Every successful company sooner or later realizes how important it is to know the answer to some key questions. Who are my customers? Which of them are important? And which do not buy as much as we wanted? Did any of them stop buying completely?
This is all completely natural. As your business grows, it becomes impossible to keep everything under control. You can’t supervise everything yourself. Of course, it is a sales rep’s job to keep an eye on their clients. But do they have enough time to do it? And do they work as thoroughly as you would?
It could easily happen that one day you wake up and you realize that one of your key customers is now buying less than he used to buy. Your competitor has offered him a product for a better price and eventually, they overtook him completely. It was a slow process and you haven’t even realized it.
Or you have underestimated a client’s potential and you haven’t cared about him the way he deserved. Because of that, your company doesn’t grow the way you wanted. And here is where ABC analysis can help!
What is ABC analysis?
ABC analysis classifies your clients into three groups: A-B-C. Each client gets a letter depending on how important they are for you.
It follows the Pareto principle, which basically says that eighty percent of sales is made by twenty percent of your customers (however, Pareto’s principle works for more values and apart from sales).
The ABC method goes even further and divides customers into three groups:
- represents 10 percent of your clients, who make 75 percent of your sales
- represents 20 percent of your clients, who make next 15 percent of your sales
- represents 70 percent of your clients, who make the last 10 percent of your sales
Which companies is the ABC analysis suitable for?
You can apply the ABC analysis to all companies whose customers buy regularly. It’s difficult to use it for customers who spend a lot of money, but only once. You get better results with a bigger purchase frequency.
How does it work in practice?
The steps are easy. Come and try it with your clients and their last year’s turnovers.
- Prepare a chart with names of clients and the turnovers they brought you last year. That’s how it could look:
- Summarize the turnover coming from all these companies.
- Calculate 75 percent of all turnover, fifteen percent of all turnover and ten percent of all turnover.
In our example the whole sales are XY USD, so
- 75 percent is 587 890,- USD
- 15 percent is 122 966,- USD
- 10 percent is 81 354,- USD
- List your clients by the highest turnover and keep adding their turnovers starting with the top client, until you get 75 percent of total turnover. If you work with Microsoft Excel, you can easily highlight these companies, for example with the color green. This should be about ten percent of your clients, but it doesn’t matter if it doesn’t fit perfectly. These are your A clients.
- Keep going. Take your first non-A client and keep adding the turnovers below until you reach fifteen percent. These are the B clients. Highlight them with the color blue.
- You don’t need to count the third group of clients. They are C clients.
Did it work? Did some of the companies surprise you?
You must take care of your A clients as much as possible. They are your favorite ones, your superstars, those laying golden eggs.
B companies are mostly nice and healthy companies. Their amount is usually two times bigger than that of A group, but they don’t generate such a big turnover. You have to work on these.
But what’s with the C group? There could be a hidden treasure among them. Have you tried looking at the size of these companies? Are you sure you can’t find a few companies there with a big potential? I bet you can!
By now you have probably realized that this analysis is not static. The rating changes with time and your job is to stay focused. Every time a client changes their group, you have to know about it and react. Let’s say an A client has moved to the B group. That doesn’t have to be a tragedy. Maybe he keeps buying the same as before, but he got skipped by a better client. That’s great news! However, if his purchases are declining, it’s necessary to find out why it’s happening.
You don’t need to always base your analysis on whole year’s data. It depends on the character of your business and the frequency of your clients’ purchases. If your clients buy on a weekly basis, you can analyze the data from the last quarter. That won’t do you any harm. Vice versa, you will become more flexible.
Also, this doesn’t have to be done manually. The market is full of specialized CRM software solutions, which keep an eye on that for you and they are ready to tell you when something changes.
So let’s do this and don’t forget – be effective!