Cash Cow

Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Cash Cow Meaning

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.

Key Takeaways

  • Cash cows are well-established products that generate constant profits in the long run.
  • It is one of the four grids in the Boston Consulting Group (BCG) matrix and resembles an enormous market share with a nominal growth rate.
  • Also termed a money maker, it yields regular returns, just like a cow that provides milk regularly.
  • Companies focus on these moneymakers to fund other ventures, maintain customer loyalty, and enjoy scalability.

Understanding Cash Cows

Cash Cow

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The word cash cow is often used to denote a money maker. This could be any company, product lineProduct LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing.read more, 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 flowsCash FlowsCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more, 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.”

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Cash Cows in BCG Matrix

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 scaleEconomies Of ScaleEconomies of scale are the cost advantage a business achieves due to large-scale production and higher efficiency. read more, 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.

Cash Cow Examples

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.  

Cash Cow Examples 1

Solution:

Cash Cow Examples 1-1

Potential for next five years:

Cash Cow Examples 1-2

Explanation:

Strategy

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.

Advantages

#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-averseRisk-averseThe term "risk-averse" refers to a person's unwillingness to take risks. Investors who prefer a low-return investment with known risks to a higher-return investment with unknown risks, for example, are risk-averse.read more 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 makersPrice MakersPrice maker (P-M) refers to a firm having enough market power to control the market prices of its products and services without losing its customers.read more in the industry. Price Leadership refers to a situation where the dominant firm sets up the price of goods or services in the market.

Disadvantages

The limitations are as follows:

Frequently Asked Questions (FAQs)

What do cash cows symbolize in the BCG matrix?

Cash cows have a low growth rate but a high market share on the BCG matrix. It represents stable returns from money-making products, companies, product lines, or assets.

Which strategy is used in the cash cow position?

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.

Should you invest in a cash cow?

A cash cow is a money-making product, business entity, or asset. Though it has a meager growth rate, the market share is usually enormous, ensuring persistent cash flow throughout its lifetime. Investors looking for a safe investment option with limited returns over a long period can choose moneymakers.

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