Businesses and companies allocated marketing budgets and launch promotional campaigns to increase their sales and revenue. When the marketing campaign doesn’t deliver the expected result, then there’s no point in spending resources.
Today, we’ll discuss harvesting strategy, definition, types, and examples.
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What is Harvesting Strategy?
A harvesting strategy is a plan and management decision to reduce all the marketing expenses to increase the profit. You can develop a harvesting strategy for your business and the product, it serves as the function of an exit plan when the product becomes obsolete.
The term harvest strategy usually goes for the business line or the brand. However, the harvesting strategy is a part of the company’s business where you decide whether to decrease the marketing budget or cancel it. Management decides to oversee the cost of boosting the sales, if it costs more, then they would leave it.
The marketers choose to apply the harvesting strategy when they think that the product/service has finished its life cycle. Now, it’s time to extract as much profit as you can.
When the profit doesn’t meet the marketing expense level, then you should reduce or eliminate all the marketing expenses in order to increase the profitability.
Understanding the Business/Product Life cycle
Now, the question is how you’re going to know that the product has reached its life cycle and time to apply the harvesting strategy. Therefore, it’s very important to know the various stages in the product life cycle. The life cycle of any product has usually four stages, and they’re as follows;
The start-up stage is the initial stage, where the business is still going through the developing and growing phase. It requires a huge investment at this stage to develop, market, and launch the product or business line into the market. The goal of the business at this stage is to the general sales by increasing customer market awareness.
It’s the stage when the demand for the company’s products continues to increase. Here you increase the production rate in order to make the product accessible to everyone. The attraction of the new customers would keep on increasing and the current customer base would become mature.
The maturity stage is when the production and marketing cost of your business would start decreasing. The business makes the highest possible profit. The operational system of your company becomes efficient and revenue becomes constant at this stage.
The decline stage is when the business or the product line of your business would start losing market share and the market becomes stagnant due to the increasing competition. This stage also goes by the name of cash cows of your business. Here your company doesn’t need further investment, if you do increase the investment, it won’t make any profit.
A company follows three harvesting strategies; reducing and completely cutting the capital expenses, reducing or completely cutting the marketing expenses, and reducing or completely cutting the operational expenses. It usually comprises of shifting or channeling the resources.
Why Companies use Harvesting Strategy
Businesses and companies use harvesting strategy for various reasons and they’re as follows;
Launching a business line or product at the cash cow stage, it’s the stage where the promotion of your product is no longer useful. You could reallocate the same resources in the other areas, where they could increase more revenue.
Developing a new product, when you’re working on the development of the new product, then it requires a lot of resources and investment so that it would generate sales and profit.
Disconnecting the business line or the product, here the management decides to finish the product line and marketing reinvestment is no longer an option.
Types of Harvesting Strategies with Examples
Some of the main types of harvesting strategy are as follows;
Cash cow is the mature market stage of the product life cycle where it makes a profit without making any investment. Companies and businesses usually apply a harvesting strategy at the cash cow stage. The management is aware of the fact that the sale won’t increase even after the marketing investment.
If the company uses the profit on some other project, then it would provide a better return. They usually have three options while applying the harvesting strategy;
- Reducing or eliminating all the capital expense on the product, but keep on using the equipment until it’s out of order
- Reducing or eliminating all the marketing and advertising budget expense, the loyal customers would keep buying the company’s products without ads
- Reducing or eliminating all the operation expense, you bear the expense only when the potential return is very high
Many telecom companies across the world are shifting their interest from landline telephone to wireless signal technology. It’s because it works even in storms when the landline cable is destroyed. That’s why they’re spending their resources on the development of wireless technology.
In other words, they’re utilizing the profit of the mature (cash cow) product on the development of the new technology. However, some telecom companies are investing resources in the development of the current product in some areas that still have growth potential.
Equity investment has several meanings, it’s the proposed potential plan of any venture capitalist or equity investor, and its goal is to make the maximum outcome from the investment.
Launching an IPO (initial public offering) of the floating company is a very good example of an equity investment harvesting strategy. IPO usually happens when a company offers its shares to the public and they buy it for the first time. Other investors start buying it in the stock exchange market.
Harvesting strategy is usually the plan of private equity investors, venture capitalists, and investors. They call it an exit strategy because they cancel the investment after the success of the project. The goal is to earn maximum profit and utilize the same funds on the other ventures. The time duration of the strategy is between 3 to 5 years to fully recover the investment.