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. Revenue “milked” from cash cows is often used to subsidise less profitable parts of a business.
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.
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
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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. 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.
Example cash cows
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
- Apple Inc's iPhone lines
- The higher education sector is often reliant on international students as a cash cow to subsidise research, management, administration and teaching of home students.
- Private Market Assets can serve as a cash cow for investors.
See also
References
- 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.
- ^ 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.