About that Cash Cow
A Cash Cow is a metaphor used for a business or a product, which exhibits a strong potential in terms of returns in a low-growth market. The rate of return from this business is usually greater than the market growth rate.
More profit – Less market growth
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A company does not have to invest much in the business apart from the initial outlay. Once the company recovers its initial investment, it does not have to put in more cash to keep the business growing.
Example: Windows OS is Microsoft’s Cash Cow, the initial invest was put into Windows OS developing and now is about selling it.
A cash cow is a term used in the Boston Consulting Group (BCG) matrix. A business becomes a cash cow or a dog depending on its performance in the growth stage. Under the growth share matrix model, a business can either become a cash cow if it becomes a market leader in the industry or a dog, which represents a low market share and a low growth rate. Cash generated from cash cows are used to fund other product portfolios of business. It can be used to fund research and development, grow market share or service corporate debt and reduce the overall debt burden on the company. The company can also use the cash to pay dividend to shareholders as well as buy back shares. Cash cows tend to grow at a slow rate, but they are usually market leaders in the industry where there are lot of entry barriers. The presence of entry barriers means that there will be less competition.
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