Cash cow

Cash cow

In business, a cash cow is a product or a business unit that generates unusually high profit margins: so high that it is responsible for a large amount of a company's operating profit. This profit far exceeds the amount necessary to maintain the cash cow business, and the excess is used by the business for other purposes.

A firm is said to be acting as a cash cow when its earnings per share (EPS) is equal to its dividends per share (DPS), or in other words, when a firm pays out 100% of its free cash flow (FCF) to its shareholders as dividends at the end of each accounting term. This also implies that the firm is not investing in product improvements (distributing all earnings) and is essentially considering itself not in a growth market. This could be the case if a company sees the future of a product line as bleak as a result of some other technology taking away its market share.

Risks of a cash cow include complacency, with management ignoring the need for change as market forces erode value; and ongoing turf wars between the management in charge of the cash cow and other managers trying to garner support for other products.

That said, every business longs for a cash cow product. The BCG growth-share matrix developed by the Boston Consulting Group, still used by analysts in large companies, uses the term "cash cow" to describe business units experiencing high market share and low market growth.

Origins

The expression is a business metaphor rooted in the notion of a dairy cow that can be milked on an ongoing basis with little expense after being acquired.

Uses

"Cash cow" is also used sarcastically by sales & business people to describe a customer or organization that has no control over its spending. Quite often used to describe government departments like: Defense; Foreign Aid; Highways & Social Security, where the spending is out of proportion to the services or goods received. In other words the tax payer is being cheated because Congress & government procurement personnel are not doing their jobs properly. This problem is not confined to the USA. European Union countries also experience milking in the same way. Hence, milk cow or cash cow is used to describe the process.

"Cash cow" is also used in a Growth-share matrix to represent one of the four quadrants in the matrix. A "cash cow" product has high market share in a slow-growing market. A corporation would want to have as many "cash cow" products as possible.

Signs of a cash cow

  • Product variations
  • customer segmentation
  • pricing flexibility
  • cost reduction
  • targets specific competitors

Examples

The mini storage (or self storage) industry's net profits of 35-40% are not uncommon with a minimal amount of work. This industry has long been considered a cash cow for this reason.

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