a mature stage where they must consistently maintain the quality of the products or services. Only then will they retain consumers’ trust. The hype brings its own expectations, sometimes unrealistic.
• Achieving consumer confidence for new products in the same market is highly difficult.
• A money maker cannot expect growth in sales and profitability since it already captures a huge market share.
• It discourages new entrants since competing with these established companies requires large capital investment.
• Moneymakers dominate the industry, which affects the other small players. Price Leadership refers to a situation where the money maker decides the price. The competition has to match the price even if they cannot afford to.
• It increases monopoly practices since there is little competition. The competitors have to price their products at lower rates to survive. 
• At times, a new entrant breaks the industry stereotype by introducing new technology to capture the money maker’s market share.