Classify Your Customers with the ABC Analysis

Do you know who your important customers are? – The ABC analysis and its benefits

Every day you make decisions and distribute tasks. These may involve short-term actions or long-term strategic decisions. You will certainly have noticed on more than one occasion that the basis for these decisions rests on a personal assessment, a gut feeling, or even externally applied pressure. Without wishing to judge this approach to decision-making, it does carry a certain degree of uncertainty.

Decision-making – The ABC analysis as an aid

If instead you know who your most important customers are, or which products are bringing the most success, you can make targeted decisions. A relatively simple yet very informative method for this is the ABC analysis. The ABC analysis has its origins precisely in this use case. How do I distribute my available time across activities? What do I focus on? What is worthwhile for me, and where should I invest less energy?

To answer these questions, the ABC analysis classifies the decision criteria into three groups: A, B, and C.

How the ABC analysis works

The best way to explain the ABC analysis is with a common example. Revenue is the most important criterion for the continued existence of your own company. Your customers are key to achieving that revenue. It is therefore of great importance that you look after your most important customers and focus your resources on them. To find out which customers generate the most revenue, the ABC analysis is there to help you.

As a basis, you need a simple table with 2 columns. One column contains the customers and the other the revenues generated by those customers. You then sort the list so that the customer with the highest revenue is at the top and the one with the lowest revenue is at the bottom.

In the next step, you determine the percentage share of total revenue for each customer. This share is then accumulated row by row, so that you reach 100% at the bottom.

Finally, you assign the customers to groups A, B, and C according to the cumulative percentage shares. The A customers are those with the highest revenue and the C customers are those with the lowest revenue.

Where you set the thresholds for each group is not fixed and can be determined individually.

Classically, it is assumed that a relatively small proportion of customers is responsible for the majority of revenue. The Pareto principle follows the 80/20 rule. According to this, 20% of customers generate 80% of revenue.

A tabular threshold could therefore look as follows:

ABC analysis classification

Setting priorities and taking the right measures

Once you apply the ABC analysis to your customer base, you know how priorities are to be set and how tasks are to be distributed.

While it is important that you look after all your customers appropriately, you should give the group of A customers higher and more specialised attention and treatment. Possible measures can include assigning a skilled key account manager, prioritised handling of enquiries, special offers, or targeted further development of products.

The measures can vary and also depend on the customer and the industry. But most importantly: through the ABC analysis, you know exactly which customers you can apply the appropriate measures to.

ABC customer overview

Information at all key decision points

The results of the ABC analysis are one thing – implementing the measures is another. In practice, it is not sufficient to simply apply the ABC analysis. Rather, the insights derived from it must be lived and visible to the relevant people in the right places.

What good does it do, for example, if an A customer writes an important message, but the employee handling the matter does not know it is an A customer? Or if your marketing employee wants to launch a campaign but has no information about the most important customers? Even when a project stalls or important decisions need to be made, it matters how the customer is classified.

These examples illustrate that in such cases a tool is needed that brings the results of the ABC analysis to the right places and displays them to the employee. Only then does the practical benefit of the ABC analysis become apparent to you.