The BCG or the Growth-Share matrix is a planning tool introduced in 1970. It derives its name from its parent organization: Boston Consulting Group. The BCG matrix graphically represents a company’s products in a matrix form to help them decide on their products. It can help you decide what products to continue, discontinue, or change depending on which quadrant of the matrix they belong to.
Management popularly uses it to determine the value of a product/service as opposed to the investment made to it. Hence, the allocation of resources becomes easier since you can make long-term plans for optimal usage of capital. Therefore, the framework is used to determine the degree of profitability of each product by reviewing product portfolios. Additionally, it is an excellent tool for medium to big companies since they are most likely to have multiple ongoing projects and products.
Moreover, the BCG matrix is not a predictive tool. It is a decision-making tool. Like any theoretical tool, it has certain limitations. Therefore, it does not work for new ‘disruptive’ products or drastic shifts in consumer demand.
How does the BCG matrix work?
The BCG is a 2×2 matrix, which means there are four quadrants in total. Each quadrant has its own set of characteristics, which companies use as a guideline to classify their products. The matrix defines the relationship between market growth and market share. Therefore, each quadrant represents a specific combination of market share and growth. We assign each quadrant a name to help identify its unique qualities. Four names correspond to four quadrants: star, question mark, cash cow, and pet/dog.
Additionally, market growth is represented by the y-axis. Whereas, the x-axis represents market shares. The value of the x-axis increases from left to right, and the value of the y-axis increases from bottom to top. Below is a graphical representation of the BCG matrix with labels.
|Low market share||High market share|
By classifying each product based on their investments and revenue, you can make decisions about continuation, capital allocation, and resource delegation for each product.
Applications of BCG matrix in SaaS
About half the Fortune 500 companies use the BCG matrix and it makes up an integral part of business studies. The BCG is a tool that can apply to several industries or fields. It is versatile and also relatively accurate. However, to understand how the BCG matrix applies to the world of SaaS, we first need to understand the quadrants and what they represent.
Star (high growth and high market share)
Products classified as stars are likely your best offerings since they have high growth potential and a large market. They perform extremely well and have a large buying audience. Therefore, they generated large amounts of revenue compared to the investments made in them. We consider your best products in their growth and early stage of maturity of their lifecycle to be star products depending on how much revenue they bring in. Such products also consume a large amount of capital in areas such as marketing, product development or positioning, etc.
Due to their high future potential, invest more capital and resources to center these products as leaders in your industry. The same products will eventually become cash cows when they mature and saturate their market. Therefore, star products become cash cows when the overall market growth declines. Such changes are inevitable and expected. However, delay the transformation of a star into a cow as much as possible.
Read More: The Types of SAAS Products and Companies
Question mark (high growth and low market share)
The name of the quadrant is self-expiratory. These are the products that make you wonder: should we keep them or remove them? Question mark products have high growth potential but a small market demographic. However, with the right marketing strategies and by optimally positioning the product, you can boost revenue significantly. Or even convert a question mark product into a star product.
Moreover, companies should regularly analyze such products to determine performance and profitability. Question mark products grow quickly, but they tend to require more capital and resources. If such products perform well after tweaks, you can continue investing in them. However, drop such products as soon as they need more capital than they generate. They have a doubtful future and can become pets if they are not handled carefully.
Cash cow (low growth and high market share)
We consider products in the late stages of maturity or saturation in their lifecycles to be cash cows. Therefore, they are the leading products in mature markets. They have low growth but still have a big market. Additionally, cows have a sustained cash flow due to the size of the market. Hence, they return more revenue than their growth rate. Plus, the cash flows are predictable, which can be rerouted to other, more successful products such as star products. You should milk such products as much as possible for as long as possible, hence their name ‘cash cows.’ Moreover, once a cash cow product declines, it has to be taken off the market before it becomes a liability for the company.
Pet/Dog (low growth and low market share)
Dog products have low market growth and low market demographic, making them liabilities. You should sell, liquidate or reposition such products since they generate little revenue to no revenue, and they have no scope for growth. These products are cash traps and therefore they should be dropped before the revenue generated goes into the negative. However, there are many benefits to having dog products. One would include occupying your rival’s target demographics with the dog product. The products can also have adverse effects on the company from a financial standpoint. Since these products do not make a profit, they drain capital from the organization. Therefore, liquidate a dog product if you do not have a strategic reason for the product.
Read More: 5 SaaS Pricing Models for a Balanced Revenue