What Is a Harvest Strategy?
Let me explain what a harvest strategy is directly to you. It's a marketing and business strategy where you reduce or terminate investments in a product, product line, or entire line of business. The goal here is to reap, or harvest, the maximum profits from it. You typically employ this toward the end of a product's life cycle, once you've determined that further investment won't boost revenue anymore.
Key Takeaways
- A harvest strategy involves reducing spending on an established product in order to maximize profits.
- Typically, harvest strategies are used on outdated products as profits are reinvested in newer models or newer technologies.
- Strategies for venture capitalists to exit successful investments also are referred to as harvest strategies.
Understanding Harvest Strategies
Products go through life cycles, and when an item is nearing the end of its cycle, it usually won't benefit from more investments or marketing efforts. This stage is known as the cash cow stage, where the asset is paid off and doesn't require further investment. So, by using a harvest strategy, you can pull out the maximum benefits or profits before the item hits its decline stage. Companies often take the proceeds from this ending item and use them to fund the development and distribution of new products. Those funds might also go toward promoting existing products that have high growth potential.
For instance, consider a soft-drink company that stops investing in its established carbonated product and reallocates those funds to a new line of energy drinks. You have several options when it comes to harvest strategies. Often, companies rely on brand loyalty to drive sales, which means reducing or eliminating marketing expenses for new products. During the harvest phase, you can limit or eliminate capital expenses, like buying new equipment to support the ending item. You can also restrict spending on operations.
A harvest strategy might involve gradually eliminating a product or product line when technological advances make it obsolete. Take companies selling stereo systems; they gradually stopped selling record turntables in favor of CD players as compact disc sales rose and record sales dropped. Similarly, when product sales consistently fall below your target levels, you may gradually remove those related products from your portfolios.
Important Note on Common Applications
Computers, cellphones, and other electronics products are common targets for harvest strategies because they quickly become outdated, and you put the profits into newer gadgets.
Special Considerations
Harvest strategy also applies to business plans for investors like venture capitalists or private equity investors. This is commonly called an exit strategy, where investors look to exit the investment after it's successful. As an investor, you use a harvest strategy to collect the profit from your investment so you can reinvest those funds into new ventures. Most investors estimate it takes between three and five years to recoup their investment. Two common harvest strategies for equity investors are selling the company to another company or making an initial public offering (IPO) of the company stock.
