Business Glossary
What Is ABC Analysis in Business?
ABC analysis classifies products or customers by profit contribution. A-class (top 20%) typically generates 70–80% of profit. B-class is the next tier. C-class consumes resource without proportionate return.
The Formula
ABC Classification: Rank by gross profit contribution. A = top 20%, B = next 30%, C = bottom 50%
Worked Example — UK SME
A UK distributor with 80 product lines: top 16 (A-class) generate 74% of gross profit. Next 24 (B-class) generate 19%. Bottom 40 (C-class) generate only 7% but consume 50% of warehouse space.
UK Benchmark
📊 In most UK SMEs, the top 20% of product lines generate 70–80% of gross profit. Rationalising C-class lines typically improves margin mix and reduces overhead complexity.
Common Questions
How does ABC analysis help profitability?
Focusing pricing, marketing, stock, and service on A-class items drives disproportionate returns. C-class items can be repriced, given minimum order quantities, or discontinued.
What is ABC analysis of customers?
The same principle applied to customers. Your top 20% likely generate 70–80% of profit. Prioritise retention for A-class customers.
How often should I run ABC analysis?
Annually at minimum, ideally every 6 months. Product profitability shifts as costs and prices change.
Related terms