ABC Analysis: An Essential Business Method

ABC analysis is an important business tool that involves categorizing items according to their value. For example, category A will have the most valuable items. These are the items (such as products or customers) that give you the most profit. Category B, meanwhile, will have the less valuable items, but these are more valuable than those that belong to category C. Finally, category C will have the items that are the least valuable to your business.

ABC analysis was derived from the Pareto Principle, which is also known as the 80/20 rule. It states that 80% of the effect comes from only 20% of the cause. The digits are not conclusive, but this is the usual distribution. The Pareto Principle simply stipulates that the greater results can be derived from only a small portion of the efforts.

ABC analysis for inventory management

When you apply ABC analysis to your franchise inventory, for example, you will know which products need to be prioritized. You will discover that only around 20% of your products contribute to 80% of your profit.

Once you have identified the most profitable products, you will be able to solve space limitation issues. This can be in your physical franchise store or warehouse. ABC analysis can also help you save on costs in product acquisition as well as logistics costs.

ABC analysis for customers

Categorizing your customers will give you more control over how to best engage them. Your marketing strategies can already target specific categories, and you will also know which customers need to be prioritized.