ABC analysis

What ABC analysis means

ABC analysis orders items by their importance. Every product is sorted by revenue, contribution margin or units sold, the values are added up cumulatively, and the list is divided into three groups. Group A holds the few items that carry a large part of the result. Group B sits in between. Group C covers the many items with a small share. The distribution is almost always similar: one fifth of the items brings around four fifths of the revenue.

The choice of metric matters. Sorted by revenue, group A holds the highest selling items, which are not necessarily the most profitable ones. Sorted by contribution margin, the group appears on which the result depends. Both views are useful, but they answer different questions.

Which thresholds are common

A widely used split is 80 percent for group A, 15 percent for group B and 5 percent for group C. These are a convention, not a law of nature. For a shop with few items this produces groups of two or three products, which can hardly be managed. There it is more sensible to form the groups by item count, for instance the strongest ten percent.

What follows from it

• Stock: A items must not run out. They justify safety stock and tighter reordering, while C items are held lean.
• Advertising: A items carry broad campaigns, C items are only advertised when they contribute to a goal such as basket value.
• Range: a C item that causes effort and contributes nothing belongs on the review list. That covers listing, catalogue image and maintenance effort.
• Pricing: A items are price sensitive because they are compared often. With C items there is more room.

Where the method misleads

The analysis shows no causes. A high revenue item with a thin margin looks strong and still contributes little. It also changes the view of new customers: an item that mainly brings first time buyers ranks small in revenue and is strategically valuable. And it is a snapshot. Anyone running it twice a year misses the slow decline of an item whose sales fall over months.

Frequent questions

• Does it work for customers too? Yes, as an ABC analysis of customers by revenue or contribution margin. The strongest group can then be looked after deliberately.
• Should I cut C items? Not across the board. First check whether they are bought alongside others or bring new customers.
• How often to run it? Quarterly is enough for assortment decisions.