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{{short description|Business jargon}} |
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{{original research|date=May 2010}} |
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{{Refimprove|date=June 2007}} |
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[[File:Cow female black white.jpg|right|thumb|250px|By analogy with [[dairy cattle]], revenue “[[milking|milked]]” from cash cows is often used to subsidise less profitable parts of a business]] |
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A cash cow is business [[jargon]] for a business venture that generates a steady return of profits that far exceed the outlay of cash required to acquire or start it. Many businesses attempt to create or acquire such ventures, since they can be used to boost a company's overall income and to support less profitable endeavors. <ref>Investopedia (http://www.investopedia.com/terms/c/cashcow.asp)</ref> 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. |
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A '''cash cow''' is a product or service that generates significant [[revenue]] over a long period of time for the company that sells it. They also generate more cash than they consume.<ref>{{Cite book |last=Jones |first=Rob |title=Business Student Book 2 |publisher=Pearson Education Limited |year=2019}}</ref> Revenue “[[milking|milked]]” from cash cows is often used to [[subsidise]] less [[Profit (economics)|profitable]] parts of a business.<ref name=cashcam>{{cite web|url=https://dictionary.cambridge.org/dictionary/english/cash-cow|website=cambridge.org|title=cash cow definition|author=Anon|year=2023|publisher=[[Cambridge University Press]]}}</ref> |
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The [[BCG growth-share matrix]] developed by the [[Boston Consulting Group]] uses the term "cash cow" to describe business units experiencing high market share and operating in a mature industry. |
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The term cash cow is a metaphor for a [[dairy cattle|dairy cow]] used on farms to produce milk, offering a steady stream of income with little maintenance.<ref>{{cite web|publisher=[[Merriam-Webster]]|author=Anon|year=2023|website=merriam-webster.com|url=http://www.merriam-webster.com/dictionary/milch%20cow|title=Cash Cow}}</ref> |
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==Origins== |
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The term cash cow originates from the farm, where farmers would have a "milch cow" that was kept for its steady supply of milk. <ref>Merriam Webster (http://www.merriam-webster.com/dictionary/milch%20cow) </ref> Peter F. Drucker is credit for being the first to introduce the word to the world of business consulting in the 1960s with his book, [[The Frontiers of Management]] <ref>Drucker, Peter F. The Frontiers of Management. New York: Truman Talley, 1986.</ref> |
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Cash cows are products or services that have achieved market leader status, provide positive cash flows and a [[return on assets]] (ROA) that exceeds the market growth rate. The idea is that such products produce profits long after the initial investment has been recouped. By generating steady streams of income, cash cows help fund the overall growth of a company, their positive effects spilling over to other business units. 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. |
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Cash cows can be also used to buy back shares already on the market or increase the [[dividend]]s paid to shareholders. They usually bring in cash for years, until new technology or shifting market preferences renders them obsolete. |
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== Disadvantages == |
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| ⚫ | [[File:ドラゴン桜直伝!! (87462615).jpg|thumb|[[iPod]]s for sale in a Japanese [[7-Eleven]]. 48% of [[Apple Inc.|Apple]]'s revenue for the first quarter of 2007 was from iPod sales<ref name=apple>[https://www.apple.com/pr/library/2007/01/17results.html Apple Reports First Quarter Results] {{Webarchive |url=https://web.archive.org/web/20110521114127/https://www.apple.com/pr/library/2007/01/17results.html# |date=21 May 2011 }}, ''[[Apple Inc.]]'', 17 January 2007. Retrieved on 2007-02-17.</ref>]] |
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Cash cows can act as [[barriers to entry]] to the market for new products, as entrants need to invest heavily in order to achieve the [[brand awareness]] required to capture a significant share of the market away from the dominant players.<ref>{{cite web |url=http://education-portal.com/academy/lesson/cash-cow-in-marketing-definition-matrix-examples.html#lesson |title=Cash Cow in Marketing: Definition, Matrix & Examples |work=study.com |access-date=19 August 2015}}</ref> |
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A higher pay out rate of earning in the form of [[share repurchase]] or cash/share dividend might also increase the risk of future dividend cut and is an indication of lack of growth opportunity. |
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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. |
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In his book ''[[The Innovator's Dilemma]]'', [[Clayton M. Christensen]] argues that listening to existing customers' concerns can prevent a highly successful business from innovating, resulting in smaller competitors eventually producing [[disruptive innovation]]s. This sentiment is expressed in the business aphorism "If I had asked people what they wanted, they would have said faster horses", which is misattributed to [[Henry Ford]], a pioneering manufacturer of the [[automobile]].<ref>{{cite journal|url=https://hbr.org/2011/08/henry-ford-never-said-the-fast|title= Henry Ford, Innovation, and That "Faster Horse" Quote|journal=[[Harvard Business Review]]|first=Patrick |last=Vlaskovits|year=2011}}</ref> |
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== Example cash cows== |
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Successful products that satisfy the criteria for cash cows include: |
