Are you familiar with the term ABC Analysis? Do you know what it is and how it can help your business?
The goal of an ABC classification is to help businesses focus on what's more important/valuable so that segment can be monitored closely.
An ABC Analysis can be performed on pretty much all areas of a business, as long as it can be quantified: products, services, customers, suppliers, resource allocation, pricing, etc...
Let's take the example of an ABC analysis in product segmentation.
When an ABC analysis is performed, products are divided in three categories (A,B,C):
-"A" products are very important. They represent 80% of your turnover/sales volume. They are your "star" products.
- "B" products are less important. This category accounts for the next 15 % of your turnover/sales volume. They represent your "average" products. "B" products have potential to become "A" products.
- "C" products are marginally important. They are your “tail” products. They only generate 5 % of your turnover/sales volume.
It is 3-step process:
1. Two single ABC categorisations are conducted: one based on turnover and the other one based on volume.
2. A double ABC categorisation is then performed: a single ABC categorisation provides a snapshot based on one single parameter but it is not enough to evaluate a product's performance (e.g. two products may have the same volume but their turnover may be hugely different). A double ABC categorisation gives a better overview by combining the two single ABC categorisations.
3. Once the products are categorised into segments, a strategy is implemented for each one of the segments.
It is a very powerful tool to help businesses focus on what's more important/valuable so that segment can be monitored closely. It also ensures that time, money and resources are correctly invested.