Cash cow, in business

jargon Jargon is the specialized terminology associated with a particular field or area of activity. Jargon is normally employed in a particular communicative context and may not be well understood outside that context. The context is usually a partic ...

, is a 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. The term cash cow is a metaphor for a

dairy cow Dairy cattle (also called dairy cows) are cattle bred for the ability to produce large quantities of milk, from which dairy products are made. Dairy cattle generally are of the species ''Bos taurus''. Historically, little distinction was mad ...

used on farms to produce milk, offering a steady stream of income with little maintenance. Cash cows are products or services that have achieved market leader status, provide positive cash flows and a

return on assets The return on assets (ROA) shows the percentage of how profitable a company's assets are in generating revenue. ROA can be computed as below: :\mathrm = \frac This number tells you what the company can do with what it has, ''i.e.'' how many doll ...

(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

dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...

s paid to shareholders. They usually bring in cash for years, until new technology or shifting market preferences renders them obsolete.

Disadvantages

Cash cows can act as

barriers to entry In theories of competition in economics, a barrier to entry, or an economic barrier to entry, is a fixed cost that must be incurred by a new entrant, regardless of production or sales activities, into a market that incumbents do not have or ha ...

to the market for new products, as entrants need to invest heavily in order to achieve the

brand awareness Brand awareness is the extent to which customers are able to recall or recognize a brand under different conditions. Brand awareness is one of two dimensions from brand knowledge, an associative network memory model. Brand awareness is a key consi ...

required to capture a significant share of the market away from the dominant players. A higher pay out rate of earning in the form of

share repurchase Share repurchase, also known as share buyback or stock buyback, is the re-acquisition by a company of its own shares. It represents an alternate and more flexible way (relative to dividends) of returning money to shareholders. When used in coord ...

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 ''The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail'', first published in 1997, is the best-known work of the Harvard professor and businessman Clayton Christensen. It expands on the concept of disruptive technologies, a te ...

'',

Clayton M. Christensen Clayton Magleby Christensen (April 6, 1952January 23, 2020) was an American academic and business consultant who developed the theory of "disruptive innovation", which has been called the most influential business idea of the early 21st century. ...

argues that listening to existing customers' concerns can prevent a highly successful business from innovating, resulting in smaller competitors eventually producing

disruptive innovation In business theory, disruptive innovation is innovation that creates a new market and value network or enters at the bottom of an existing market and eventually displaces established market-leading firms, products, and alliances. The concept w ...

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 Henry Ford (July 30, 1863 – April 7, 1947) was an American industrialist, business magnate, founder of the Ford Motor Company, and chief developer of the assembly line technique of mass production. By creating the first automobile that ...

, a pioneering manufacturer of the

automobile A car or automobile is a motor vehicle with wheels. Most definitions of ''cars'' say that they run primarily on roads, seat one to eight people, have four wheels, and mainly transport people instead of goods. The year 1886 is regarded ...

Examples

Successful products that satisfy the criteria for cash cows include: the

Ford Transit The Ford Transit is a family of light commercial vehicles manufactured by the Ford Motor Company since 1965, primarily as a cargo van, but also available in other configurations including a large passenger van (marketed as the Ford Tourneo in ...

and Ford's pickup trucks,

Kellogg's Corn Flakes Corn flakes, or cornflakes, are a breakfast cereal made from toasting flakes of corn (maize). The cereal, originally made with wheat, was created by Will Kellogg in 1894 for patients at the Battle Creek Sanitarium where he worked with his broth ...

Coca-Cola Coca-Cola, or Coke, is a carbonated soft drink manufactured by the Coca-Cola Company. Originally marketed as a temperance bar, temperance drink and intended as a patent medicine, it was invented in the late 19th century by John Stith Pembe ...

Google Google LLC () is an American Multinational corporation, multinational technology company focusing on Search Engine, search engine technology, online advertising, cloud computing, software, computer software, quantum computing, e-commerce, ar ...

YouTube YouTube is a global online video sharing and social media platform headquartered in San Bruno, California. It was launched on February 14, 2005, by Steve Chen, Chad Hurley, and Jawed Karim. It is owned by Google, and is the second mo ...

, and the

iPod The iPod is a discontinued series of portable media players and multi-purpose mobile devices designed and marketed by Apple Inc. The first version was released on October 23, 2001, about months after the Macintosh version of iTunes wa ...

and iPhone lines. Airport hangars that have reverted to airport ownership are often referred to as cash cows.

References

{{Reflist Business terms Metaphors referring to cattle

Disadvantages

Examples

See also

References