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* [[Amazon Web Services]] generates revenue which is used to subsidise the less profitable business of [[online shopping]] at [[Amazon (company)|Amazon]]<ref name=aws>{{cite web|url=https://www.tbray.org/ongoing/When/202x/2023/04/27/Amazon-A1-2023|first=Tim|last=Bray|authorlink=Tim Bray|year=2023|title=Amazon Q1 2023 Financials|website=tbray.org|quote=Amazon as a whole isn’t really very profitable. Its retail sector loses money, and that loss is made up by the tens of billions in gravy coming in from AWS and Advertising}}</ref><ref name=naughton>{{cite web|authorlink=John Naughton|first=John|last=Naughton|year =2015|title=How Amazon took control of the cloud|url=https://www.theguardian.com/commentisfree/2015/nov/01/how-amazon-took-control-of-the-cloud-john-naughton|website=[[The Guardian]]|quote=If Amazon were to spin off AWS, it would be valued at somewhere between $70bn and $160bn}}</ref> |
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* [[Apple Inc]]'s [[iPhone]] lines<ref name=apple/> |
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* The [[higher education]] sector is often reliant on [[international student]]s as a cash cow to subsidise [[research]], [[management]], administration and teaching of [[Home student (United Kingdom)|home students]].<ref name=ft>{{cite web|url=https://www.ft.com/content/a18af755-d65e-451e-a5f1-fe8f0ac44a9b|website=ft.com|publisher=[[Financial Times]]|first=Alice|last=Gast|authorlink=Alice Gast|title=Letter: Overseas students are more than a cash cow for UK universities|location=London|year=2022}}</ref> |
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* [[Private Market Assets]] can serve as a cash cow for investors.<ref>{{cite news|url=https://www.economist.com/leaders/2022/02/26/investors-have-come-to-see-private-markets-as-a-cash-cow|newspaper=[[The Economist]]|author=Anon|year=2022|title=Investors have come to see private markets as a cash cow}}</ref> |
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== See also == |
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* [[Growth–share matrix]] |
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== References == |
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{{Reflist}} |
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[[Category:Business terms]] |
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[[Category:Metaphors referring to cattle]] |
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[[Category:Revenue]] |
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[[Category:Profit]] |
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Latest revision as of 18:19, 14 December 2024
A cash cow is a product or service that generates significant revenue over a long period of time for the company that sells it. They also generate more cash than they consume.[1] Revenue “milked” from cash cows is often used to subsidise less profitable parts of a business.[2]
The term cash cow is a metaphor for a dairy cow used on farms to produce milk, offering a steady stream of income with little maintenance.[3]
Cash cows are products or services that have achieved market leader status, provide positive cash flows and a return on assets (ROA) that exceeds the market growth rate. The idea is that such products produce profits long after the initial investment has been recouped. By generating steady streams of income, cash cows help fund the overall growth of a company, their positive effects spilling over to other business units. 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.
Cash cows can be also used to buy back shares already on the market or increase the dividends paid to shareholders. They usually bring in cash for years, until new technology or shifting market preferences renders them obsolete.
Disadvantages
[edit].jpg)
Cash cows can act as barriers to entry to the market for new products, as entrants need to invest heavily in order to achieve the brand awareness required to capture a significant share of the market away from the dominant players.[5] A higher pay out rate of earning in the form of share repurchase or cash/share dividend might also increase the risk of future dividend cut and is an indication of lack of growth opportunity.
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.
In his book The Innovator's Dilemma, Clayton M. Christensen argues that listening to existing customers' concerns can prevent a highly successful business from innovating, resulting in smaller competitors eventually producing disruptive innovations. This sentiment is expressed in the business aphorism "If I had asked people what they wanted, they would have said faster horses", which is misattributed to Henry Ford, a pioneering manufacturer of the automobile.[6]
Example cash cows
[edit]Successful products that satisfy the criteria for cash cows include:
- Amazon Web Services generates revenue which is used to subsidise the less profitable business of online shopping at Amazon[7][8]
- Apple Inc's iPhone lines[4]
- The higher education sector is often reliant on international students as a cash cow to subsidise research, management, administration and teaching of home students.[9]
- Private Market Assets can serve as a cash cow for investors.[10]
See also
[edit]References
[edit]- ^ Jones, Rob (2019). Business Student Book 2. Pearson Education Limited.
- ^ Anon (2023). "cash cow definition". cambridge.org. Cambridge University Press.
- ^ Anon (2023). "Cash Cow". merriam-webster.com. Merriam-Webster.
- ^ a b Apple Reports First Quarter Results Archived 21 May 2011 at the Wayback Machine, Apple Inc., 17 January 2007. Retrieved on 2007-02-17.
- ^ "Cash Cow in Marketing: Definition, Matrix & Examples". study.com. Retrieved 19 August 2015.
- ^ Vlaskovits, Patrick (2011). "Henry Ford, Innovation, and That "Faster Horse" Quote". Harvard Business Review.
- ^ Bray, Tim (2023). "Amazon Q1 2023 Financials". tbray.org.
Amazon as a whole isn't really very profitable. Its retail sector loses money, and that loss is made up by the tens of billions in gravy coming in from AWS and Advertising
- ^ Naughton, John (2015). "How Amazon took control of the cloud". The Guardian.
If Amazon were to spin off AWS, it would be valued at somewhere between $70bn and $160bn
- ^ Gast, Alice (2022). "Letter: Overseas students are more than a cash cow for UK universities". ft.com. London: Financial Times.
- ^ Anon (2022). "Investors have come to see private markets as a cash cow". The Economist.